Salary vs Dividends vs Bonus | CPA Canada Exam Tax Technical

► Mallory, from Gevorg CPA coaching team, explains what factors to discuss when analyzing salary vs dividend, or salary vs dividend vs bonus AOs in CPA Canada PEP and CFE exams.

► Salary - Pros:
• Will provide a deduction in the calculation of corporate tax, therefore reducing the taxable income.
• You will receive payments from the CPP program later in life when you retire. This is an effective and stable form of pension planning.
► Salary - Cons:
• Included in employment income in the year received and taxed personally using increasing tax brackets.
• Requires payments into the CPP program (employer and employee portions).

► Dividends - Pros:
• Capital gains produce amounts for a capital dividend account (CDA) balance. This can be paid out as a tax-free dividend.
• Generally, create less tax at the personal level. This will depend on numerous factors, including: whether the dividend is eligible or other-than-eligible, personal tax bracket, tax rates and tax credits.
► Dividends - Cons:
• Dividends are not deductible like salary payments, thus increasing taxable income for the company. However, dividends will be paid out of after-tax profits and be eligible for a dividend tax credit which, assuming integration is working, will offset the higher corporate rate of tax paid. Therefore, they reduce cash flow and do not decrease corporate income taxes.
• Does not generate RRSP contribution room and pensionable earnings for CPP.

► Bonus - Pros:
• Bonuses declared at year-end create the opportunity for a personal tax deferral since the amount does not need to be paid for 6 months.
• Can often be directly deposited in RRSP, reducing the amount of taxes paid compared to receiving the bonus directly.

► Bonus - Cons:
• If a bonus is declared and not paid right away, cash flow issues later could create difficulty in actual payment of bonus.
• Paying a bonus (like salary) comes with a higher cost, as employer and employee portions of CPP must be factored in.

► Presented by Mallory Stevens, CPA

☞ Instagram: @gevorgcpa

Intro (0:00)
Salary Pros (0:52)
Salary Cons (2:22)
Dividend Pros (3:25)
Dividend Cons (5:07)
Bonus Pros (6:07)
Bonus Cons (6:59)
Conclusion (7:30)

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