Episode 233: Salary vs. Dividends: How to Choose the Right Mix for Long-Term Wealth in Canada

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Are dividends really more tax-efficient for business owners—or is that advice costing you hundreds of thousands over time?

If you’re an incorporated Canadian business owner, you’ve likely heard the age-old advice: “Just take dividends—it’s simpler and saves tax.” But what if that oversimplified strategy is quietly undermining your long-term wealth? In this episode, Jon and Kyle unpack the real math behind salary vs. dividends, revealing how your compensation choices ripple through CPP contributions, RRSP room, investment opportunities, and future flexibility. Whether your business is just starting out or generating strong retained earnings, understanding these trade-offs is crucial to building sustainable wealth.

By the end of this episode, you’ll discover:

• Why dividends don’t always save tax—and when they can actually hurt your long-term growth
  

• How to use salary strategically to open up RRSP room and diversify beyond your business
  

• A clear, math-based breakdown of which approach works best at different income and retained earnings levels

Press play now to finally take the guesswork out of how you pay yourself—and make smarter, wealth-building decisions as an incorporated business owner.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

For Canadian business owners seeking financial independence and early retirement, the salary vs. dividends decision is more than just a tax move—it’s a cornerstone of your Canadian wealth plan. Navigating the Canadian tax system requires clarity around CPP, RRSP optimization, and the ripple effects on corporate and personal tax planning. In this episode, we unpack tax-efficient investing strategies, corporate structure optimization, and how to use your financial buckets—from real estate investing to RSPs—to build long-term wealth in Canada. Whether you’re pursuing a modest lifestyle with smart financial systems or legacy planning for the next generation, this conversation will sharpen your investment bucket strategy, enhance your corporate wealth planning, and help you set a clear financial vision. Discover how tax efficiency, capital gains strategy, and diversified corporate finance can drive real results for Canadian entrepreneurs committed to financial freedom.

Transcript:

Jon Orr:
All right, let’s talk about one of the most common, most misunderstood and most confidently misapplied strategies among corporate and Canadian business owners. And we’re talking today about something we’ve talked about many times here on the podcast, because it’s constantly, every year you’re kind of reevaluating and that’s that system you want to start developing. But really what we’re talking about is here, do I take a salary? Do I take dividends? What’s the blend? Is there a blend? Is there not a blend? What’s the optimal route here? I think we keep asking ourselves this question. So if you’re incorporated, there’s a very good chance you’ve been told some version of the just take dividends, it’s more tax efficient. And to be honest, when we first incorporated, we were in that mindset. We were like, let’s just, let’s do this and then we’ll just funnel dividends out to us because it seems like there’s no CPP. We don’t have to worry about that. There’s lower to personal tax. It’s cleaner, it’s simpler. And on the surface it did and it does feel right. You your personal tax bill is lower, your accountant happy and your payroll, you don’t have to have payroll. Like that was, you and me to be personal, that was a drawback because we were like, whoa, what does that mean? Like who does payroll? Do we have to hire that? Like that seems interesting all of a sudden. But today’s episode is about why that confidence can be dangerous. And because dividends don’t actually save tax and not once you understand how the Canadian tax system is designed. for many incorporated business owners, especially as profits grow, paying yourself only dividends quietly costs you hundreds of thousands of dollars over your lifetime. So this episode is not about rules of thumb, it’s about integration. It’s about CPP and RSPs and how compensation decisions ripple through your entire wealth system. So let’s get into it, Kyle.

