Ep. 40 | Salary vs Dividends: How to Pay Yourself

Should you pay yourself a salary or dividends from your corporation? If you’re a Canadian business owner, this decision shapes your long-term wealth. In this episode, Tré Bynoe, CFP, CIM, breaks down why it’s not a binary choice and what most professionals and incorporated entrepreneurs get wrong.

You’ll learn the real tax impact of each strategy, why RRSP room and CPP contributions matter, and how your spending habits, investment style, and future goals play a role. 

You’ll learn:

• Why the best strategy is usually a mix—not one or the other
• How CPP and RRSP room shift the math on salary vs dividends
• The importance of mastering personal cash flow first
• What accountants often miss (and planners catch)
• When complexity just isn’t worth it—and how to simplify

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Transcript

Tre (2) 0:00

Hello, and welcome to the Plain English Finance Podcast, the podcast dedicated to helping you make smart financial decisions. I'm your host, Tre Bynoe, Certified Financial Planner and Chartered Investment Manager. I'm a financial planner with TCU Wealth Management and Aviso Wealth. For more Information check out the show notes on my website, trebynoe.ca/podcast and if you want to learn more about me, start with episodes one and two. Okay. This episode is, Salary vs Dividends. So we're gonna kind of put together a little bit of the stuff that we've learned about corporation stuff and help people think better about the decision salary vs dividends. Yep. Okay. And part of this will lead to other questions, but we'll get to other CPP related questions later. So off the bat, why do you think this is an important decision?

Sierra 0:54

Tax, I'm gonna say like tax implications. Strategy, there's probably rules for both. And you're gonna tell me how one benefits, one situation and one benefits the other situation?

Tre 1:09

Yeah. It's one of those, it's one of those questions that, um, a lot of people have, a lot of business owners have. Are you okay?

Sierra 1:17

Oh yeah. You know, I already, I'm just breathing. Okay. But I just, you know, I can't actually breathe normal. I have issues.

Tre 1:27

Okay. Um, so it's one of those, it's one of those questions. It's a really common question and the decision matters a lot to your ability to create long-term wealth. Okay, so off the bat, the majority of accountants out there, like compliance focused accountants and not the planning type of accountants, but the compliance ones, the old school type of accountant will immediately say just dividends. Dividends are the correct way to do it. And then there's planners, that do enough planning to be able to weigh in on the topic, will say salary is a great way to go. The truth is it, it's not really a, salary vs dividends, it's a what percentage of salary versus what percentage of dividends should I really be taking. The best outcome is typically a mix of the two. Okay. Yeah. So first off, it isn't a one or the other, it's just a mix of the two is gonna be the right answer in the vast, vast majority of circumstances. So I'll start off with what the actual tax result could be, if that makes sense. Yeah. So here I have a calculator that you can see, and so we'll say that their business is earning, oh, let's keep this simple. We'll keep it below the. Small business, so we'll say the business is earning$500,000. Okay, and the second part of the equation that you need to know to be able to answer the question. What do you think it is?

Sierra 2:57

Um,

Tre 2:58

I always come back to it. It always ends up as the first thing that you have to do when we

Sierra 3:02

Net worth.

Tre 3:03

No, not quite.

Sierra 3:05

Come on. That's usually me. That's, that's,

Tre 3:07

that's, that's one thing you should be tracking. Yes. Yes, that's correct. No, it's something that always comes up when I'm talking about like order of operations and things like that,

Sierra 3:16

So the first one was what? Income?

Tre 3:19

No, the business income.

Sierra 3:21

So that's the first thing

Tre 3:22

That's one of the things that I need in order to be able to do this calculation. And you're asking

Sierra 3:26

for the other thing?

Tre 3:27

Yeah.

Sierra 3:28

Expenses.

Tre 3:29

Yes.

Sierra 3:30

So you're figuring out the net worth. Is that right?

Tre 3:34

No.

Sierra 3:35

Okay.

Tre 3:41

You're just obsessed with network. It's

Sierra 3:43

net worth. The answer's always net worth.

Tre 3:45

No. So it's what is needed. Remember I say cashflow, cash flow. Cashflow, cash flow. You have to master your cash flow. Yeah. In order to be able to do any true financial planning, any optimization, cashflow needs, mastering. If you cannot master your cash flow, all planning is for nothing. There's no point. What should I actually do, I should have two tiers of fees. Fees, one for people that come to me with a budget and a proven way to keep to an accurate number and one for everybody else. And everybody else is gonna be no, just like within, you know, they can tell me what their spending is gonna be within like 10%. Yeah. That's within a, that's a reasonable range. Yeah. The amount of people that will say, Hey, I, I, I spend like$50,000 a year. I dunno where the money's going. And you look and it's like, okay, you're spending$150,000 a year. That's not quite, there's a, a big difference. That's where between, that's where the money's going. But yeah, no, you need to know what you need. You need to know your cost of living. Fundamentally. So two inputs here, we put in the business income and then how much cash that I need. So we'll put businesses earning$500,000 and we'll say we need$180,000 to cover our cost of living. Okay? Mm-hmm. We're in Saskatchewan. So what does it show? So it shows that in if you was to take one or the other. So this is why a hybrid approach is often the best. In this case you would get to keep$12,272 more in your pocket if you paid out dividends. Okay? So this is the, we'll start with dividend one. So in order to get this$180,000 personal, it means that we'd need$247,000 of dividends. The total tax that we would pay is$117,000 in total.

