Weekend Reading: A Taxing Decision Edition

For years I’ve wrestled with the taxing decision of whether to pay ourselves dividends or salary (or some combination of the two). For background, my wife and I co-own and operate our corporation, which includes our financial planning business, this blog, and some freelance writing work.

We’ve always paid ourselves an equal amount of dividends from the corporation to fund our personal spending and saving needs. It was easy (no payroll), it kept our personal tax rate fairly low and predictable (dividends are taxed at a lower rate than salary), and we just invested whatever was leftover inside our corporate investment account.

But as our business has grown in revenue and our corporate investment account balance swelled, it was clear that a change might be needed to avoid potential tax traps in the future.

First, any income earned up to the small business deduction limit is taxed at a friendly 11%, but income earned above that limit jumps to 23%. That wasn’t an issue for many years, but it’s going to be this year and into the foreseeable future.

Second, if a corporation earns more than $50,000 in passive income (say, from VEQT distributions), the small business deduction limit is reduced by $5 for every dollar of passive income above that threshold.

That’s not an issue right now with a corporate investing balance of $500,000 earning perhaps $10,000 of passive income. But if we continue aggressively adding to our corporate investments for another 5-10 years this could easily spell trouble with a portfolio of $2M or more. 

The problem with dividends is that, while easy and less taxing personally, they’re not deductible from our corporate income so we’ll end up paying more corporate tax (especially once revenue exceeds the small business deduction limit).

Salary is deducted from corporate income and, while taxed higher personally, also creates RRSP contribution room and allows us to pay into CPP.

Speaking of RRSP room, one more reason I’ve hesitated to switch to salary is that both of our RRSPs are fully maxed out. Paying salary creates RRSP room – but not until the next tax year.

So what did we decide? Starting May 1st we’ll each pay ourselves a salary of $9,000 per month ($72k for this year) and have set up the appropriate payroll deductions for taxes and CPP contributions. We’ll also continue to distribute dividends that will top-up our income to meet our personal spending and saving needs.

The $144,000 in salary can be deducted from our corporate income to keep our corporate taxes low. We’ll pay ourselves enough to keep up with our TFSA snowball approach (catching up on unused room over the next few years), and the trade-off for this change will be fewer dollars contributed to our corporate investments.

We’ll each generate $12,960 in RRSP contribution room for 2026, and that will give us more flexibility to increase our salary and resume RRSP contributions for the first time in six years.

I’m happy with this new mix of salary and dividends as it relates to our overall financial plan and goals.

I’m also grateful to Ben Felix and Dr. Mark Soth for creating the incredibly valuable Money Scope podcast for Canadian business owners, as well as to my friend Aravind Sithamparapillai for helping me think through this taxing decision.

This Week’s Recap:

Markets rallied this week with global equities surging ahead by 6%. I’m sure that was a welcome reprieve for investors who undoubtedly were shaken after their portfolios fell sharply the week prior. 

It’s yet another reminder that stock returns are random and unpredictable, and the best advice is to stay the course with a sensible low cost, globally diversified portfolio.

I said as much in my last edition of Weekend Reading – is “stay the course” helpful advice?

Promo of the Week:

This week I’m highlighting an often forgotten rewards credit card pair, the Marriott Bonvoy American Express Card and the Marriott Bonvoy Business American Express Card.

These cards have been staples in our wallets for many years. Why?

Unlike most rewards credit cards, which I will happily churn (apply, collect the welcome bonus, and then cancel before the card anniversary and annual fee kick-in), the Bonvoy American Express Cards come with an annual free night certificate with a room redemption rate worth up to 35,000 points.

The personal Bonvoy card comes with an annual fee of $120, but the free night redemption alone can easily be worth $350 depending on when and where you redeem it.

The business Bonvoy card comes with an annual fee of $150, but again the free night certificate more than offsets the fee.

That’s not all. New applicants can sign-up for the Marriott Bonvoy American Express card and earn 55,000 points after charging $3,000 to their card in the first three months.

New applicants for the Marriott Bonvoy Business American Express Card can earn 60,000 points after charging $5,000 to their card in the first three months.

As mentioned, my wife and I each have a personal AND a business card (as the primary holders, none of this supplementary card nonsense), and so we each get two free night certificates to use at Marriott’s worldwide.

These come in handy when booking travel. For instance, if we have an early flight departing from Calgary we’ll use a free night certificate to stay at the in-terminal Marriott the night before and then just roll our bags out the door to international departures the next morning.

We’ll also use a free night this summer in Glasgow, where we’re staying overnight and then taking a train to London before our return flight home.

We’ve also used free night certificates for a weekend away in Calgary or Vancouver.

It’s not often a rewards credit card carries value from year-to-year once the welcome bonus disappears, but with these two Bonvoy American Express cards you can easily extract value from the annual free night certificates. They’re worth a look!

Weekend Reading:

Steadyhand’s Tom Bradley echoes my sentiments exactly by saying the best advice for investors right now is to do nothing. Really.

The late Peter Bernstein said it best: “In calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions.”

Heather Boneparth shares an excellent piece – how does your partner cope when the sky is falling?

Many Canadians are confused about how capital gains work. Jason Heath explains how to reduce capital gains with RRSP contributions (a good reminder to those who plan to sell rental properties in the future).

Mark McGrath and David Chilton looked at the TFSA vs. RRSP debate with an insightful 15 minute discussion:

Why market volatility feels different this time – but it probably isn’t.

Finally, one interesting development taking shape since the U.S. launched a global trade war is the soaring loonie – which has now climbed above 72 cents USD. Unfortunately for our travel plans, the loonie is not holding up that well against the Euro or Pound sterling.

Have a great weekend, everyone!