How to pay yourself from your practice

What are the pros and cons of dividends?

Paying yourself with dividends from your business also provides several benefits and drawbacks.

Pros of dividends

• Dividends do not require a payroll account or timely remittances to the CRA.

• Dividends typically yield a higher cash outflow to the shareholder because tax is not withheld at the source.
• Dividends require no contributions to CPP, resulting in higher profits for the company and more cash to the shareholder.
• There is more flexibility around the timing and payment of dividends.

Cons of dividends

• You may owe a significant amount of personal tax in April due to no taxes being withheld on payment, and may be required to make personal tax instalments for future tax years.
• Dividends will not build any room to make RRSP contributions.
• There are no contributions to CPP, which impacts your CPP payout in retirement.
• You will not be able to claim certain personal tax deductions, such as childcare expenses and moving expenses.
• Additional documentation is needed when paying dividends, such as a T5 filing with the CRA and director’s resolutions in the corporate minute book.
• The Tax on Split Income (TOSI) rules can apply where dividends are paid to shareholders that are not involved in the business. If TOSI applies, dividends are taxed at the top marginal rate. This should be discussed with your tax advisor. 

Please note that the corporate tax rate will appear higher when paying dividends to shareholders since dividends are paid out of after-tax dollars (see example below). However, it is necessary to look at the combined rates of corporate and personal taxes to truly compare which is more tax. 

Example: Salary versus dividends

The example below compares the two compensation options for an Alberta resident in 2024, assuming personal tax credits are not available.

From a solely personal tax perspective, you will have $3,980 more cash if you choose dividends instead of a salary in the example above. However, you will also be paying approximately $4,132 more in income tax when you combine the corporate and personal tax being paid. While CPP is an additional cost of salaries, the benefit is reaped in retirement when CPP is collected.

Preparing a budget and maintaining awareness of your monthly living expenses can help determine which mix of compensation is best for your specific situation.

What is a Private Health Service Plan?

The ability to set up a Private Health Service Plan (PHSP) is a potential benefit of paying yourself a salary. You can think of a PHSP as a company-insured employee benefits plan that offers more flexibility than typical group insurance plans.

It can be challenging to offer benefits when a practice only has a few employees due to the high cost of administering these plans. A PHSP is a good alternative and acts as a spending account for employee medical expenses.

The company reimburses employees for medical expenses incurred up to a predetermined amount through a PHSP. The amount is set by the employer on an annual basis and can also be customized for different employees or groups of employees. The employees must pay their own expenses above that limit. Reimbursements are considered an expense for the company when expenses are incurred and submitted by the employee.

Eligible medical expenses under the CRA are not considered a taxable benefit to the employee. Expenses outside the CRA guidelines for medical expenses would need to be added as a taxable benefit on the employee’s T4 slip.

If 90 percent or more of the medical expenses reimbursed by the plan are eligible under the CRA guidelines, this qualifies as a PHSP and is fully deductible to the corporation.  

Take the next steps

Determining how to pay yourself from your business depends on what works best for your unique situation. It is necessary to carefully consider both the benefits and drawbacks of a salary versus dividends as well as your long-term goals for the future. However, it is important to remember that you can always change your decision if the method you chose is not working for your specific situation. You can also choose a blend of both compensation options if that option works best for your lifestyle needs.

For more information, contact a member of MNP’s Professionals team. We have the experience to help

Neelam Pamnani, CPA, CA
Senior Manager - Professionals Niche Regional Leader
780.832.4272
[email protected]

April Adam, CPA
Senior manager - Assurance & Business Advisory Services
780.832.4293
[email protected]