Salary versus dividends for health care professionals

As a health care professional with a professional corporation, you're faced with an important decision: Should I pay myself using salary or dividends?

Both methods provide different options to maximize your financial planning opportunities and will change based on where you're at in your career. Understanding the advantages and disadvantages of each can significantly enhance your wealth planning strategy.

Wages

✓ PROS

• Deductible Expense These are a deductible expense to your corporation and lower your corporation’s income taxes
• Upfront Tax Payment Personal taxes are paid up front when remittances are sent to the CRA, so taxes are paid up front and there are fewer surprises come tax season.
• RRSP Contribution Room Wages contribute to your RRSP contribution room. Even if your financial plan does not include contributing to RRSPs right now, it will be crucial to your plan at some point. Building contribution room every year provides more flexibility to use RRSPs in the future.
• Health Spending Account Eligibility Wages are needed to have your own Health Spending Account. Though you may not need it right away, this account will allow you to expense chiropractor, pharmacy, counselling, and many other medical bills inside your business.
• Disability Insurance When it comes to disability insurance, the insurance company will want proof of income. This means they will look for wage income and not dividends.

✗ CONS

• Historical Complexity Historically, remittances were cumbersome to calculate and payments had to be made manually. Now these can be taken care of through wage apps which turn this con into a pro.
• No Special Tax Credits There are no special tax credits with wages like there are with dividends, so the personal tax may appear higher. However, they provide the deduction in your corporation so it pays less tax.
• Payroll Taxes You have additional payroll taxes as you have to pay into CPP with wages, whereas you do not with dividends.

Dividends

✓ PROS

• Tax Credit Advantage These are not deductible to your company, but instead come out of the remaining earnings after taxes are paid. You therefore get a tax credit to compensate for taxes already paid.
• Simplicity They are simple to pull from your corporation and have no regular remittance requirements.
• CPP Savings You do not have to pay CPP remittances on dividends like you do with wages, which could save you some money.

✗ CONS

• Higher Tax Bill No tax is remitted up front which can result in a higher tax bill in April. So when you withdraw dividends from your company, you should be setting money aside to pay the tax.
• No RRSP Contribution Room It does not build RRSP contribution room.
• Disability Insurance Dividends do not count towards your disability insurability, so you may not be able to buy, or purchase additional coverage with dividend income only.

Recommendations for each stage of your career

Early career professionals

Many early-career Health Care Professionals should look at using wages to maximize their RRSP contribution room. Even if the contribution room is not used right away, it can be used in the future to take advantage of financial planning tools available to you.

After you have maximized your RRSP contribution room, the benefits to doing additional wages will depend on your situation. In most instances, dividends will make sense to complement your wage income if additional income is needed.

Mid-career professionals

Building RRSP contribution room is still important at this stage. However, your corporation is also likely starting to build up equity inside it and you may have started to invest some of the excess equity. Investment income in a corporation results in refundable dividend taxes which are near 50%. Now as the name alludes to, this tax can be refunded. This happens when dividends are paid out of the corporation. So the main change at this stage of your career would be to add some dividends in order to get the refundable taxes to you.

Retirement

As you retire, your corporation will change from a professional corporation into a holding corporation. The corporation likely has a lot of equity built into it that are now in the form of investments. As there are limited, or potentially no active operations, you may not be able to pay yourself a wage, so your income will come in the form of dividends. It is also helpful to use dividends as the larger investments will mean more refundable taxes to get refunded.

Conclusion

Wages and dividends will both play an important role in the compensation you receive from your corporation. The categories we've covered above are a great place to start.

However, with so many moving parts, your situation will most likely be unique to you and will require a custom solution. That is why we always recommend consulting with an accountant or financial planner that is well-versed in health care professionals, such as our resident expert, Brett Ficur.

Questions?

If you have any questions about this article, salary versus dividends for health care professionals, or any of our other related services, please contact one of our Health Care Professionals accounting experts, or complete the contact form below