In October 2023, 100% Salary income from your corporation is the way to go for 90%+ clients. The very few outliers are typically new clients who approach us at or near the end of the year. The lack of prior planning isn’t too costly, but it’s certainly not the most efficient when you consider all of what you’re giving up.

When it comes to managing your finances as a medical professional in Canada, one of the most crucial decisions you’ll make is how to pay yourself from your corporation. The two primary options are taking a salary or drawing dividends. Both have their pros and cons, and the best choice often depends on your management capacity. In this blog post, we’ll break down the differences between salaries and dividends to help you make an informed decision.

What is a Salary?

A salary is a fixed, regular payment made by an employer to an employee, typically paid on a monthly or bi-weekly basis. For medical professionals who own a corporation, this means paying yourself as an employee of your own company.

Pros of Taking a Salary

  • Required to be scheduled and planned payments throughout the year. 
  • RRSP Contribution Room: Salaries create RRSP (Registered Retirement Savings Plan) contribution room, allowing you to save for retirement.
  • Easy Tax Planning: With a salary, you know exactly how much you’ll be taxed, making it easier to plan.
  • Qualify for Benefits: A salary allows you to qualify for various benefits like the Canada Pension Plan (CPP).
  • Pension Contribution room: Tax free savings over and above your RRSP limits.

Cons of Taking a Salary

  • Higher Administrative Requirements: Payroll taxes and other administrative tasks take time to plan and put in place.
  • Less Flexibility: Salaries may be more fixed and regular, offering less flexibility in how you pay yourself.

What are Dividends?

Dividends are payments made by a corporation to its shareholders from its after-tax profits. As a medical professional with a corporation, you can choose to pay yourself through dividends if you have positive retained earnings at year end.

Pros of Taking Dividends

  • Flexibility: You can choose when and how much to pay yourself, offering greater financial flexibility.
  • Lower Administrative Costs: Dividends require less paperwork and administrative hassle compared to salaries.
  • Potential to defer taxes: Taxes may be due annually for new dividend recipients.

Cons of Taking Dividends

  • No RRSP Contribution Room: Dividends do not create RRSP contribution room, limiting your retirement savings options.
  • No Benefits: You won’t qualify for CPP when you pay yourself through dividends.

Dividends: The Myth of Tax Efficiency:

Flat out: Dividends are taxed at a lower personal tax rate compared to salaries, offering potential tax savings of 1-3% per year in a perfect situation. In reality, it’s very difficult to experience the full tax savings of dividends while accounting for lost RRSP and Pension contribution room. The tax savings also get diminished by paying higher corporate taxes.

Which is Better for Medical Professionals?

At MedTax, the choice has been clear since 2014. Salaries are the better option, and they require diligence to implement. There are rare circumstances which may require a dividend top up, but they can usually be avoided with proper planning. Even rarer is a dividend only strategy the best method.

Consult the Experts at Imperial Lifestyle Management

Choosing between salary and dividends used to be a complex decision. As financial advisors specializing in serving medical professionals in Canada, we understand the unique challenges you face to implement your salary only strategy. Consult with the experts at Imperial Lifestyle Management to tailor a strategy that maximizes your earnings.

Don’t leave your financial future to chance. Make an informed decision today here.

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