Sierra 5:43

Okay.

Tre 5:44

Okay.

Sierra 5:45

Yeah.

Tre 5:46

On the year. Between the business and the

Sierra 5:48

so this is like to, when it says total dividends, that's your gross, like what profit?

Tre 5:57

No. What has to be paid to me personally.

Sierra 6:00

Oh, and then once it's in your name, you pay your income tax. Yeah. So I need of 417 and then, no,

Tre 6:07

no, no. So I need$180,000. Yeah. My business. Has is making$500,000. Okay.

Sierra 6:14

Yeah.

Tre 6:15

Okay. So then this is where the, this is where the next step in planning comes into and why a lot of planners just leave it. Mm-hmm. Um, so you can't think of it as, like right now, if you get paid, you don't have the option of leaving it in a company or not taking it this year. But with this individual, they, their company's making$500,000. Mm-hmm. They need$180,000 and the goal is to find out the best way to give them that$180,000.

Sierra 6:43

Yeah.

Tre 6:44

So then we look at, we need to look at how much tax the business is gonna pay and the person is gonna pay.

Sierra 6:50

Okay. So this 117 isn't just their income tax?

Tre 6:54

No. It's what is paid on this$500,000.

Sierra 6:58

Yep.

Tre 6:59

To get$180,000 out.

Sierra 7:01

Okay.

Tre 7:02

To spend personally. Does that make sense? Yep. So on this, the, your pay on this total transaction, this total year,$117,000. So that includes what you're gonna be paying personally and what the business is going to pay, okay? Yep. And then what's left over can be invested or whatever the strategy is. Okay? Then the salary, if you're taking the exact same thing. The salary is, you'd need to take a$283,000 salary mm-hmm. To get$180,000 net. Mm-hmm. Of that in this total transaction. In this case,$129,000 is sent.

Sierra 7:47

But it's a CPP.

Tre 7:49

Yeah. And then it shows the CPP contribution. Yeah. That has been made.$8,860 basically. So what you will often see is that the CPP is a major factor when it comes to determining how much you get from salary or dividends. Okay? So the reason that a lot of accountants will say it's not worth it, is because you have to pay the CPP amount. So that's less money that you have to spend or to invest.

Sierra 8:25

Like today.

Tre 8:26

To invest today. Yeah.

Sierra 8:28

So if you take salary, the reason your tax, like the reason the money that you send to the CRA is higher is because part of it is, is going into your is a CPP contribution. Yeah. That's it. So it's not, that's it's.

Tre 8:45

For majority. Yeah. But then there's an argument CP, which we'll get to CPP later. Okay. But there's an argument around the CPP. Yeah, for sure.

Sierra 8:53

Okay.

Tre 8:54

Um, so that's fundamentally the two differences. Okay. So dividends, you don't pay CPP salary, you do pay CPP, but you also get RSP room. Okay, so like in this case, in the salary case, you've generated$32,000 of RSP room. Mm-hmm. And do you remember what RSPs RSPs do?

Sierra 9:14

Move one, sorry. Move income from one year into another.

Tre 9:18

Yeah. So in this case, if he was to then contribute, this individual was to contribute the$32,000, it means that they would move income in a year where you had a high income. To ideally a year where he has a low income.

Sierra 9:32

Yeah. So is does that mean out of that 180, he can now put 32 if he wants to?

Tre 9:41

Y yes. If that's the W, yeah, but then I would assume that the right way to do this is that you have extra money. Above and beyond what you actually need personally, because you'll have other needs personally that you'd want to accumulate for over time. But

Sierra 10:00

like the 180?

Tre 10:01

Yeah, so let's say, right, you wouldn't just take 180 if somebody said somebody came in their budget, or sorry, their budget was exactly$180,000, I would want$200,000. So I could put$20,000 aside, if not more. For RSPs, for TFSAs for things like that. So there would be cash, but yes,$32,000 could be contributed to an RSP.

Sierra 10:25

So why can't the dividend person, why is everything zero for RSP and CPP?

Tre 10:33

Because you don't contribute to CPP and you don't earn RSP room if you take a dividend.

Sierra 10:41

So if you're a business owner

Tre 10:43

Yeah,

Sierra 10:44

and you decide. You're gonna take dividends. You can't like open an RRSP.

Tre 10:49

You don't earn any RSP room.

Sierra 10:52

So you wouldn't, even if you opened one, you can't put anything in it

Tre 10:55

because you aren't earning any room.

Sierra 10:57

That's so weird.

Tre 11:00

It's not. RSPs are designed for salaried individuals to earn, like to be able to save for retirement and stuff, right? You forego that if you are. Earning compensation by just owning the company. Mm-hmm. Remember we looked at the difference between other income and dividends?

