Trading Self-employed income for dividend payments
November 16, 2013
Self-employed individuals have the ability to deduct various business-related expenses from their taxable income. These deductions may seem to offer an advantage to the self-employed, as compared to regular employees who don't have the same opportunities for business deductions. However, these self-employed advantages are typically offset by CPP contributions which comprise 9.9% of earnings up to a certain amount (presently $4,712.40). A regular employee will max out at approximately $2,356.20 as his or her employer will equally contribute to their CPP contributions.
Incorporating a small business can present more options for self-employed individuals in tax planning strategy. Through incorporation, an individual can have their income taxed at the corporate level and pay dividend income to themselves in a personal capacity. Dividend income, unlike regular income, does not attract CPP obligations so incorporating a company may significantly reduce CPP payments for the individual. Dividend income may also serve to 'income split' with lower earning spouses who have lower marginal tax rates.
It's not the author's intention to portray the CPP as a mere expense for Canadian households, as it obviously serves a vital role for many retired Canadians (along with widowed spouses, disabled workers etc.) However the potential savings suggested above for the incorporated individual may present greater opportunites for investment elsewhere, such as higher earning RRSPs.
Disclaimer: The above article is for general informational purposes only and is not meant to be a substitute for proper financial planning. Readers are encouraged to speak with a financial planner about their individual situation before pursuing any strategies suggested above.