In the previous episode, we discussed different ways an incorporated business owner could pay themselves. There are general rules of thumb about using salary or dividends. However, the optimal strategy is usually a mix of salary and dividends. It will depend on the unique situation, and will also change over time as that changes.
We have put that into an algorithmic model. It can be boiled down to five major steps. Knowing about your notional accounts and how to release the buying power that they represent is important. So is balancing that against the benefits of salary. It is all driven by your current consumption, with some consideration of your future plans.
A basic understanding of this will help you to ask the right questions of your tax professional and financial planner. Possibly even redirect that discussion if they are using rules of thumb that are sub-optimal for your situation. We also go into detail and have tested the algorithms using long-term models, in case you are a tax advisor and want to consider more of the rationale and nuts and bolts behind it.
This is an area where you can boost your after-tax spending power now and in the future without extra costs or risks by paying attention.
“The optimal mix of salary and dividends is going to change over time as the corporation’s active income changes and as a passive income changes.”
@LoonieDoctor
“We’ve made this public service announcement a few times throughout this podcast series, Mark, but I think it’s worth saying again. Check your notional account balances.”
@benjaminwfelix
“There may be cases when paying dividends, even when you don’t need the money to spend right now could make sense.”
@LoonieDoctor
“If you have RRSP room, you should be using it.”
@benjaminwfelix