Sierra 11:19

Right.

Tre 11:20

So for tax, for taxes and stuff. So this is the same thing where with a salary, it's all taxed in other income. Mm-hmm. For a dividend, it's taxed under that dividend columns.

Sierra 11:30

Yeah. Okay. We looked

Tre 11:31

at, okay, so that's just the, that's the rules. So dividends, you do not get RSP room and you do not contribute to CPP. For salary, you do get RSP room and you do contribute to CPP.

Sierra 11:43

Okay.

Tre 11:43

Okay.

Sierra 11:44

So would you say maybe I'm jumping the gun. I love to do that. Um, would you say salary is maybe better for people who are more prone to spending, like, or overspending because then it forces them to have some sort of savings. Or like when you're thinking of splitting,'cause if you have the dividend, you could invest it all however you want.

Tre 12:16

Yeah. So if we look at what's left over after taxes, so after after tax cash, that's personal and in the corporation you'll notice that the dividend holder has more cash left in the corporation. So if I took that salary, I'd have$190,000 left in the corporation. If I took it as a dividend, I'd have$202,000 left inside of the corporation. Yeah. Okay. So that's

Sierra 12:43

over 10 grand.

Tre 12:44

Yeah. 12. About$12,000 difference. Yeah. So yes, theoretically, if this individual was then to invest, that you might be able to get ahead. For sure. When you look at the overall numbers, if I was to invest it perfectly, deferred capital gains, the way that I would do it, like low cost index funds, minimal, like no, no bonds, no. Interest. Like you did it person perfectly like that dividends would win the vast majority of the time. Mm-hmm. Because you can, the issue though. Most people don't. Yeah, that's, I was

Sierra 13:24

gonna say again, it's always like, on paper, this looks good, and then in practice does it happen?

Tre 13:30

Yeah. And that's the thing a lot with a lot of people, it doesn't happen. So

Sierra 13:34

Yeah.

Tre 13:34

But that that aside, so you'll see here though, that, so the total taxes, personal, so we can look at personal tax that is paid. And we see the corporate tax that is paid at a corporate level. So you see the both, this is the dividend column. It ends up overall$117,000 and the salary column$129,000. Mm-hmm. And that difference is really the CPP in there. Okay. Then we see the cash. Same principles as obviously would apply the. The person that's paying out dividends end up ends up with more cash inside of their corporation mm-hmm. Than the individual paying out a salary. Okay.

Sierra 14:16

So is the benefit really? Yeah. Like you're not paying more in taxes if you take a salary, are you?

Tre 14:24

No, because of the CPP. Okay. So you are paying your, you are, you end up with less in your pocket

Sierra 14:33

for now

Tre 14:34

because of the CPP.

Sierra 14:36

But CPP is just the Canada Pension Plan, right? Yeah. So it's just going into a retirement fund.

Tre 14:42

Yes. But if you was to, historically, if somebody was to take what they would contribute to CPP throughout their lifetime mm-hmm. And invest it instead, they would end up ahead.

Sierra 14:53

Okay.

Tre 14:54

Right. Like we will look at CPP, but ultimately, quick and dirty summary is CPP is. Isn't as simple as that because it's split into multiple sections. Mm-hmm. So for instance, right now CPP disability right. For, For certain people is, is really valuable. Yeah. Disability insurance is even harder to get. Right. If you have a, if you have a condition, if you have the certain things that, okay, maybe I would want to be contributing to an extra, it's almost like an extra insurance. Yeah. For disability. So it's not just retirement.

Sierra 15:32

There's like other perks. There's other

Tre 15:33

perks. There's also survivor benefit and you know, like there's. There are other perks. People think of it as apples to apples, but it's not quite,

Sierra 15:41

Never is.

Tre 15:41

But we all look at that in a future episode.

Sierra 15:44

Yeah, sorry. Now I'm like trying to make it all make sense.

Tre 15:47

No, and that, and this is I, so I was explaining to you the other day, I dunno if I've used this illustration on the podcast, have you used a cog thing?

Sierra 15:53

I can't. You know what? I was just thinking about this and I'm like, I can't remember if we referenced it a couple episodes ago or not.

Tre 16:01

Okay I'll quickly explain it because this is this is a prime example of that. Yeah. Where, so I dunno if anybody remembers when they were young and they had a, like a pegboard with the cogs on and it was like gears that you would put in.

Sierra 16:14

Mm-hmm.

Tre 16:14

And you would turn one and they would all turn.

Sierra 16:17

Yeah.

Tre 16:17

And then if you turn a different one, they would all turn and they were kind of like all connected. Financial planning is very similar to that as in. Think of the different decisions that you can make within financial planning and think of those as all the individual cogs. And when you turn one, it means that it would mean the best decision is different for other areas of the board. Mm-hmm. And a financial planner's job is to take out of all those decisions, take the ones that are most impactful for you, and then. Tell you what the optimal thing would be based on the ones that are most important to you.

Sierra 17:00

Yeah.