Kyle Pearce:
Yeah, absolutely. And you’re right, John. It’s very hard when you’re beginning. And first of all, what I want to assure people of as we dig into this episode, if you’re on the fence trying to figure out which one should I do, especially if you’re just starting a business. So if you’re in a business where there’s not a massive amount of retained earnings, I don’t want you to get too hell bent on it. And I don’t want you to, I’m going to almost call it waste too much time on it. Okay, because at the end of the day, what we’re dealing with here is a situation where we’re not actually going to be saving tax itself, as you had already mentioned, we’re gonna be essentially dealing with whether we are funding or not funding CPP. And in a way, when you think about CPP, CPP is a very conservative asset, but like it is a pension, right? So it is an insurance product, right? You have to always remember that. So you’re putting money in, just for the safety of it and the negative you’re getting as an incorporated business owner when you are the shareholder of the business that you’re working in. If you do choose to take a salary, you are choosing to essentially double pay on CPP, right? Like that’s the big thing that you really have to debate for yourself and really think about. is that I am now paying both ends of the CPP I’m paying it’s it’s like a government match program right or a employer match program that the government essentially is making us do so I get to pay CPP off of my personal, you know, income, not income tax, but my personal pay stub, and my business that paid me that generated that pay stub is also going to pay so There is some lost, we’ll call it value in the CPP by doing it this way, but I’m gonna argue that the amount of money we’re talking about here isn’t like significant enough to really move the needle for the vast majority of business owners because we’re talking about like less than $10,000 per year. And once again, like a lot of people might be like, well, like 10,000 is a lot of money. So if that’s a major aspect in your plan, You just have to recognize though that those $10,000 you do need if you do choose to do a dividend, you do need to make sure that that $10,000 does actually hit an investment if you want to sort of play the game of like I could do better in the market. Like one of the biggest hardest parts is the behavioral economics aspect of, you know, taking those dollars not paying into it, but then not investing in something else, right? And those dollars just sort of go out the window. So You know, when we’re really looking at things, we typically suggest people if it’s not going to quote unquote break you in order to diversify, we often are telling people listen for lower salary amounts, we would suggest or lower income amounts, we should say, we typically suggest the salary just because it’s a forced diversification away from whatever else you might be investing in. anyway and and once again like we really want to make sure that that’s not the only dollars that you’re going to be investing we want to see you investing more than the less than $10,000 that would have been going into CPP anyway right so again this is the part that I think is is really important we’re hoping to see a much larger amount going into your investments as a business owner because remember if your business is your greatest asset if it’s your greatest investment That is a lot of risk, right? When we’re putting all of our eggs into that one basket, we want to make sure that we are diversifying out into other assets in whatever market or asset class you’re in. And CPP can be a nice compliment to this. You know, I’ve never heard someone down the road say, you know, I really hate CPP. I wish I never had it, you know, like you’ll never hear that some people might say I overpaid for it. It’s not enough. All of those things. But at the end of the day, You know, we really want to make sure that, you know, we’re not, you know, aimlessly picking salary or dividends because we think we’re actually saving a significant amount of tax. That’s not actually true due to integration. What we’re really dealing with is do I want to double fund CPP or could I do better with those dollars doing something else?

Jon Orr:
Now you mentioned integration. Why don’t you explain that.

Kyle Pearce:
Yeah. So integration is basically, I mean, if you look at the income tax act, and if you really like look at the taxation of small businesses, incorporated businesses in Canada, there’s some complexity there. They want to give you some advantage by allowing you to actively earn. This is, you know, not passive income, but active business income. They want to give you a low tax amount to encourage the growth of businesses. This is actually like a great gift. for our business owners, right? Up to $500,000 of net operating income, we’re only gonna pay somewhere between nine and 12 % ish depending on the province that you’re in. Of course, being in Ontario, you and I, we get to be on the higher end of that spectrum. But in other provinces, some of the other provinces are a little bit lower. So if we say it’s somewhere around 10%, that’s a great thing. So what the government’s doing is they’re basically saying, and the CRA is saying, listen, If you take out money as a salary or a dividend, there’s a few things we get with a salary. One is we get a expense to the company. So basically, if I am salaring any employees, including the owner, if I’m salaring myself, I get to actually reduce my net operating income. That means I save on the taxes that my business is going to pay at that low tax rate. However, at a personal level, we need to take on the full personal taxation. Now, said another way, if a shareholder chooses to take a dividend instead, then that dividend that they receive at a personal level is going to be taxed at a lower amount because a dividend is not an expense to the business. And therefore, our business has already paid either the low tax amount, that nine to 12-ish percent, or around 25, 26 % if you are earning more than $500,000 of net operating income. So basically the government’s saying if you choose to take a dividend, we don’t wanna punish you for that, we’re gonna allow you at a personal level to pay less tax. But if we put it all in the machine, it should come out to be about the same. And it’s very reasonably close, right? Like we can go and split hairs. We have an episode where we did go and split hairs and we looked at some scenarios where there’s slight optimization opportunities. But again, not really worth your time or your effort. The real debate here for you as a business owner is really deciding again, do I want to double fund that CPP? And then let’s talk about the next one, which I think is a big asset that we get. through a salary, which is the benefit of receiving contribution room to our RSP.

Jon Orr:
Now, I just want to, you know, kind of go back to something that you said just a minute ago, because what you said was that the business, like you said that the government is trying to make it about the same. And I think what we want to make sure we’re clear here is that it’s about the same because the business owner is, you’re looking at it both, you’re owning the business and therefore you’re paying tax in the business. and on the personal side because that’s, it’s different if you don’t own that business. Like I guess you’re a shareholder and you can take dividends, but it’s like, it’s a little different when you think about like, especially when you think like I’m the sole shareholder or my family is the sole shareholder of the business versus, you know, and my personal side, because I think that sometimes plays into that like thinking of like why it’s designed in this way. Okay, so let’s get into our RRSP’s and why dividends is actually maybe killing your RRSP room.

