Paying yourself Salary vs. Dividends

When a pharmacist takes relief shifts, either as their full-time employment or to supplement a staff position, incorporation is a question that comes up a lot.

Structuring yourself as a corporation vs. a sole proprietor is a complicated discussion that everyone should have with a professional before making that commitment to one or the other.

But if you are incorporated, there are different ways you can pay yourself.

Salary

One is salary. This is pretty straightforward, and is what most people think of when they think of income. It’s a payment from your corporation to yourself, as an employee, for the work that you did. One of the biggest benefits of taking a salary is that it generates a “record” of that income. This becomes important if you’re applying for loans or a mortgage. I’ve seen self-employed pharmacists have a hard time applying for mortgages simply because their earned income was “too low”, even though they made really good money. But that money was never paid to them as salary, so the banks ran them through extra scrutiny, requiring their Notice of Assessment, T1 Generals, and a 2-year average. It doesn’t matter how much income the corporation made if it wasn’t paid out to the employee. From a legal perspective, the corporation is an entirely separate legal entity from yourself, so its income is also separate.

Another major consideration for taking a salary is that it generates RRSP contribution room. This allows you to put money away, tax-sheltered, into an investment account for retirement. And because RRSP contributions are tax deductible, any amount you put in there will reduce your personal taxes owed. But your RRSP contribution limit is calculated as 18% of your previous year’s “earned income” (up to an annual limit), so if you’re not taking a salary from your corporation, you might not be generating RRSP room and unable to take advantage of this powerful retirement planning tool.

So why would anyone want to take a dividend from their corporation?

Dividends

First, let’s look at what a dividend is. This is a distribution of after-tax profits paid to you as a shareholder, not necessarily compensation as an employee. This is an important distinction, because as a shareholder, this income isn’t considered “earned income”. This mean you miss out on RRSP contribution room, Canada Pension Plan benefits, and lenders may not accept this income on a loan/mortgage application.

But a benefit of a dividend is that it’s taxed at a lower rate than your salary, for you personally. This is due to “tax integration”. Because dividends are paid from the corporation’s after tax profit, a certain amount of taxes have already been paid on this money. To avoid double taxation, the amount payable by you as the dividend recipient is lower. This is a great way to be strategic about getting money out of your corporation in a tax efficient way.

But another word of caution: dividends are not taxed at source the way your salary is. So while the tax rate is lower, it’s your responsibility to ensure enough is set aside to pay the taxes when you do your annual filing.

Overall, the optimal mix of salary-to-dividends is personal. Every person has different living expenses, different retirement ambitions, and a different tax situation. The best way to ensure you’re doing things correctly, is to work with a professional who is specialized in helping pharmacists with exactly this.

Also, the rules around pharmacy professional corporations in particular are a bit unique from other types of corporations. For example, provincial pharmacy regulators determine who’s allowed to be shareholder and non-voting shareholders, and other rules can vary province-to-province. For all these reasons, working with someone who knows about those nuances is critical.

• Salary is your foundation It pays your day to day bills, builds your RRSP limit, and contributes to CPP.
• Dividends from after-tax profits When your corporation keeps money inside, it pays a lower tax rate. When pushing this back to yourself as a dividend, you'll pay the difference (roughly)
• No single right answer The correct mix of salary and dividends depends on your needs and goals.

Related Pharmacist Resources:

Avoiding Personal Services Business Classification

Deciding Whether to Incorporate: important considerations for pharmacists deciding on their structure.

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