Dividends vs. Salary

A recent comment by the top wealth advisor at QFS caught my attention and I’d like share it with you. The comment revolved around the consequences of a business owner only paying themselves with dividends and not taking any salary. The usual arguments that support this strategy are lower taxes owing and not having to pay CPP premiums. Let’s contemplate a retirement without CPP. To keep the math simple let’s assume inflation and discount rates are equal. Consider this, the present value of the maximum CPP benefit for a 65 year old over 20 years is $267,473, and for a couple, that’s $534,946! If a business owner does decide to go the dividend route, they should consider how they are going to replace the CPP income. Obviously, that means saving more. As usual a compromise might be the best solution. The business owner could pay themselves a salary equal to the Yearly Maximum Pensionable Earnings ($55,300 in 2017). This way they contribute the maximum to CPP and create some RRSP room. They could also save inside the business corporation so that the CPP benefit can be replaced by dividends in the future. Corporate whole life insurance may also fit the bill. I hope you can share these thoughts with your clients who are business owners and I look forward to all your comments. Remember, wealth cases count for Two by Tuesdays too! Take care, Scott Edgington Director of Wealth Qualified Financial Services Scott.edgington@qfscanada.com 416.786.4140 ps. Don't forget to sign up for our PD Day on September 14th!