Dividends or Salary

It’s not all about minimizing tax

Businesses are continually trying to determine the best method to minimize tax through payment of salaries and dividends. The focus on tax savings often overshadows the non-tax factors that should have just as much or even more consideration.

Consider all the factors:

  • Effects on RRSP contribution room
  • Old Age Security clawback
  • Cost of Canada Pension Plan (CPP) premiums
  • Cost of future reduction in CPP benefits
  • Refund of Refundable Dividend Tax on Hand
  • Provincial employer health tax

Some factors don’t relate to tax

Below are some non-tax factors that should be considered along with the tax calculations in deciding whether to pay salaries or dividends, or some combination thereof.

    • Group insuranceFor group insurance purposes, the plans will often refer to coverage for employees. The definition of employee may refer to “salaried individuals who work on a regular basis for the employer”. If the decision is made to pay only dividends, the owner may no longer be considered an employee and, therefore, will not be eligible for group benefits. In this case, you may be able to adjust your group insurance policy to include owners that are compensated through dividends.
    • Disability insurance/group life insuranceThese will often calculate benefit coverage based on a percentage of “gross salary” or “employment income”. If the decision is made to reduce or eliminate employment income in favour of dividend income, the owner may no longer be covered by the disability plan and may have reduced life insurance coverage.
    • Child care expensesA deduction for child care expenses is limited to 2/3 of an individual’s earned income for the year. Salary and wages will qualify as earned income, but dividends will not. Therefore, the decision to reduce or eliminate salary may reduce or eliminate the available deduction for child care expenses.
    • SR&EDWhere owners have involvement with Scientific Research and Experimental Development (SR&ED), salaries and wages are a large component of the SR&ED tax credit calculation. If the company is using the proxy method for calculating SR&ED tax credits, the affect caused by reduced wages is even larger.

Other items to consider

The decision may also affect:

      • Alternative Minimum Tax
      • Personal tax installments
      • Individual Pension Plans
      • Workers’ Compensation


With the recent change to dividend tax rates in the 2013 federal budget, the salary vs. dividend review will need to be revisited once again. Remember, when planning for compensation decisions, the focus should not be all about tax.