Introduction

This research paper will analysis and discuss the question of whether the owner of a small business corporation is better off taking a salary or drawing a dividend. The salary vs. dividend question is common among small business corporation owners. Unfortunately, there is no one straight forward answer. There are two types of share holder owners who are eligible to extract funds from a corporation, shareholders that actively work within the corporation and shareholders that are not active within the corporation. The shareholder owner that works within the corporation is given the option of drawing a salary or dividend. The shareholder that own shares but does not actively work in corporation can draw dividends only. This paper will focus on the active owners of a small business corporation. The analysis will compare the methods and the impact on owners as well as the corporation using each approach. The mix method will also be analyzed and discussed. Basic tax concepts are based on the theory of integration. BDO defines Integration in The Tax Factor, they say that” A tax system is said to be integrated if the same amount of overall tax is paid when the income is earned indirectly through a corporation or directly by an individual.” (BDO Dunwoody, 2009, p.1) According to this theory there should be no difference to the individual regardless of the method chosen. But we know that in order for there to be integration the rates have to be perfectly matched. The tax system in Canada is not perfect and there will be a savings or a cost when drawing dividends (BDO Dunwoody LLP, 2009).

Provincial corporate and personal tax rates vary significantly from provinces to province. The corporate tax rates have been very active, consistently dropping in many provinces. Along with tax rates dropping, small business limits have been