Tre 17:00

Right. Because you don't want, you will never be able to turn all 50 cogs

Sierra 17:05

flawlessly, flawlessly

Tre 17:06

to the perfect way that you want it to be. But there might be five or six of those that you, that are really, really important to you, that you do wanna make sure that they are set to a certain. To a certain direction. I want my family to be looked after. If I, if I die, I want to be able to retire X, Y, Z age. Mm-hmm. I am comfortable with this type of risk in my portfolio, whatever it is. Yeah. Often people have certain ones that they want. A certain turn, and that's a financial planner job. And this is very similar to that. Whereas there are so many different cogs here, and when you start messing with one of them,

Sierra 17:40

it

Tre 17:41

changes everything. It changes everything else. Yeah. So CPP is one of those where if you have no CPP, it means you have to save more for your retirement.

Sierra 17:48

Well, and that's exactly what I was thinking. If it seems like you're either letting somebody else take. On some of that for you, and you're maybe paying a little bit of a price for it, or you're taking it all on yourself and so you have more cash. But again, are you

Tre 18:07

more accountability, more and more consequences as well? Yeah. Yes, exactly. Yeah. So we see the personal amount of cash. Okay, now this is the, this is the one that people talk about, so the effective tax rate. And that's what they're so concerned with.'cause you end up with slightly less. But the RSP room is a major, a major benefit. Mm-hmm. And this is another cog that might impact this is when, I dunno if we've done the episode on asset location yet, but basically different types of investments should be held in different accounts because of the after tax to maximize after tax dollars. RSPs are one of them where, as I said, if you invest perfectly, you can. Get around a lot of the benefits of RSPs if you within with a corporate, with a corporation. But you have to invest in a very specific way in order to get there. If you are the type of individual that can't handle your portfolio, fluctuating the way that a hundred percent equity portfolio would, and you want fixed income, you want other things in there, RSPs are are almost a must. In order to be able to do that efficiently. Okay. Okay. So if I, if I need to make myself sleep at night and I need fixed income, I am going to tilt more towards a salary heavy strategy so that we can build RSP room so that you can hold the portfolio that you're comfortable with. Yeah. If you are somebody like me where I'm, I sleep fine at night. Then maybe not. Maybe you are looking at something more optimal and saying, okay, I'm, am I willing to do, I have an iron stomach for the ups and the downs? Right. Right. So that's the basics of what it will look like. Mm-hmm. Um, some of the pros, as I said, so there's with a with the way that it works out, so with a salary, it's an expense for the business. With a dividend. The dividend, the income comes into the business, the business pays tax, and then it's paid out afterwards. Do you remember that?

Sierra 20:15

This what, yeah. This is what we just talked about in Yeah,

Tre 20:17

a few ago. Perfect. So less corporate tax if you pay salary. Yeah. But then you end up paying more personal tax. Yeah, and same thing for a dividend. So more corporate tax, less personal tax. But that's for a dividend..

Sierra 20:29

That part again, is like you explain kind of a wash. It doesn't really matter.'cause they tried to make it somewhat fair.

Tre 20:35

Yeah, it doesn't really make it, it doesn't make a difference. Okay. Then we spoke about notional accounts, which we haven't spoke about yet, but we will get to them. So with the dividends you get, there are special tax treatment for those notional accounts that we talked about.'cause we want to remember, we wanted to pay them down. Okay. Yeah, with a dividend, with a salary though, you don't get that. So, and remember, we do want to get rid of these account balances for various reasons, but we do wanna get rid of them. So there's a downside to just paying yourself salary. Upside RSP room, depending on the individual dividends. Do not create RSP room. And we touched on the CPP. Obviously the downside of not paying into CPP is that you don't get any benefits from CPP. Yeah. If you don't pay into it, which means that you have to do the hard work yourself. Yeah. Right. Yeah. The way that, because dividends are increased in gross up. How would you describe gross up? Remember I showed you the$30, like I said, if it was a hundred dollars paid and. They kind of do a, a gross up in inverted quotes where it's, we'll just say that it was this much, it was this much instead, and it was a higher amount. Yeah, so the thing is that, that it impacts your taxable income, so any taxable income benefits are impacted by that. For example, if I have old age security, again, I haven't done an episode on this yet, but old age security is clawed back when your taxable income is over a certain level, it means that you then okay, have to so, for example, in this situation, this individual was paid$247,000 as non-eligible dividends. If I gross that up, it's now$284,000 of taxable income. So it's the same. It's about the same. Yeah. Look

Sierra 22:37

at the salary is 2 83 7 something. Yeah. It's like, it's

Tre 22:41

about, it's about the same. So it's still but there's, that, there is definitely that, that impact there.

Sierra 22:47

Yes.

