My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 13, 2017

The Salary vs Dividend Dilemma 2017 Version - What Small Business Owners Need to Know

In January 2013 (my, how time flies), I wrote a three-part series on the question of whether small business owners were better off taking a salary or dividend. I have been asked numerous times by readers, to update the series, but since it took 15 hours or so to write, I resisted.

However, I have cried uncle and decided to provide a short update on the absolute and deferred tax savings rates and re-iterate some of the issues you need to consider in making this decision.

Bloggers Note: I live and work in Ontario, so I have used Ontario tax rates in my analysis. The discussion should be relevant for most provinces, although there are a couple outlier provinces, so please discuss any tax planning with your accountant.

Absolute vs Deferred Tax Savings

There are two concepts that need to be understood in relation to this discussion:

1. Absolute income tax savings
2. The power of the deferral of income tax and the time value of money  

I illustrate these two concepts below.

I had some issues with the formatting of the charts that I could not fix, so I apologize in advance that they are not aligned perfectly. 

Absolute Income Tax Savings

Absolute income tax savings are the actual tax savings a business owner would have by utilizing a dividend only strategy over a salary strategy or vice versa. In 2013, using a dividend only strategy resulted in a significant absolute tax savings benefit (3.38%). i.e. you would have $338 more dollars in your pocket if you paid yourself a $10,000 dividend in 2013 than if you paid yourself a salary. However, due to the various increases in income taxes implemented by the Liberals, there is essentially no difference in 2017 on income eligible for the small business tax rate for a high rate taxpayer.

This is demonstrated below. Please note I have excluded employer health tax.

Income Eligible for the Small Business Deduction ("SBD")

Income earned by the business                                         100.00
Corporate taxes payable                                                   (15.00)
Income available as an ineligible dividend                              85.00
Personal tax payable on ineligible dividend                          (38.51)
Net cash to shareholder                                                       46.49

Total corporate and personal tax                                      53.51

Personal tax at top rate                                                        53.53

Savings/(cost) of earning income in a corporation
and paying it as an ineligible dividend                               0.02

If you account for employer taxes, there is approximately a .009% tax savings in paying an ineligible dividend vs taking a salary.

Income not Eligible for the SBD

Income earned by the business                                            100.00
Corporate taxes payable                                                      (26.50)
Income available as an eligible dividend                                   73.50
Personal tax payable on eligible dividend                               (28.91)
Net cash to shareholder                                                         44.59

Total corporate and personal tax                                        55.41

Personal tax at top rate                                                         53.53

Savings/(cost) of earning income in a corporation
and paying it as an eligible dividend                                  (1.88)

If you account for employer taxes, the tax cost of earning income not eligible for the small business rate comes down to about 1%.

The long and short of all this is; from an absolute income tax perspective, you are pretty much indifferent on taking salary or dividends unless tax rates are changed in future budgets.

The Deferral on Corporate Income

The chart below reflects the amount of income that is deferred when a business owner leaves excess funds in their corporation.

Active Income Eligible for SBD

Tax at top personal rates                                                     53.53
Tax at small business corporate tax rates                             15.00
Tax deferral from retaining income                                 38.53

Active Income not Eligible for SBD

Tax at top personal rates                                                     53.53
Tax at general corporate tax rates                                        26.50
Tax deferral from retaining income                                 27.03

The above reflects there is a substantial tax deferral when you leave income in your corporation. This deferral allows you to invest that money in your corporation to grow your company, or just invest it passively in stocks, real estate or other investments. However, it is important to understand, this is just a tax deferral, not an absolute tax saving.

The "Bonusing Down" Decision

In the old days (5 years ago) the “conventional wisdom” was to pay a bonus when your corporate taxable income exceeded the small business limit. However, these days, most accountants suggest their clients pay the higher general rate of corporate income tax, if the money is not needed in the short-term (3-5 years depending upon various investment return assumptions) or better yet, the long term (10-25 years). The reason for this is there is a tax deferral of 27.03% as noted above, while the absolute tax cost is 1.88% or less. In most cases where money is not required, the investment returns on the 27% deferral should significantly exceed the small absolute tax cost.

What Jamie Says

Jamie Golombek, the Managing Director, Tax & Estate Planning of CIBC has written several outstanding papers on whether small business owners should take a salary or dividend.

In 2011, he wrote a paper titled “Bye-bye Bonus! Why small business owners may prefer dividends over a bonus”. This report was updated in 2015 and can be found here. In that report Jamie stated that “Although dependent on the long term assumed rate of return and time horizon, if funds are not needed to fund current lifestyle, it may be advisable to have SBD Income initially taxed inside the corporation at relatively low corporate tax rates. The after-tax SBD Income can then be retained and invested in the corporation with the after-tax amount later paid out as a dividend to the shareholder, so as to enjoy a significant tax deferral of SBD Income within the corporation.” This was essentially the same conclusion Jamie came to for active business income not subject to the small business rate.