Kyle Pearce:
Yeah, yeah. And, you know, when we say that, it’s like, it’s not, it’s not necessarily killing it in terms of like, reducing the room, it’s just, it’s not actually introducing any new contribution room. Now, for some people, when they’re business owners, and if your plan is like, No, I’m going to use a corporate investment strategy, and I don’t really see the benefit for our SPs for yourself, like there, you can make a case for it, like everyone can make a case. However, I always look at it and I say always, I wasn’t always thinking along these lines. I would say that currently my thought is if I’ve got an opportunity to create additional RRSP room, even if I’m not gonna choose to use that room now or today, having the room available could be very helpful. So I wanna give one example. So John, you and I used to be teachers, we had a pension. and we’re in the process of commuting our pensions over to ourselves. So essentially, you know, opting out of our pension plan because we had left teaching well before our retirement or 85 factor in the retirement years. And basically what would end up happening if I have a bunch of our RSP room available, usually when we commute a pension, there’s a chunk of that money that actually cannot be put into a locked in retirement account. That’s a lira. that portion gets given to you as cash. And if we don’t have our RSP room for that cash, if it let’s say it’s a lump sum of 30, 50, whatever $70,000, that cash is now going to come to me as essentially like a salary, right? It’s not a salary, it’s going to come to me and it’s going to be added as income on my income tax. And I’m going to have to pay whatever tax rate I’m at personally, but If I had 50,000 of room in my RRSP or if I had $70,000 of room or whatever that amount might be, I have the option to take those dollars and put it directly in there. And that would allow that full 70 to go in instead of me or at least getting, know, if they withheld tax, getting that tax back at the end of the year, and then we can, you know, dump it back in after you’ve got some more flexibility there with the RRSP room. I’m not necessarily a huge fan unless we’ll talk a little later about where this might make sense. But I’m not a huge fan of necessarily overpaying yourself through a salary just to get it into a RRSP unless you have a significant enough amount of retained earnings where it’s just a great move as a diversification play. But if we’re like, you know, fighting with the money that we have to decide, like if it’s a big decision, do I take an extra 20 grand out of the corporation or leave it in just so I can get it into an RRSP that then I’m not necessarily a great fan of it. But if I’ve got 200,000 500 that like whatever that amount of retained earnings each and every year, it could make sense for you to say, Hey, I’m gonna take a larger salary this year, try to get maybe up to 180 or 182, the maximum amount that’s going to produce RSP room, and I’m gonna backfill that RSP simply as a diversification play. And again, if we’re talking about 200,000 in retained earnings, and then you look at your RSP and I can only put 30,000 in, I’m still talking about a very small portion comparative to the amount I’ll be investing inside my corporate structure.

Jon Orr:
Right, yeah, yeah. So like when you think about dividends, it’s like there’s, you’re paying yourself a dividend, you’re saying no to creating any RRSP room in that year, and when that year’s gone, it’s gone. You’ve got zero tax-deferred personal growth happening here, you you’ve got future tax smoothing kind of flexibility dropping off, and you know, like when you think about that, that can be over the course of your or your working time, this could be very significant. And so you want to at least not just rule out RRS, like paying yourself a salary, just going the dividend route because that’s what you’ve heard. You’re thinking about these added benefits of paying yourself a salary. Now we are gonna get into like, there is a math problem here to say like, well, what’s the right number? Because you kind of hinted towards that about like how much. I’m making, does it make sense to create that type of room to start passing that to myself in terms of salary? But I want to address a question that we kind of bring up often, which is this idea that people contribute to their RSPs because it gives you tax deferral now, you push it off to later, and the theory is because you will make, why it made sense now to load that in there was that And the initial theory was that most people think I’m going to make, like when I retire, I’m going to make less money because I’m not working anymore. And therefore, my future income will be lower than my current income and therefore that’s why I wanna defer it. So I will pay less overall down the road because of this deferral. However, here on this podcast, many times we’ve said that the goal of an entrepreneur is to try to make more. down the road, you’re going to make more money and you’re hoping your income five years, 10 years in retirement is either the same as it is now or it is more because you’ve earned more money and your business has grown. So let’s just chat about that before we move into what the actual numbers look like. But how do we address the, I’m gonna make more so why would I wanna pad my RSP and therefore create room in my RSP?