Tre 22:48

Child expenses. So this is where we get into the compliance side of taxation, which I don't really, I'm not gonna spend too much time on, but basically there are other types of the incentives that come from the government tend to be for salary paid individuals, which means a lot of like moving expenses and childcare expenses and things like that. You need a salary in order to better deduct those costs and things like that. But yeah, that aside ignore that one for now. Okay. And then the one that I totally understand. Complexity. So a lot of accountants will recommend salary or dividends, maybe dividends just simply due to complexity. There is a, it's a pain to, if you were the only individual and you're trying to pay yourself a salary, I could definitely see how you would just be like, it's not worth it. It's such a pain in the bum to do. Yeah. That you're just like, ah, it's just probably not worth it. If, however. You have staff that you're already paying salaries to. Just you adding another name to the list isn't that much of a pain. Yeah. But I could definitely see the case purely from a mental capacity point of view.

Sierra 23:58

Like is this easier for the accountant or easier for

Tre 24:02

Both.

Sierra 24:02

Okay. Okay.

Tre 24:03

Yeah, and it'd probably be like easier for the accountant is relative. I'm sure there's plenty of accountants out there that would pick that just because it's easier, but it would often mean they'd be billing more.

Sierra 24:13

Right.

Tre 24:13

Which makes it more expensive if they're the ones doing all the remitting and it's like,

Sierra 24:17

is it actually worth it for the client at the end of the day?

Tre 24:19

And you, the numbers would show that probably is if, depending on the type of investor, depending on the other cogs, right? Yeah. But I could definitely, I would definitely be on the fence of this is I an hour saved here is like, I can put that somewhere else in my business and not worth it. Don't want to think about it.

Sierra 24:38

It feels very, like all of this, it feels very decision fatigue heavy. Like where when you're talking about the cogs, you start to get to a point where you're oh my gosh. I get why people have financial advisors, obviously, because you're having to make so many decisions already and

Tre 24:55

If you're trying to be optimal. Yeah, yeah. Which is why, I know people really like customization. I'm not so sure. I feel like if I could do it anyway, I would just build.

Sierra 25:08

A system???

Tre 25:09

Three systems that clients then opt into. That's really, honestly, that's how I would do it, where it's just a case of this is the way I do it. This is optimal for this type of person. If you're not this type of person, I have two other options. If you don't fit into those boxes, I can't help.

Sierra 25:24

That is so surprising to me.

Tre 25:26

I know. So surprising because you do

Sierra 25:28

Tre's favorite word is system.

Tre 25:29

You do like it's, it is so many different small tweaks and changes based on small stuff that. Yeah, it makes a big difference even the way you invest. If somebody said to me, which we'll get to in the next episode, actually, uh, but the types of ways you invest lean more towards certain types of tax treatment, which means that would change this whole system if I want to use active management versus passive. Like it's, anyway, I digress. Yeah, I definitely get it.

Sierra 26:00

Yeah.

Tre 26:00

Yeah. And then as I said, government grants and credits and stuff like that are typically based, designed for salaries, salaried employees, right? That's, that's who gets the vast majority of government credits, okay? So there is a general rule of thumb, which is the first place that I look. So when I'm bringing on a client. The first thing I do is check the, not the first thing, one of the first things in the opening act of working with me. One of the things we do is look at the notional accounts, okay? And the reason is, the reason why is because the notional accounts are often neglected, and there is a lot of tax advantage to paying them off and out. So a common one that you'll see just get neglected is the capital dividend, like the capital dividend account. Money can be paid from that free. No taxes incurred. It's that, remember I was showing you that it's that 50% of the capital gain

Sierra 27:04

Yeah. Goes

Tre 27:05

into that account.

Sierra 27:06

Yeah.

Tre 27:06

Oftentimes, depending on how long the person's been investing or whatever, that can just go by the wayside and not really thought about. And that's free money just sitting there that you can pull. Mm-hmm. So there, there are, but there has to be a dividend. That's a dividend. And then there's the refundable, the eligible refundable dividend tax on hand account, which that's a priority as well.

Sierra 27:25

Good thing they have the acronyms, like, what is that?

Tre 27:28

E-R-D-T-O-H

Sierra 27:30

and then NE. Oh, that's nerd.

Tre 27:32

The NERD. Yeah.

Sierra 27:33

There we go.

Tre 27:33

The ERD and the NERD.

Sierra 27:34

If you're starting on this episode, you gotta go back to the other one.'cause we we're referencing a lot on that other one, right?

Tre 27:40

Yeah. It makes a big difference. Yeah. Yeah.

Sierra 27:42

We are building.

Tre 27:43

There you go. And then the GRIP, the general, we never, we didn't really talk about this, but the GRIP is income that is taxed at the general corporate rate instead of the small business rate. Okay, so it's taxed at a higher rate. Versus the lower rate.

Sierra 28:01

So is it like if you're in the small slash medium gross income, is that what it is? And then it's

Tre 28:09

like bus, it's, no, it is net income. It's business income. Oh, okay. So, but I definitely know why you're saying that.'cause there's different nets now because it's like the personal net income and that business net income. Yeah. Yeah. That's, this

Sierra 28:21

is what I'm saying. It's like That's fair. It's also, again, late. We have a 1-year-old. This is a lot for this brain. Sorry.

