Salary vs Dividend

As a business owner, you have the ability to pay yourself a salary or dividend or a combination of both. In this article and infographic, we will examine the difference between salary and dividends and review the advantages and disadvantages of each.

When deciding to pay yourself as a business owner, please review these factors:

  • How much do you need?

  • How much tax?

  • Other considerations including retirement and employment insurance.

How much do you need?

Determine your cash flow on a personal and corporate level.

  • What’s your personal after-tax cash flow need?

  • What’s your corporate cash flow need?

How much tax?

Figure out how much you will pay in tax. Business owners understand that tax is a sizeable expense.

  • What’s your personal income tax rate?

Depending on the province you reside in and your income, make sure you also include income from other sources to determine your tax rate. (Example: old age security, pension, rental, investment income etc.)

If you decide to pay out in dividends, check if you will be paying out eligible or ineligible dividends. The taxation of eligible dividends is more favorable than ineligible dividends from an individual income tax standpoint.

  • What’s your corporation’s income tax rate?

For taxation year 2020, the small business federal tax rate is 9% . Please also remember, if you pay out salary, salary is considered a tax-deductible expense, therefore this will lower the corporation’s taxable income versus paying out dividends will not lower the corporation’s taxable income.

Other considerations

If you pay yourself a salary, these options are available.

  • Do you need RRSP contribution room?

As part of this, it’s worth considering ensuring that you receive a salary high enough to take full advantage of the maximum RRSP annual contribution that you can make.

  • Are you interested in contributing to the Canada Pension Plan?

This is unique to your circumstances and a cost-benefit analysis to determine the amount of contributions makes sense.

  • Do you need employment insurance (EI)?

For shareholders owning more than 40% of voting shares, EI is optional . There are situations worth careful thought such as maternity benefit, parental benefit, sickness benefit, compassionate care benefit, family caregiver benefit for children or family caregiver benefit for adults.

The infographic below summarizes the difference between Salary vs. Dividend.

We would also advise that you get in touch with your accountant to help you determine the best mix for your unique situation.

Nova Scotia Budget Highlights 2020

Corporate

General Corporate Income Tax Rate Reduction

Effective April 1, 2020, the province will reduce the general corporate income tax rate from 16 per cent to 14 per cent.

The general corporate income tax rate in Nova Scotia has been set at 16 per cent since 1990. From 1982 to 1989 the rate was 15 per cent. The reduction by 2 percentage points will provide businesses with $70.5 million in 2020–21.

Small Business Corporate Income Tax Rate Reduction

Effective April 1, 2020, the province will reduce the small business corporate income tax rate from 3.0 per cent to 2.5 per cent.

From 2011 to 2014 the small business corporate income tax rate was reduced by one-half percentage point each year—dropping the rate from 5 per cent to 3 per cent. The small business rate is available on the first $500,000 of active business income by Canadian Controlled Private Corporations (CCPCs) with taxable capital of less than $10 million. The rate reduction will provide small businesses in the province with $10.5 million in 2020–21.

Extend Digital Media Tax Credit (DMTC)

The DMTC is a refundable corporate income tax credit. It was introduced in 2007 to encourage the employment of skilled Nova Scotians and to foster the development of an interactive digital media industry in the province. Since its introduction, the province has provided almost $54 million in tax credits across 675 applications.

The DMTC was legislated to expire on December 31, 2020, but new legislation will be introduced as part of Budget 2020–21 to extend the tax credit for five years—to December 31, 2025.

The province will review the DMTC in consultation with the industry and stakeholders to ensure that the tax credit remains relevant and effective in an ever-changing digital technology environment.

Extend Digital Animation Tax Credit (DATC)

The DATC is a refundable corporate income tax credit. It was introduced in 2015 to provide support for the production of digital-animation productions in the province. The tax credit, together with the Film and Television Production Incentive Fund, was put in place to replace the former Film Industry Tax Credit. Since its introduction, the province has approved Part A applications totaling almost $45 million across 45 applications.

The DATC was legislated to expire on June 30, 2020, but new legislation will be introduced as part of Budget 2020–21 to extend the tax credit for five years—to December 31, 2025.

The province will review the DATC to ensure that the tax credit continues to support the digital animation industry.

Personal

Increase Tobacco Taxes

Effective February 26, 2020, the province will increase the tax rates on all tobacco products sold in Nova Scotia.

The tax rate on cigarettes and tobacco sticks will rise from 27.52 cents per unit to 29.52 cents per unit.

The tax rate on fine cut tobacco will rise from 26 cents per gram to 40 cents per gram, while the tax rate for other tobacco products will rise from 18.52 cents per gram to 40 cents per gram. Nova Scotia is the only province that has separate rates for fine cut and other tobacco, and the rate increase brings the province in line with other Canadian jurisdictions. It also treats fine cut tobacco similarly to cigarettes.

The tax on cigars will rise from 60 per cent of the suggested retail selling price to 75 per cent. Again, this is in line with tax rates applicable to cigars across the country.

The tax increases are expected to generate approximately $17.4 million in revenues for 2020–21.

Implement Vaping Products Tax

Effective September 15, 2020, the province will implement a tax on all vaping products

sold in Nova Scotia.