Kyle Pearce:
Yeah, you know what, it’s a great question. I would say just because the unknown, that would be the main reason, right? Is we don’t know what the future holds. We don’t know what tax rates are gonna be in the future. There are some, you know, a lot of people I would tend to agree. Like I don’t think we’re gonna see tax rates come down anytime soon. Like I’m not gonna bet on that, that’s for sure. If anything, we’ll be lucky if tax rates stay the same and inflate up with inflation that that’s the part that I think is really going to get us whether tax rates themselves increase or not. But if they don’t inflate with real inflation, you know, like if we just take like a nominal inflation rate and the tax brackets slowly move up by 2%, but inflation is really 4 % like that’s problematic, right? When we’re going to take money out of an RSP. So yeah, I don’t necessarily want to balloon my RSP. But I would argue though. If let’s say if I’m putting $30,000 maximum into my RSP per year, and I’m leaving significantly more than $30,000 retained in my corporation, it’s like the bigger balloon is going to be your corporate assets, right? So sometimes having a little bit of diversification can work there. Now, you know, there’s some plays that you can take and as we get older, we tend to get a little more risk off. Like right now, if you’re 35, if you’re 45, even sometimes even if you’re 50 and planning to work till 65, in your mind, you might be saying, well, the rational move is to be in higher risk assets that I should keep risk on. But when we get to retirement, oftentimes when we look at our pile, you’re using that pile as sort of the number to decide how much can I afford for my lifestyle needs moving forward. And a lot of people would rather see that pile stay the same or slowly decrease at a predictable amount rather than seeing it flip all over the map, right? Where they start to get concerned, right? And then behavioral science comes in, right? And behavioral psychology kicks in and we go, shoot, you know, do I have enough to retire? And now I can’t sleep at night. So why I say that is that if we get our RSP and we use our RSP as the tax deferral bucket that it is, we can be strategic in which assets we choose to put in there, right? Now, I would never say no to growth in any bucket, right? Like, let’s be real here, these are good problems to have. So if you can 10x something in your RSP, it’s a good problem to have. Now, at the end of the day, you will essentially lose 50 % of it coming out if it gets too big, right? If I can’t drain it in a tax efficient manner. I’m going to lose half of it. again, if it 10x is that’s that’s a good thing. That’s a good problem to have.

Jon Orr:
Yeah. Yeah, like that’s good distinction because I think what we’re most of the time when we’re working with our clients, we’re talking with, you and if you’re listening to this podcast, you’re talking about like you’re in a good situation and you’re trying to figure out where should I put dollars? And I’ve got lots of dollars on the business side. I got enough to live on my personal side. And now I’m just kind of going to like, what buckets could I fill? And since this bucket is here, like, and you’re saying like, I’ve got money over here, but it’s like, but I’m not utilizing this bucket and it could be paying off, why not reallocate some in that way? And I think when you move into some of the math, that can help justify why you might wanna fill that bucket up, even though you might make more money down the road. Like when you think about like, hey, I’m making a ton of money over here. And that’s what kind of this next little piece of the episode will be about, because it does come down to math. There’s no universal answer to this problem. You have to decide this for yourself, but knowing the math, knowing some of the numbers, knowing the reasons will help you make this decision a little bit better. So let’s dive into like, think about retained earnings. Like now I’ll move to my business side. When does it make sense math-wise for me to start going, ah, it’s a no-brainer to pay myself a salary?

Kyle Pearce:
Yeah, absolutely. I would say the less money you’re paying yourself. So if let’s say, you know, we’re talking about like really low amounts, I would say the less money you’re paying yourself and the less money that you have overall in the business, the more that this optimization problem matters, right? Said another way is like that. If that $10,000 or 90, you know, $300, whatever the maximum amount of EI that you would be paying on both sides. You’d pay half personally, you’d pay half in the corporation. Like if that number is substantial relevant to all of the money that you earned in the business that year, then you’re going to want to pay more attention to it. And maybe you’re going to be opting for the dividend because those dollars are really important to you. The other piece that’s going to be important is that if that amount is small, like significantly small. So the, we’re talking about, let’s say the business net operating income is maybe, I didn’t do the exact math here, but let’s say it’s let’s say it’s a 150 net operating income and you’re paying yourself $72,000 via a salary or dividend. There’s a little bit left in the company and you know, while those are retained, you might still not be able to invest them because you need some cashflow for the business. Like you might need those liquid dollars there just for cash flowing the business. that’s $72,000 that you’re taking, it’s gonna open up some RSP room, but unless you see the business growing from there, you’re never gonna be in a substantially high tax bracket for you to really benefit significantly from the RSP and paying double CPP is actually a lost opportunity, right? So the example that we actually picked here for today, was a business that’s earning around $500,000 of net operating income. Now, you know, we picked that number just because again, it’s gonna keep the business within the low tax rate, the small business tax credit is gonna be applied. So they’re only gonna pay nine to 12 % in the business. And we’re gonna talk on the personal side that. The actual individual requires a lifestyle spending need of about 100,000, okay? We picked out, we have a blog post and we’ll share the link to the blog post in this episode so you can go right through all of these numbers and follow along. We’re gonna round numbers here a little bit on the podcast just because people are driving. We don’t wanna see people getting in accidents, trying to think and rounding the numbers or carrying the one. But we’ve got someone who needs about $100,000 to spend. we’re going to look at, we’re calling them Sammy salary taker. Okay, so this, this is yeah, we need $100,000 ish of after tax money. So if salary, salary taker, sorry, Sammy salary taker needs 100,000, they’ve got, they’ve got growth salary of $180,000. Now, we’re picking these numbers pretty strategically, right? So we’re getting essentially right up against the maximum amount of RSP room that we can pull.