Tre 28:31

That's okay. Um, Okay so, the decision making process is, I'll give you the version that works until it doesn't work. You know me so many nuances, but we're gonna go through that version just so people have a framework of how to think about the decision. Okay? Okay. Yeah. So first step that you wanna do is you wanna clear out your capital dividend accounts, your CDA and your ERD account.

Sierra 28:57

ERD TOH.

Tre 28:58

ERD TOH, yeah. That means that you're gonna be paying out eligible dividends and any capital dividends that are available because if it's there, you might as well pay it out. Like it's, there's very little reason that you'd want to be investing inside of the corporation if you can take it out via these accounts. Okay? Mm-hmm. Because it's very little tax, and if it's invest inside the corporation, it's likely going to be attracting more tax. Okay.

Sierra 29:28

Okay.

Tre 29:30

So this is what I would pay out if you, even if you didn't need the income, I want it out. Okay. Second of all you're gonna be looking at other expenses that, other things personally that may make you want to take a salary. Over taking a dividend.

Sierra 29:48

Okay.

Tre 29:49

So some of those are like childcare expenses, moving expenses, Canada Child benefit.

Sierra 29:56

What do you mean by moving expenses?

Tre 29:58

There's just a deductible

Sierra 29:59

if you like, move city or a

Tre 30:01

certain distance for Oh, okay. Reasons? Yeah.

Sierra 30:04

Okay.

Tre 30:04

Yeah. So that then you would look at that and then, because, so here's the thing about them. It depends on the income and it depends on who's doing the work. Okay. Right.

Sierra 30:14

So it depends, huh?

Tre 30:16

Yeah. So if, so, if I am doing the work, I'm probably not gonna bother because the tax for the time, it's gonna take me to go through it. I don't know whether I say I'm, if it was me, if it was me and my money, I would do that. That's what I would do.

Sierra 30:30

Sorry. Clarify that You're, you lost me.

Tre 30:31

If I am a busy executive

Sierra 30:33

Yeah.

Tre 30:34

In a company and struggle to find an hour to myself, I'm not gonna spend it doing that.

Sierra 30:42

Yeah.

Tre 30:43

I'm probably just going to ignore this part.

Sierra 30:47

Okay.

Tre 30:47

Simply, but if I'm paying somebody to do it, it's like my accountant.'cause that's who should be doing this. Then I'm gonna expect that they did it.

Sierra 30:55

Okay.

Tre 30:56

Does that make sense? Yep.

Sierra 30:57

Yeah. Yeah. Because you're paying for it.

Tre 30:58

Yeah, I'm paying for it, right? Like if I am, same as if a, if somebody was coming to me and the accounts are not optimized by location, I would have a problem with that if I was a client. But if it's the client doing it and it's gonna take them 15 hours to do it, I might say, okay, well is it really worth, there might be other places that you could spend 15 hours. Of your time, that might be worth more than the benefit of doing this

Sierra 31:25

D instead of de deciding between Rs, PT, Fs A or whatever, like, yeah. Yeah. Okay. Okay. Yep.

Tre 31:32

Okay. So then you would look at the other types of notional accounts. So this is the grip account and the non-eligible dividends. It's worth it for few, a few different reasons, but it can still. It can still be worth it. There's so many, I'm thinking of so many different examples and scenarios.

Sierra 31:58

This one's tough. It's basically, it comes down to, it seems that as a business owner you have to like have all your information for your business and your circumstances and have a nice custom plan and not follow just some framework or system.

Tre 32:17

Or you change your life so you fit the system,

Sierra 32:23

change your identity. Yes. This is fun. Sorry, I'm sorry. This is a tough one, I will say, because yeah, the it, it's like. It's hard to give examples and stuff when it's so dependent.

Tre 32:47

Yeah. Yeah. Anyway, I'll keep going. Yeah,

Sierra 32:50

yeah. Keep going. For sure. Yeah,

Tre 32:51

so there's the grip. If income is hitting above that amount, the small business amount. Oftentimes it can make sense to pay a salary to earn RSP room on that income, then pay the higher amount inside of the corporation and let it sit there anyway.

Sierra 33:13

Mm-hmm.

Tre 33:13

Because you're not saving enough by leaving it in the corporation for it to be a landslide decision one way or the other.

Sierra 33:20

Yeah.

Tre 33:21

See, within a corporation, if you can pick between, and it's at the small business rate, and you could pick between spending. 11% of your income goes to taxes right now, and you can invest the rest, or you're picking 48% of your income. It's a very easy decision to make. Yeah. So it's, it's a little harder when it's, when that gap is a lot smaller. Yeah, there's a lot more nuances to it, which is why I'm like, I can think of so many nuances that I can't, it's very difficult to give a solid,"this is what you should do."

Sierra 33:53

Yeah, but that's anything in finance. But

Tre 33:55

these, but these are definitely things that you want to be thinking about for sure.

Sierra 33:59

Okay.

Tre 34:00

Then it comes to,

Sierra 34:02

that one looks good. Income split, income splitting.

