At a Glance
A wage is a fixed regular payment for work done. Wages are typically paid daily, weekly, or monthly.
A dividend is am amount paid by a business to its owners (shareholders) out of its profits or cash reserves. Dividends can be paid at any time or interval during the year provided the company makes a profit.
Wage vs Divided: Business owners tend to choose to receive dividend payments over wages to reduce the amount of tax they pay. On the other hand, some prefer wages or salaries to guarantee a consistent business income.
A Simplified Example
Nick, a medical doctor, runs a profitable practice in Vancouver. He wants to maximize his net income to invest in an alleged bankable idea his real estate developer friend, Ron, mentioned a few weeks ago. Nick's about to decide whether to go the wage or dividend route to maximize his disposable income:
If Nick takes the dividend route, he ends up with an extra $21,879 compared to when he earns wages. But while dividends offer huge tax savings, wages offer a consistent way of earning weekly or monthly as well as an entitlement to the Canada employment credit.
Dividends do not require the business to hold and remit resulting taxes at source; salaries mandate companies to remit taxes within days or weeks of payment.
Clearly, each option has its distinct merits and demerits depending on the circumstance. As such, the best compensation method should be based on a cost-benefit analysis decision where the business owner selects an option that offers more benefits at lower costs.
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