Jon Orr:
Now when you say that, you’re basically reverse engineered because the RSP says something percent You’ve always got these numbers memorized. don’t, 18, yeah.

Kyle Pearce:
Yeah, yeah, sorry. So it’s going to be 18 % of your total income, but it’s up to just north of $180,000. So you can get about 32 ish thousand dollars of contribution room. Right. So we’re speaking right now to the people that have been taking a salary at 350, for example, probably not the best move, maybe adjusting and taking a certain amount of salary, at least up to the 180 ish. and then taking some additional dividends can be helpful. Now here’s the problem that these high income earners run into is like, were you taking 350 because you wanted to invest personally, or is this just for lifestyle, right? Like these are the challenges that you really run into and you go shoot, you’re not only paying a lot in tax, but you’d actually have to take out more money as a dividend in order to help you stuff the RSP in order for those dollars to come down. So we’ve just got a bit of a. a cashflow problem here. Like these are people that really require some more advanced strategies and potentially leverage strategies so that they don’t pay 50 plus percent in round trip interest all the way around, right? So we’ll get into that a little bit later, but this individual is gonna be taking 180 as a salary. That means that a couple of things are gonna happen. First of all, the business is gonna get to essentially write off that salary, right? So the business isn’t gonna pay any tax on this 180. Now the business is also going to have to pay the employer side of CPP. So the business is gonna pay about $4,700. The employee is also going to have to pay the $4,700 off of this salaried pay stub. Okay, so that 180 is starting to dwindle away here. Also, taxes withheld on that automatically, right? Whereas with a dividend, We didn’t factor this into our calculation by the way, with a dividend, you can actually pay later in the year based on the dividends you took. So there is a little arbitrage that can take place there as well. Meaning, you know, on January 15th, when you get your first pay stub from the employer, you’ve already given the taxes to the government. Whereas if you took a dividend, you didn’t pay on any tax on that dividend and you can wait until the end of the year. So there is. you know, some strategy that can take place here if you really want to get into it. I would argue growing your business is going to be a better time for you to spend your time and your thinking time on than trying to arbitrage the tax money you haven’t paid the government. Now, as we go, this means that they’re going to have a taxable, we’re also going to assume this person is going to put into the RSP. Okay, so they take in 180. They want us put $32,000 into the RSP. So their taxable income’s gonna go down to 148, and therefore they’re gonna pay around $40,000 in personal tax. So after all is said and done, they’re gonna be left with just north of $100,000 of spendable income. So the big nuance here with this calculation is that the RRSP is going to represent a investment And we want to kind of see like what’s going to happen when the RSP, if we left that money in the corporation, it was taxed and we’re able to invest those dollars inside the corporation. well, what I’ll mention here first is the, like, let’s assume this person took a dividend instead, right? So if they take a dividend instead and left more money in the corporation to invest, there’s a couple things going on. First of all, the company’s gonna get taxed on those same dollars. So if we assume that $180,000, in this case, we’re gonna assume 184,700 because there’s no CPP having to be spent by the company for a dividend taker. So we’re actually gonna like adjust that up. We’re gonna call it about 185 is the money that’s available for the person to take as a dividend instead. Now they still only need $100,000 of after tax income. The difference though is that that 184 is gonna automatically go down in the corporation because of taxation. So if we apply Ontario’s tax rate and the federal rate, we’re going to lose 12.2%. which is about 22,500. Like right there, when you see that in your corporation, oftentimes people are like in a panic, they’re like, my God, that’s a lot in tax. When you take it as a salary, oftentimes you don’t notice it as much because it just never hit your bank account. So this one’s like a harder pill to swallow, but it’s still significantly less tax until you choose to take it out of the corporation. So now the company’s got about $162,000 left. in order to get themselves paid and to make the same investment. So when we do this, when we look at what they actually need at a personal level, this particular individual is going to essentially be left with around $40,000 of retained earnings in the corporation in order for them to get that hundred ish thousand dollars of after tax income at a personal level. So when we think about this for a moment, Sammy Salarytaker has $32,000 in their RRSP, all right? They also have CPP. Whereas David Dividendtaker, as we call them in the blog post, has the same after-tax income, which is about $100,000 at a personal level, but the corporation now has $40,000 that they can do whatever they wanna do with. And again, on the corp side. we’ve got 32,000 invested in an RSP. Again, we’re going to call that like high security prison. Plus you’ve got CPP high security prison two things there. Now, Davey dividend has $40,000 in the lower security prison known as the corporation has retained earnings. And now those 40,000 have to go into some sort of investment. The difference on these two investments that we have to just keep in mind is that I’m going to invest less in the RSP, but all of it is going to be tax deferred, meaning I can earn interest, dividends, capital gains. I can do any of those things and I’m not going to have to pay any tax until I start to take money out as income. Whereas in the corporation, we could be subject to higher taxation if we invest in things that are not ideal to be invested inside the corporation. So I’m gonna pick on interest first. If we pick interest, we’re gonna spend 50 % in essentially the highest tax bracket on that interest. So if Davey is willing to do more capital gain like assets, or pick ETFs that are corporate class and don’t produce a dividend or interest, then he will have some of the same benefit. that the RSP would have had. And potentially, if let’s say we took a capital gain asset and we were to put it in the RSP or leave it inside the corporation, he’s gonna do significantly better inside the corporation with those $40,000, assuming that asset continues to grow.