Tre 34:06

Then it comes to the income splitting. There is TOSI, tax on split income rules. There's lots of rules around this. This is where a compliance accountant is perfect and you love accountants and you make sure you thank them a lot. Because they're, you want to be sure that you're on the right side of the spirit of the law when it comes to this, but also this is where planning well in advance comes into play for a lot of people. Just as an overview in example of that or how this impacts, if I wanted to start a business today, you would pay for it. So during, up until now when you've been working, you've been saving the money that comes into your account and that goes into savings. Mm-hmm. Right? So it means that we can point to an account and say That's Sierra's money that she has earned through going to work and earning. Okay. Yeah's a few benefits to that and one of the major benefits to that is that if we were to start a business, even if I am running the business. You can pay for the business and then you're a fully invested owner in the business, then it's reasonable that you would get a return in dividends on the business. And if I am providing my labor, then it's reasonable that I would be paid a salary. Oh. Plus we'd make an arrangement where I could pull out dividends and stuff as well as a part owner. But it would, but it has to. It has to make sense. And that's really the, when you look through the tax laws and stuff like that, it, it highly favors the people that are prepared well in advance. Yeah.'cause what, often happen is, I'm a plumber, I want to go start a plumbing business. And now my wife doesn't really work in the business and I now want to pay her dividends because I've just realized that I'm now paying. 50, almost 50% of my income and my wife next to nothing.

Sierra 36:13

Yeah.

Tre 36:13

And then the TOSI rules come into play and they say, well, your wife has nothing to do with the business. You can't do that. And you're like, what? Again?

Sierra 36:22

But I don't, that's hard. Like I get it, but I feel like I have a problem with income splitting.

Tre 36:31

Me too. I absolutely do as well. I'm like, I do

Sierra 36:33

as well. I don't love the rule because. When you get married, if you're legally married, you say in your vows, what's yours is mine and what's mine Is mine just kidding? But you know what I mean? Like you, that is like the marriage contract and they love to do use that in certain situations. But then when it comes to income, it's like, okay, this is the plumber's business, but are we not married? And what's yours is mine. The government's like, we don't like that anymore.

Tre 37:05

Yeah. Yeah. Don't get me started on that.

Sierra 37:08

Except for that part. Yeah.

Tre 37:10

I don't like it either. I think it's, yeah, I don't like it. Yeah. It doesn't make, that is that's the rule book. So you play by the rule book.

Sierra 37:16

Yeah.

Tre 37:16

But again, that is an area where planning well in advance makes sense. Mm-hmm. And it's a part of the reason that we did it that way for years and years and years. So if we ever wanted to. That's an option.

Sierra 37:32

I can go out and buy a business.

Tre 37:34

Right.

Sierra 37:35

Leave you, leave You broke on the streets.

Tre 37:38

Living under a bridge.

Sierra 37:39

Yeah. No way.

Tre 37:43

Yeah. No, and that's so, yeah. Anyway, you'd look at that and then you would still nuances here, but you would typically pay yourself a salary after all of that is cleared out because of the other benefits of salary. But again, there are tons of nuances here that I haven't even started to,

Sierra 38:03

your brain is just like,

Tre 38:05

yeah, you have

Sierra 38:06

all the cogs in your brain right now going

Tre 38:08

Yeah. And you're

Sierra 38:09

like, it's all connected

Tre 38:11

and, and this is where the long-term tax planning comes into play, hitting certain tax brackets and knowing what you're doing for the long term and planning well ahead. And an example of that is, let's say in this situation, I. I am spending$180,000 a year, but I know that not even, I might not even know what I want to do, but I know that that's my base spend is, that's what it costs me to do everything that I wanna do with my family and live a great life. But that's what, that's what my spend is. But I know at some point, maybe I do want to buy a really nice car. Maybe I do want to buy a cabin, maybe I, like you would, I would plan ahead of time and be taking more, right? Mm-hmm. And. And balancing that tax over multiple years instead of just this one big, Hey, I need another million dollars from the company. And you're like, okay, but we, I know this level of gross salary. You're already in the top tax bracket anyway. But you understand what I'm saying, theoretically?

Sierra 39:14

Yeah. Yeah, for sure. Like doing anything in one big chunk seems. When it comes to

Tre 39:19

taxes. If there's a better way you want to do it, you wanna reduce the tax, overall taxes, that you would owe. Also gives you some flexibility. The amount of times when people, don't have enough money for a vehicle or things like that because it's all in the company and you're like, well, or they only have TFSAs, and you're like, okay. But the TFSAs are really nice for, for investing. Like a really, really good long term. So like it, I dunno.

Sierra 39:46

It's just, yeah,

Tre 39:47

pros and cons. There's so many pros and cons.

Sierra 39:49

It's hard though because it's like, again, I feel like I maybe sound like a broken record, but it's tough that you can only plan so well because life is completely un unpredictable.

Tre 40:07

Yeah.

Sierra 40:07

So you can only. Yeah. You are planning if I maybe want a cabin, if I maybe want a car,

Tre 40:14

but you put yourself in a situation or I think you put yourself in a situation where those things are optional. Yeah. Versus put yourself in a situation where the, where you doing those things is really suboptimal, if that makes sense. Yep. Yeah, for sure. You know, putting yourself, like even if we never started a business. It's not the end of the world that you are, you have the money that we can point to that says, I earned this. It's not the end of the world. It's just a

Sierra 40:47

paper trail. It's

Tre 40:47

there, we've done it. Paper trail. It was easy to do.

