Remember, active business income of a CCPC is eligible for specially reduced rates of both federal and provincial/territorial corporate tax due to the small business deduction. In order to maximize the potential for this tax savings, it is common for owner-managers of CCPCs to pay themselves a combination of both salary and dividends.
Some time ago, in situations where the active business income of a company exceeded the federal small business limit, it was common practice for a corporation to automatically "bonus down" to that limit. The reason was that the total corporate and personal tax associated with retaining the excess income and paying it out as a dividend often exceeded the personal tax cost when paying the excess income as a bonus. This concept is referred to as the tax integration cost.
However, with changes to the rules governing the taxation of dividends in 2006 and the gradual reductions to the federal and (some) provincial general corporate tax rates, the cost of retaining income within a corporation has declined. As a result, paying a bonus may not always yield the most tax-efficient result. Furthermore, where profits are left in the business (to be distributed at a future date as a dividend), the additional personal tax on the dividend will be deferred.
As a cautionary note, if you decide to retain income in your corporation to take advantage of the tax deferral, and invest in passive assets, this may increase the passive investment income earned by the corporation. If that is the case, it will be necessary to consider the impact of the new passive investment income rules. These rules generally apply to taxation years that begin after 2018, and will restrict the small business deduction that can be claimed by a CCPC where passive investment income of an associated group exceeds $50,000 in the previous year.
Our Incorporating Your Business Tax Bulletin provides further discussion on retaining income within a corporation, along with a chart that illustrates the tax integration costs and potential amounts of deferrals for each province and territory. This Tax Bulletin also provides a more detailed explanation of the passive investment income rules.
Take note that other factors can influence your decision to take a salary versus being paid dividends. Your cash flow needs must be taken into account, since retaining income in your business won't work in cases where you need money for other purposes. Also, bear in mind that drawing dividends alone will not provide you with earned income for purposes of your RRSP contribution. Moreover, on the corporate side, you will want to consider the impact of any relevant payroll taxes, as well as any remittance requirements and filing obligations that may arise.
As you can see, establishing the best possible remuneration strategy can be a complex undertaking. Your BDO advisor can help you determine your optimal mix of salary and dividends.