Weekend Reading: Downside of Dividends Edition

Weekend Reading: Downside of Dividends Edition

No, I’m not talking about investing in dividend paying stocks. Been there, done that, not going back. I’m referring to paying myself non-eligible dividends from my corporation instead of paying myself a salary.

A quick explanation: My wife and I incorporated our online business back in 2012, while I was still working a 9-to-5 job and Boomer & Echo was just a side hustle. As the business grew, we paid a modest dividend to my wife, who was a stay-at-home mom at the time, and left any remaining funds in the corporation to defer taxes.

Fast forward to 2019 and I quit my day job to focus on financial planning and freelance writing full-time. I took the commuted value of my pension, with the bulk of it going into a LIRA and the remainder paid out as taxable cash. That meant I did not need to take any money out of the business in 2020, while my wife took a small dividend that year.

We paid ourselves an equal amount of non-eligible dividends in 2021 and 2022 to meet our personal spending and savings goals, and to keep our finances simple. But I’ve always wrestled with the idea of whether to pay ourselves a salary, pay ourselves dividends, or to pay a mix of salary and dividends.

The downside of dividends is that you don’t generate new RRSP room, you don’t pay into CPP, and dividends are not a deductible business expense. One further downside is that when we decided to build a new house and apply for a mortgage, our personal income appeared to be much lower than it would have been if we paid ourselves a salary – which may have affected how much we could borrow from the bank.

On the plus side, non-eligible dividends are taxed at a much lower rate than salary. On $80,000 of dividend income I’d pay taxes of about $10,500 this year (13.1% average tax rate). On $80,000 of salary, I’d pay taxes of about $17,100 (21.4% average tax rate). I’d have to pay myself about $90,000 in salary to get the same net pay – and that doesn’t factor in paying the employee portion of CPP ($3,754).

Some business owners consider it a plus not to have to pay into CPP. I disagree. A guaranteed, inflation-protected, paid for life income stream is a wonderful addition to any retirement plan. The trouble is having to pay both the employer and employee portion of an expanding program (costing more than $7,500 per year). If you elect to pay yourself dividends just to opt-out of CPP, you better make sure you have robust savings elsewhere.

My hybrid solution is to pay ourselves a salary up to the CPP maximum ($66,600 this year) and top-up our income with dividends to meet our desired personal spending and savings goals. My plan is to make this switch in 2024, once we get through this complicated year of buying a new house and getting settled.

This Week’s Recap:

Last week I shared the why it’s important to retire with purpose.

Many thanks to Rob Carrick for linking to my tax deductions versus tax credits explainer in his latest Carrick on Money newsletter.

The sale of our house officially went through this week as the buyer’s financing condition was removed. We did it!

Now we have three weeks to get packed and organized for the big move. Fortunately, we have about a week between taking possession of our new house and the new buyer’s taking possession of our house. 

Remember, one of my main financial goals for this year was to set aside $50,000 from the sale of our house for landscaping, window coverings, and some furnishings. No “some day, maybes”. That will leave us with about $100,000 in cash, which will either go towards the new mortgage, back into our TFSAs, or a mix of both. 

Given where interest rates are today, I’m leaning towards the mortgage. 

Promo of the Week:

My DIY Investing Made Easy course shows you exactly how to take control of your own investments by opening your own self-directed investing account, funding the account with new contributions, transferring over your existing accounts, and how to buy an all-in-one ETF that can reduce your investment fees by up to 90% or more.

Nearly every one of my clients who have taken this approach (firing their expensive mutual fund manager and investing in an all-in-one ETF) have told me they were surprised it was so easy to implement.

No more being scared to break up with your advisor. This is your step-by-step guide to moving your underperforming funds over to a self-directed account so you can invest in a globally diversified, risk appropriate, and easy to manage ETF. 

Weekend Reading:

Gen Y Money discusses food inflation in Canada and lists some good tips to help stop the bleeding

Why understanding your money scripts can be key to developing a healthier relationship with money and achieving your financial goals.

Not all loyalty point redemptions are the same. Travel expert Barry Choi explains how to calculate their value.

Deanne Gage lists four overlooked deductions to include in your tax return.

How the ‘tax’ on singles has people who live alone feeling the pinch.

Jesse at The Best Interest blog looks at overconfidence in investing:

“Instead, the “perfectly confident” investor knows how diversification, dollar cost averaging, and staying the course will help them in the long run…but doesn’t try to time the short run.”

Markus Muhs on why the vast majority of investors aren’t going to get rich by constantly jumping into “the next big thing”.

Last Week Tonight’s John Oliver nails this piece on timeshares, including how people get into them and why it’s so difficult to get out:

How to have the most tax-efficient retirement income plan without letting the tax tail wag all of your decisions.

Millionaire Teacher Andrew Hallam explains how much retirees can withdraw from their investments each year.

A first-person account from The Globe & Mail: How do I ‘do’ retirement and find the recipe for a happy, fulfilling life?

Finally, Jonathan Clements shares a wish list for how he’d like to spend his time in his 60s. 

Happy Easter, everyone!

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  1. Peter Guay on April 9, 2023 at 1:44 pm

    Hi Robb,

    Great blog, but you can’t ignore the value of the deduction in your Corp when comparing the tax cost of dividends vs. salary. The tax savings in your Corp will bring the difference in total tax paid between dividends and salary to within a percent of each other. Tax integration isn’t perfect, but it’s pretty good. Golombek has always been good at tracking this across the provinces.

    I always discuss the value of participating in social programs (QPP, QPIP, etc.) and the value of tax diversification (by having a topped up RRSP) to make your system more robust to future changes in the tax code.

    Love your work! Keep up the great writing!


    • Robb Engen on April 9, 2023 at 2:13 pm

      Hi Peter, thanks for your comment. Big fan of your work as well!

      You’re right, of course. I was referring to my personal tax situation, but I fully recognize tax integration and that salary is tax deductible on the corporate side.

      I have a decent sized RRSP already from my years working as a T4 employee, and 20 ish years of paying into CPP, so I totally agree on diversifying across different buckets to give me more options in retirement.

      Thanks again!

  2. Douglas Boraas on April 9, 2023 at 1:50 pm

    Why not have dividend paying stocks and pay yourself and wife dividends? It’s not a case of either, or! I did and do both; retired now!

  3. Brenda on April 9, 2023 at 2:04 pm

    I’m also incorporated and pay myself the yearly CPP maximum pensionable earnings and any additional amount needed as ineligible dividends. Another reason that I take a salary is because I have independent disability insurance. If I were ever in a situation where I needed to make a claim, the benefit is based on personal earned income. If I paid myself fully in dividends, there’d be no point in having the disability policy.

    • Robb Engen on April 9, 2023 at 2:14 pm

      Hi Brenda, that’s a great point. Thanks for sharing!

  4. Brad S on April 9, 2023 at 2:58 pm

    Thanks for posting this. I’ve always wondered about what to do if incorporating. I did presume it was a combination of salary and dividends but not aware of how much salary.

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