Management Fees vs. Dividends

The big question that I ask clients regarding compensation from their own companies relates to their Canada Pension Plan (CPP) contributions. CPP premiums are applicable to T4 management fees, but not to T5 dividends. As a result, owners of their own company can decide if they want to contribute into CPP.

Anyone with multiple T4 incomes with applicable CPP employee deductions and employer contributions would want to make certain they do not exceed the CPP maximum contribution levels. If they do, the company would be over contributing. While an individual receives a refund of their overpaid employee portion of CPP contributions, the employer’s portion of the over contribution is non-refundable. This is an unnecessary way to pay extra taxes.

Another import consideration is cash flow requirements. For new companies cash flow can be hard to find. Reducing management fees during the initial startup years can make a big difference for small businesses on a tight budget. Just make sure that you are contributing the minimum amount to CPP each year to obtain or maintain CPP Disability coverage. It’s a relatively inexpensive form of insurance and if you end up qualifying for the program there is a minimum monthly payment amount of $433.37/mo. plus an amount based on your total CPP contributions.

Built up retained earnings might also be a factor in determining management fees vs. dividends. Your accountant will be able to advise you on your specific situation.

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