With the 4% increase in personal tax rates since the publication of Jamie’s 2015 paper, one would assume his conclusions would still hold true. To be sure, I asked him recently to confirm my assumption.

One of the members of his CIBC tax estate planning team confirmed that because of the significant tax deferral advantage for active business income, they would still support payment of dividends over salary in many cases. However, there are two exceptions to this rule.

1. TFSAs - In Jamie’s 2015 report, TFSAs for Business Owners, he commented that it may be better to invest in a TFSA than in a corporation for most types of income (the main exception being deferred capital gains). That is the same conclusion I came to in this blog post.

2. RRSPs - I will discuss this exception next week (in context of a new paper Jamie released just last week) when I review whether you should pay a salary and contribute to a RRSP, or just leave the money in your company and pay dividends, as required, over time.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Thank you for the clear summary.
    One potentially important addition. Deferral can lead to absolute tax savings through "income splitting with your future self", i.e. withdrawing dividends in future years when your income will be lower, therefore your personal tax rate lower. Perhaps you will cover this in your comparison with RRSPs?

    1. Hi Martin:

      Yes, you are correct, that could be the case. Unfortunately, I only have so much time to write between my real job and life, so i do not get into that issue very much in my RRSP post.

    2. @Mark
      How would one go about deciding if the deferral is worth it when taking into account the future value. i.e if I have $100 left after corporate tax that I could take out, how much would it be worth in 15 yrs from now. Will that be lower than the after tax value of $100.

      Is inflation rate the right way to go about?

    3. I am really not a great discount and present value guy,I always have someone run the numbers for me. I think you would need both an expected rate of return and inflation rate, but if you know a good math person, ask them

  2. Any thoughts on the talk of the government eliminating or reducing the exempt portion of capital gains, or even possibly the dividend tax credit? The latter is hard to believe, as it would be somewhat nonsensical, but people are talking about it at least:

    1. Hi Nathan

      There is concern, I just dont know how real. We are doing some planning to crystallize gains for certain clients who want to protect themselves.

  3. Hi Mark,

    Great overview. I'm also a big fan of Jamie's articles.

    I'm in public practice and we strive to do this type of analysis for our clients. It's too time consuming because of all the variables such as EHT (which you mention), CPP, and the Canada Child Benefit. Also, not all clients are at the top rate.

    How can anyone actually quantify these outcomes for their clients?

    1. Good question, there is no easy answer and the time it would take to run even some of the various permutations and combinations would be excessive. Ever wonder way I wait until Jamie does a paper to post on this topic :) It is because I dont have the time or manpower to run all these permutations or the ability to write a computer program to do so. But seriously, I think it is part art. Know your clients personality and spending habits and for most people that pushes me to having them make RRSP contributions, unless I can get them dividends at low rates.

  4. Hi Mark,

    I think there's another reason to leave money in the corporation. When a shareholder passes away, all personal investments will be taxable right away. However, his corporation will just be transferred to the beneficiary who will continue to benefit from the tax deferral.

    1. Hi Anon

      When you pass away, unless the shares are left to your spouse you are deemed to sell the shares of your corporation. so not correct

  5. Hi Mark - I'm curious to hear why you haven't included CPP in your analysis.

    I understand your calculations and how there is a negligible difference between Salary vs. Dividends; however, the balance shifts in favor of the Dividend option when you account for CPP (because CPP is present in Salary but not via Dividend). That was my understanding, at least.

    If you could be so kind as to clarify/comment, it would be appreciated.

    1. Hi Unknown

      CPP is ignored because as Jamie says in his paper, you could probably do better investing on your own, but many people want to pay it to receive the pension in the future. I would say the majority of my clients choose to take enough salary to max their RRSPs and pay the CPP.

  6. Hi Mark,

    I am trying to understand where you obtained the payable tax rate. When I look at the chart in taxtips, the rate for the Canadian eligible dividends is of 39.34%. This would make a total payable personal and corporate tax of 65.84%, which is way higher than the highest marginal tax rate on income.

    In such a case, I do not see sense of incorporation since the integration does not work.

    1. Hi Anon

      Integration works in all cases with maybe some small variances. If you start with $100 and pay say 26% general tax you have $74 left. If you pay the $74 as an eligible dividend at 39%, you pay another $28 or so, so total tax paid is 55%, not 65.84%. Same for CCPC. You start with $100, pay $15 tax and then pay 45% or so on the $85 remaining as an ineligible dividend so tax of $38 or so again making the total tax around 53% or so.