3 reasons biz owners should choose dividends

Business owners should consider drawing dividends rather than salaries from their corporations for the following reasons.

1. It saves tax

Dividend income is first taxed at a corporate level, so owners can claim the tax credit to offset personal taxes. They claim a grossed-up amount of income based on the approximate corporate taxes paid, and the dividend credit returns some of this inflated amount.

2. They get to keep more of their earnings

The only caveat is they should keep track of corporate tax rates. Most recently, Budget 2013 targeted the dividend tax credit. The budget documents claim, “The current dividend tax credit and gross-up factor for these dividends over-compensate individuals.”

The federal government wants to eliminate such advantages offered by bridging the gap between how dividends and normal wages are taxed. This will impact how much clients can save using dividends, says says Ken Morrison, CA and owner of Provision Accounting Group. But the strategy still works since the maximum dividend tax rate is 34.52%.

“Further, the Supreme Court says the share structure of private Canadian companies allows for even allocation of income to all family members involved in the company.”

3. Family advantages

Splitting dividend income amongst family shareholders takes advantage of lower marginal tax rates.

Say you have a business-owner client whose husband has a low-paying job. If he’s a shareholder and she takes out $120,000 in dividends per year, she can split that evenly between them to ensure they’re each taxed in a lower bracket.

This same client could adjust dividend income allocation if needed. She could raise her share of the payout if her husband gets a raise, for example. But don’t set wages too high, because CRA will deem them unreasonable and double taxation will occur. Read more: Dividends for business owners