You own an incorporated company. You hear that you should pay yourself with dividends to save some tax. The question is, “is the savings worth it”?
From an insurance & financial planner standpoint I highly recommend taking a salary up to the pensionable maximum. (The amount of salary equal to the maximum amount you can contribute to CPP in any given year.) Above the pensionable maximum, take guidance from your accountant. In 2023, the maximum pensionable amount is $66,600. The total cost to your company, that year, is $7,508.90. The maximum increases each year by cost of living or government policy changes. (By 2025, the maximum pensionable salary will be around $82,000.)
From an insurance and financial planner point of view, we base our advice on future planning. As such we look at CPP contributions as both insurance and investment.
Benefit of not paying for CPP
- You and your company save a little money.
Benefits of paying into CPP
- If you are disabled during your working years, you will be eligible to take CPP Disability income.
- At retirement, you will have CPP income. This can begin as early as age 60.
- If you are disabled before age 65 and you apply for CPP Disability income, if you have paid into CPP and are approved for a claim, the % CPP you have built will be locked for your retirement income. If you end up on a permanent disability claim, when your CPP Disability income stops (at age 65), you will have income from CPP for the rest of your life.
- If you are permanently disabled at a young age, and did not pay into CPP, you would get nothing at age 65, likely you would not have enough savings, and (if you have any disability coverage) would only have disability income until then.
- With a salary, it is easier to apply for personal loans & mortgages.
In my world, my wife was fully disabled at age 29. Because she had paid into CPP during her few working years, we were able to afford to buy our home after she was disabled. If we did not receive those funds, we could not have done so. I choose to have my company pay the maximum CPP amount for me every year and will do so as long as I am working. I then take dividends or salary for all amounts above the CPP maximum based on advice from my accountant.
If your accountant is telling you to only take dividends, show them this article. Most people do not know about all of the CPP benefits, especially when someone is disabled during their working years. This small change can make your retirement much easier if you are disabled at a working age or have not built up enough savings.
Jay Nadler, Employee Benefit Specialist.
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