Sierra 40:51

Mm-hmm.

Tre 40:52

We systematized it. It's not, it wasn't difficult

Sierra 40:54

But it took foresight.

Tre 40:56

But it takes foresight, right? And that's the thing it took, it took knowing the rules and foresight for the long term,

Sierra 41:02

which is again, like I feel that is very difficult for a lot of people and it is a lot of work, I think. Because of the decision fatigue. I get what you're saying because you're a planner, you know the rule book and you know even how to reference it if you don't maybe know exactly the rule.

Tre 41:20

Well, there's a lot of rules. I don't know exactly, but I will go you, it's still there. It's, yeah. Yeah.

Sierra 41:26

But yeah, we were talking about this the other day, how it feels like a game and. You as somebody who has read all these rules, you've read the rule book, but a lot of people are just out here like,

Tre 41:41

yeah.'cause another thing I'm thinking of is that winging it, this plumber individual, if he does have a stay at home wife and can't split the income and things like that, you would almost more, I would want to lean more towards his salary so that he could build RSP room to be contributing to a spousal RSP so that she can take the income later on. Seems very obvious to me, but I would do that at 30 years old, 35 years old, knowing that it could be a benefit to me at 55 years old.

Sierra 42:09

Yeah. Again, the knowledge

Tre 42:11

20, 30 years. Yeah, you're right. There's a knowledge bias there, which to me that seems like an obvious, what's the downside to me doing this if the, if I'm, you know, trying to decide between the one or the other, like salary or dividends, and I'm like on the fence about it. It's like, okay, well this might, this is one positive that might push me well over the edge. That case of, okay, well I'll take the salary, do the RSP contributions and do them as spousal heck, if she needed to take it out right now and she could take it out, take the minimum payments and be taxing her income. And then actually that's probably what I would do because then first$15,000 ish of income is tax free anyway, so. I obvious want her to have at least that

Sierra 42:52

duh. And if

Tre 42:53

I have to pick between getting tax, yeah, you're right. If I have to pick between getting taxed at 40% or I can give it to you, uh, next to nothing,

Sierra 42:59

you're like, really? You're going on? Why would you do that?

Tre 43:01

I don't know why you wouldn't do that.

Sierra 43:03

You're really going on a tangent.

Tre 43:04

Yeah. Anyway, all right. I'll stop. Okay.

Sierra 43:07

But that's what I mean. You have all that knowledge. The plumber does not have that knowledge. No, most likely. And. You're going to find somebody.

Tre 43:17

It seems really unfair when you think of it like that. Yeah, because I'm the, the prime example of you just do what the rules say and it works out long term. Like even short term works out really well.

Sierra 43:27

Yeah. At the same time, you know me, I love to look at it from every single angle because I feel bad for people like that, but at the same time, it's completely accessible. To read like the tax code. Could you not just

Tre 43:41

Yeah. Google it. Find, yeah, it's on Google and I wouldn't, and I would say I have not sat down and read the tax code. That is insane. I don't know who would do that.

Sierra 43:50

I feel like I wouldn't be surprised if you came to me.

Tre 43:53

Some people, yeah, I've read parts of it. It is very boring. Um, but the CRA does have some really good. Folios, I think they call'em, which is they basically break down a really key part of the tax code. Mm-hmm. And they give examples and even some of them reference court cases and things like that so you can understand them better. Yeah. So I would say even if you don't want to go read all of the stuff, you find somebody that does do that stuff. And you trust and build a relationship with, and. If it's me, you actually go through the system and work with me properly,'cause,

Sierra 44:25

System.

Tre (2) 44:25

You know, it's, yeah. Anyway, um, but those folios are really good. They're, they go through all the major, all the major planning cogs. Yeah. There's plenty of them. There's lots of them. Yeah. So lots of really good reading. Yeah. Okay. Anyway,

Sierra 44:46

If you have trouble sleeping, I guess.

Tre 44:48

Whoa, whoa, whoa, whoa. Okay, perfect. We will cut this episode there. So yeah, that, hopefully that, does that make sense? I hope that Yep. You got, yep. Something out of that. It's a big decision, but it is an important one and it dictates how you will go about building wealth with a corporation. But that's not the whole story because a major part of this is what are you going to do with the money afterwards, which is why it's so important when you're determining how you're going to do this, you need to know how much money you're going to spend.

Sierra 45:16

Mm-hmm.

Tre 45:16

Okay. So if you take anything away from it, it's as always: master personal Like master personal cash flow

Tre (2) 45:23

first.

Sierra 45:23

It's always net

Tre 45:26

worth It comes back to it.

Sierra 45:27

Just kidding. And the system... follow the system! bahhh

Tre 45:32

Okay. Alright, uh, we'll see you guys in the next one.

Sierra 45:36

Bye.

Tre 45:37

Bye.