Jon Orr:
Right. Year to year two. Yeah, year to year two.

Kyle Pearce:
And year to year. Yeah. So there’s definitely like, so we don’t want to understate. We’re still fans of the diversification. Again, you’re getting a little bit of safety in that CPP, but that CPP rate of return is very, very low, but it is guaranteed. Whereas if you mess up that isn’t guaranteed, right? Like having success or not with those $40,000, I would rather see a little bit of money going into one of these other buckets. But again, I’m probably going to go dividend if that was all my retained earnings. Like if all I had is $40,000, I’ll probably do the dividend so that I can maximize my growth. Whereas if I have a significant amount of retained earnings, things start to shift a little bit here. And in this case, we even said the business was earning $500,000 of net operating income. We still have like $300,000, $320 left to deal with, right? Like We either need it for business operations or we potentially could invest those dollars as well. But the salary taker and the dividend taker still have those dollars to do whatever they wanna do with it. So you just have to decide whether that diversification matters to you enough or whether the optimization and the maximization matters to you more. And again, limiting your opportunity for RRSP contribution room maybe down the road, right? see you’ve got a commuted value you have or maybe you have some sort of asset that you’re going to sell that will trigger a lot of tax in a given year and you want to have a place to dump it. The RSP can be a very, very helpful bucket.

Jon Orr:
Right, and you’re cutting that off, you’re cutting that off if you just don’t have the flexibility there, right? So if you’ve got the room, if you’ve got the flexibility on the retained earnings side, why not create yourself the flexibility on the personal side? And the other part is, you’re right, it depends on how much actual retained earnings are sitting there after you consider these two scenarios, because let’s say you have two partners, three partners, can you do that with everybody? No, yes, maybe. And then do you still have a corporate investing strategy that can act as your buffer, your safety net, maybe your place that’s like, that’s where all of my fixed income or my fixed assets or my safety, I guess the risk off part of my portfolio is sitting. So all of these things to consider it again, we’re thinking about facts and trying to provide those facts here in scenarios here so you can make better decisions.

Kyle Pearce:
Yeah. Yeah, and one other piece too, I want to make sure is very, very explicit, because like we didn’t really talk about like, what’s going to happen down the road. And if we pick two capital gain generating assets, so we’re not producing dividends, we’re not producing interest, because that changes the math, of course. But if we pick capital gain assets, okay, and they’re the same asset, one is held in the RSP, the other ones held in the corporation. Now the corporation has more money being invested. They have 40,000 versus the RSPS 32,000, but I want to pretend for a second. Let’s say it was the same number and we project out 10 years, 15 years, 20 years, and that capital gain grows and grows and grows and grows. And let’s just pretend there’s a million dollar capital gain on this asset. Now, I could be buying and selling in the RSP and not experience any sort of taxation. Whereas I don’t have that advantage in the corporate brokerage account or think of it this way is like in a non-registered personal account, very similar, you know, result is going to happen here. Now, when we do pull those dollars out, if we did it in one fell swoop, so let’s pick a scenario that, Hey, let’s say, down the road, we eventually are gonna pass away. Let’s say my RSP has a million dollar capital gain inside of it. I’m not gonna worry about the rest of the money yet, but a million dollar capital gain inside of it, and there’s a million dollar capital gain inside of the corporate brokerage account or whatever the asset is, could be real estate, for example, or whatever, gold bar, it’s a capital gain. Now, we sell it at the exact same time. the RSP is going to pay 50 ish percent tax. You’re going to pay actually more than that. If you’re in Ontario, it’s going to be around, you know, almost 54 % on the entire amount. So you get to get out of the RSP. If we pull the whole thing. So we got to sell the asset or we, we transfer the asset out and we don’t sell it. There’s a deemed disposition there. We’re going to lose 50 % of that capital gain. A lot of people would assume the same thing’s going to happen inside the brokerage account. That’s actually not true. What’s going to happen in the brokerage account is that you’re going to get a 50 % capital dividend account credit in the corporation because of integration that we were talking about before. So since there is a 50 % inclusion rate on capital gains for non-registered investments, so that would be at a personal level, the same is true for the corporation. So that million dollar capital gain $500,000 of it is going to be credited to the notional account known as the capital dividend account, which allows the shareholder or holders to take that $500,000 out as a non-taxable dividend at a personal level. You get $500,000 out tax-free, whereas the other $500,000 must be taxed and it will be taxed at the passive rate of 50-ish. percent if you’re here in Ontario and you will essentially lose $250,000 of it. The other $250,000 is now quote unquote stuck in the corporation. But again, you’ve got half a million in your hand plus your corporation still holds a quarter of a million. Whereas I’m only holding half a million in my hand from the RRSP. So this is an important factor for us to think about as well when we’re talking about the investments and where we’re gonna make these investments and how that will eventually pan out down the road.