Vaping substances, including those that do not contain nicotine, will be taxed at the

rate of $0.50 per millilitre. The province has previously announced that it will ban

flavoured vaping liquids effective April 1, 2020. This is consistent with the province’s ban

on flavoured tobacco products. Vaping devices and their components will be taxed at a

rate of 20 per cent of their suggested retail selling price. Cannabis vaping substances

are taxed under the cannabis tax.

All retailers, wholesalers, and manufacturers of vaping products will be required to be

licensed to sell their products in Nova Scotia, effective July 1, 2020. Vaping product

taxes are projected to be $2.3 million in 2020–21.

The full version of the Nova Scotia Budget can be found here: https://novascotia.ca/budget/

2020 BC Budget

BC’s Finance Minister Carole James delivered the province’s 2020 budget on
February 18, 2020. The budget projects:

  • For 2020, a surplus of $227 million

  • For 2021, a surplus of $179 million

  • For 2022, a surplus of $374 million

Personal Tax Changes

Personal income tax rates

Effective January 1, 2020, a new top British Columbia personal income tax rate of 20.5% (up from 16.8%) that will apply to individuals with taxable income exceeding $220,000. As a result, the charitable donation tax credit will also increase to 20.5% for charitable donations over $200 for taxpayers in the new bracket.

Home Owner Grant

BC will decrease the threshold for the phase-out of the home owner grant from $1.65 million to $1.525 million. For properties above the threshold, the grant is reduced by $5 for every $1,000 of assessed value in excess of the threshold.

Real property contractors

Effective February 19, 2020, the budget allows real property contractors who perform value-added work to goods and then install those goods into real property outside the province to apply for refunds of PST paid on those goods.

Training Tax Credit

Extended to the end of 2022

Farmers’ Food Donation Tax Credit

Extended to the end of 2023

Corporate Tax Changes

Film Incentive BC and production services tax credit

Effective February 19, 2020, the budget increases the accreditation certificate fee for the Production Services Tax Credit from $5,500 to $10,000.

Production Services Tax Credit Pre-Certification Notification Introduced

Effective July 1, 2020, corporations intending to claim the production services tax credit
must notify the certifying authority of their intent within 60 days of first incurring an
expenditure eligible for the tax credit.

Training Tax Credit

Extended to the end of 2022

Farmers’ Food Donation Tax Credit

Extended to the end of 2023

New Mine Allowance

Effective date to be specified, extended to the end of 2025

PST Registration Requirement

Effective July 1, 2020, Canadian sellers of goods, along with Canadian and foreign sellers of software and telecommunication services will be required to register as tax collectors if specified B.C. revenues exceed $10,000. Additionally, all Canadian sellers of vapour products will be required to register if they
cause vapour products to be delivered to B.C. consumers.

Sales Tax Changes

Carbonated Beverages

Effective July 1, 2020, carbonated beverages that contain sugar, natural sweeteners or artificial sweeteners will no longer qualify for the PST exemption for food products. PST will also apply to beverages that are dispensed through soda fountains, soda guns or similar equipment, along with
all beverages dispensed through vending machines (except vending machines wholly
dedicated to dispensing beverages other than sweetened carbonated beverages, e.g., coffee
or water machines)

Carbon Tax Rates Aligned with Federal Carbon Pricing Backstop Rates

Effective April 1, 2020, the B.C. carbon tax rates for 2020 and 2021 are aligned with
the federal carbon pricing backstop methodology, where applicable. As part of this
alignment, the current B.C. rates for shredded and whole tires are also being replaced
with a new category for “combustible waste”. Combustible waste includes tires in
any form, asphalt shingles as a new taxable combustible and any prescribed material,
substance or thing.
B.C. carbon tax rates are being updated to ensure they are in line with the latest science
on emissions. The previous rates were set in 2008 and are today considered to be based
on old science. For some fuel types, the rates are lower than their original scheduled rates.
For example, the tax rate for gasoline will be 9.96 cents per litre on April 1, 2020, rather
than 10.01 cents per litre. For some fuel types, the rates are higher than their original
scheduled rates. For example, the tax rate for natural gas will be 8.82 cents per cubic
metre on April 1, 2020, rather than 8.55 cents per cubic metre. The new rates will be
available on the Ministry of Finance’s website.
The B.C. carbon tax rates will be reviewed as part of the federal government’s review of
the Pan-Canadian Framework on Clean Growth and Climate Change in 2022.

Tax Rate for Heated Tobacco Products Introduced

Effective April 1, 2020, a default tax of 29.5 cents per heated tobacco product is
introduced. For specific heated tobacco products, this default can be changed by
regulation. A heated tobacco product is a product that contains tobacco and is designed
to be heated, but not combusted, in a tobacco heating unit to produce a vapour for
inhalation.

Property Transfer Tax

Exemption from Additional Property Transfer Tax for Certain Canadian-Controlled
Limited Partnerships Introduced

Effective on a date to be specified by regulation, a new exemption from additional
property transfer tax will be introduced for qualifying Canadian-controlled limited
partnerships. This exemption will treat Canadian-controlled limited partnerships in a
manner more consistent with Canadian-controlled corporations. It will ensure that new
housing developments are treated similarly irrespective of whether the development is
being undertaken by a Canadian-controlled corporation or Canadian-controlled limited
partnership.

The entire BC Budget can be found at https://www.bcbudget.gov.bc.ca/2020/downloads.htm#gotoNewsReleases