Tax implications of dividend vs salary

Question

I'm recently self employed. My accountant advised the total amount of tax I'll pay (combined business and personal) is the same whether I pay myself 100% dividend or 100% salary and the only deciding factor should be if I want to build RRSP contribution room. Is this accurate? What other factors should I consider?

Answer 1

Income taxes aside, Canada Pension Plan contributions can be a significant factor in considering salary vs. dividends. You'd need to pay into CPP based on salary received (considered "pensionable earnings" and so subject to CPP), but not for dividends.

Contributing more to CPP over your career generally results in additional pension income for you in retirement, so CPP contributions are not technically a tax — but some people see it that way.

What I think is key, though, even if you don't see CPP contributions as a tax, is the general drop-out provision used in calculating the CPP retirement benefit. The drop out provision has 17% of the lowest years of pensionable earnings excluded from the retirement benefit calculation in order to potentially increase benefits (which are derived from the average of the pensionable earnings periods not dropped out). I believe the idea is that some stretches of un/under-employment would not count against you.

So, if you are late in your career and have no or few low pensionable earnings years on record with CPP (e.g. somebody who, say, has mostly maxed out CPP contributions since age 18), then adding a handful such no/low pensionable earnings years may not actually decrease your benefits significantly — but you could save on the avoided contributions: for 2019, those are 5.1% employee contribution plus 5.1% employer contribution (and as self employed, you pay both) on pensionable earnings between $3500 and $57,400 ... i.e. about $5500 maximum for the year.