Jon Orr:
So it sounds like if I didn’t have a corporate investing strategy that was separate from how much I pay myself in terms of whether the structure of my pay myself, the dividend or salary, then like if they didn’t have that growing over there, then I might wanna heavily, especially if I make under $500,000 a year, heavily think about keeping with my dividend strategy because I can invest on the corporate side. And that there’s a lot more benefits there to grow it, because I’m growing more regularly, but then also on the end side of things, if I do go to say, use my corporate structure as my retirement vehicle, then I’m going to get more dollars in my hands later on than if I just go salary route at this point.

Kyle Pearce:
Well, and this is what makes this discussion always such an interesting one is there is no fixed answer. I want to throw this out there. We didn’t plan to talk about this, John, but here we go. Here’s the middle of the road. Yeah. The middle of the road option is this, is that nobody said that when you take a salary that you have to take a large enough salary to fill the RSP. So said another way, this salary, you know, Sammy salary taker, as we call this person, could have taken less than 180. They could have taken, let’s say 150 ish. We’d have to run the numbers and get the exact numbers, but we could have taken 150 ish. We would still pay our CPP. So there’s a little bit of loss there. We’re gonna lose that money to CPP. But again, it is a gain. We are gonna get CPP down the road. And basically what we’re gonna do is we’re gonna end up leaving the extra $32,000 inside the corporation. And we’ll still get some RSP room. So we’re going to get instead of $32,000 of RSP room, we’re going to get probably somewhere around say 20,000 ish of room, but we’re not going to use it this year. We’re going to leave it. So we’re going to take less. We’ll leave that room for if we need it. And we’re going to invest that $32,000 instead of in the corporation or in a, the RSP, we’re going to do it in the corporation because I value the 50 % inclusion rate. Now, about a year ago, they tried to change the inclusion rate for corporations to two thirds instead of one half, meaning that credit would have only been a third of the capital gain, right? So this is where diversification comes in. We don’t know what the rules are gonna do. So I tend to get people to at least consider. what the diversification could bring, but it’s really important for us to understand what we’re giving up at the same time. And I would argue math will always allow us to find the optimal amount based on today’s rules and based on very specific outcomes. But the problem is his life is very, you know, dynamic. And that’s what makes this a really difficult decision. And that’s where, again, the decision becomes easier and easier. In my opinion, the more successful your incorporated business becomes.

Jon Orr:
Right, yeah. So let’s talk about that. Let’s say, because up to this point, we were kind of leaning on the scenario that we, the business made less than $500,000. But the moment we make more than $500,000, we’re now taxed, all of a sudden now we’re on that next chunk, we’re taxed at a higher rate.

Kyle Pearce:
Yeah, yeah, exactly. And so when we get to this chunk, this is a really important piece for people to recognize. And a lot of people, it’s not on the radar, right? Like they’re so in their business and they just want to continue growing the profitability of their business that they hit that place. And sometimes it’s years down the road before they recognize because they finally like dust off all the financials and they look and they go like, wow, I’m paying a lot in tax. So remember, if we take a dividend, the business is going to pay tax first. And as soon as we make a dollar above that $500,000 of net operating income, my business is no longer going to pay 12 or nine, 10, 11%, wherever you are in Canada, we’re no longer to pay that small business tax rate on that extra dollar. We’re actually going to get bumped up into the regular, the general rate. And that rate here in Ontario, with the federal is going to be about 26 and a half percent on that dollar. So now, all of a sudden we go, hmm, that’s different. If I take a dividend, integration still going to tax me less at a personal level. So that’s important to note. It’s still gonna tax me less at a personal level. But if I gotta pay the 26 and a half percent anyway, why not think about going If I take a salary and let’s say we earn 700,000 or a million dollars of net operating income, a salary, at least a portion thereof starts to make more and more sense. And to be honest, about 130 to $135,000 of salary at a personal level here in Ontario is going to put you at about break even with what the business is gonna have to pay in taxes anyway. So why not give the business a tax deduction, take on that same tax rate at a personal level and also benefit from the RSP room that we’re gonna open up. But remember, we’re now paying that pesky little CPP on both ends, which some people might say is still not worth it to them. But I would argue again, it’s like reducing the cost associated with having to double fund the CPP and it’s opening up more and more optionality and opportunity through creating the RSP room. Plus, let’s not forget, we’re gonna have a significant amount in retained earnings inside the corporation even after paying ourselves and paying both ends of the CPP.

