Incorporation offers a certain degree of flexibility in choosing your mode of compensation: salary, dividends or a combination of both. These two modes of compensation entail different tax consequences.
Source deductions (QPP, QPIP)
Dues to the Individual Pension Plan (IPP), if applicable.
Contribution to RRSP
Maximum marginal tax rate of 49%
No source deductions;
No dues to the QPP;
No contribution to RRSP;
Maximum marginal tax rate of 36%
Income splitting possible (consult with a tax expert for tax planning strategies)
The main distinction between a salary and a dividend is the withholding of source deductions.
In some cases, compensation by salary is necessary. For example, when:
You have a child soon to be born and you plan on taking parental leave;
You have a live-in caregiver;
You wish to take advantage of deductions offered for research and development.
CONTRIBUTING TO AN RRSP
When issuing a dividend, you renounce the right to contribute to an RRSP. Is this truly a disadvantage?
No. Once incorporated, your retirement strategy simply changes. Rather than contributing to an RRSP, your goal is to invest as much as possible in your holding corporation.
We have observed that few professionals feel the need to contribute to an RRSP once they incorporate their practice.