Jon Orr:
Right, right, because at that point it’s, you know, the salary becomes a tax shield, you know, because now, like you said, it’s like it was break even around the 130 mark, I was gonna pay that tax in the business or might as well… put a shirt over here to get some more tax benefit, long-term optionality benefits that we talked about earlier in the episode. So that’s an important distinction, important consideration to think about where you are on the retained earnings side. You’re leaning, you’re small, on the smaller side, you’re on the larger side. These are some of the facts, the figures to kind of consider when making these decisions.

Kyle Pearce:
Yeah, and I would say like if we won’t go all the way down the numbers rabbit hole, but they are in the blog post for, know, yeah, we’ll have it in the show notes. Definitely if you head to Canadianwealthsecrets.com forward slash salary dash dividends, that’ll also get you there. So in this particular example, if we’re earning more net operating income than $500,000, and let’s just assume it’s enough to cover the salary we’re we’re talking about. it’s like, basically you were gonna pay 26 and a half percent ish on the full amount that you were gonna now take out and deduct to the business. It’s actually going to flip things around as long as you actually use the RSP. So what I wanna clarify here is like, let’s say we took the same $180,000 out like we were discussing. We take that $180,000 out in order to, put $32,000 in the RSP. are going to get, again, we’re going to get all of that tax money back on those $32,000 that were already taken off on the salary. So when it comes down to it, when we actually go apples to apples, even after paying CPP inside or with the salary strategy, you’re actually gonna now have $32,000 invested in your, in your RSP. Sammy’s salary taker’s gonna have the 100,000 they need for lifestyle, whereas Davey’s dividend taker will have his $100,000 after paying his personal tax and all that fun stuff, but when we’re dealing with the same amount, the same tranche of money that we use to fund Sammy, that same tranche of money is only gonna leave the corporation $25,000 to invest in this scenario. So in this particular case, if you go into this blog post, like it’s very cut and dry, that if you’re investing anyway, you’re gonna have significantly more money to invest in the RRSP in this particular scenario. Whereas in the last case, you actually had more money in the corporation to invest. Like the extra CPP money basically showed up as extra retained earnings pretty much, less a little bit of tax in order to invest. So you got to invest 40,000. in the corporation in the first example, and only 32,000 in the RSP, and remembering there’s some negative aspects on the capital gain of the RSP. Whereas here in this scenario, we’re now earning significantly more, we have significantly more retained earnings in general, and the math is telling us that you’ll actually have more of an investment if we take the salary and invest $32,000. the same tranche of money is only gonna leave us $25,000 to invest corporately. So in this particular case, it’s like the more money you earn in your business, the more logical it is for you to maximize the use of your RRSP from year to year, even though we know that the RRSP is a higher, know, higher security jail, as we call it for the money, even though now mind you, you can run the numbers and try to. predict what your capital gain will be? Is there a way that you can outpace with the $25,000 in the corporation? Of course, it’s definitely possible. But I would say starting with more money is probably gonna be a better move and diversification play in this particular case than starting with less and hoping that the tax rules down the road are going to leave you in a more favorable spot than say not funding the RSP at all.

Jon Orr:
All right, all right, we’ve talked a lot of facts, figures today. Salary, dividends, and if this episode challenged you on how to think about paying yourself, or maybe your partners inside your business, if it kind of like started to go like, heard numbers, but I need to think about this more, then we did our job. We wanna challenge you to think about these things. So we do have that resource we’ve mentioned here on our website. And if you just scroll a little bit lower, you know, there’s a, in the app that you’re in right now, then there’s a link there to get to the blog post that has the numbers, it has the scenarios, it has a little bit more built out around salary, dividends, those key numbers. And so we hope you did that, because I think what we’ve kind of made the case here is like what works when you have retained earnings of one dollar point is different than another dollar point. And you want to do, take that consideration plus Think about that diversification that you may want to plan for and cover your basis. So hopefully we did that here today. Head to that blog post. Just a couple of reminders here moving forward. We do this work. This is the work that we do on a regular basis. We meet with our clients. We meet with potential clients. Talk about wealth planning. Planning like what are we doing with salaries? What are we doing with dividends? How do I account for? that chunk of my portfolio and that chunk, what are some of the missing pieces that I need to be aware of? We do this on a regular basis. We’d love to do that with you. Head on over to canadianwellsecrets.com forward slash discovery, hop on a call with us, maybe grab some of our resources just to dig into, and we’ll be talking with you and about your unique situation. So you can do that if you’re just getting started. We would encourage you to head on over to CanadianWealthSecrets.com for us pathways. We have an assessment over there for you to complete that can give you some insight into the four pillars of a healthy wealth plan and give you some next steps. So that can be a great next move for you. Just as another reminder, the content you heard here today is for informational purposes only. You should not construe any of this information as legal tax investment or financial advice. And Kyle Pierce has a license. life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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