Paying Dividends from your Corporation to avoid CPP Contributions - why this isn't as great an idea as you think.

There are a lot of misconceptions about CPP as an incorporated business owner.

These misconceptions often lead to paying themselves in dividends to avoid the "cost" of CPP.

Benjamin Felix and I teamed up to discuss why that might not be a great idea. ????

Misconception 1: Is CPP a Tax or an Asset?

Many describe the government mandated contributions of CPP as a "Tax". Taxes are paid to support a variety of services. Some we may use, some we may not.

CPP contributions give us a DIRECT entitlement to future payments. Ergo - asset.

Misconception 2: Business owners get a bad deal due to "double contributions".

This is flawed on 3 premises:

1) There is a strong argument to be made that technically employees carry that cost implicitly because if CPP didn't exist then competitive wages would be higher.

2) The "bad deal" is viewed as "double the contribution" amount (estimated to be $8,848 at peak enhancement).

This fails to consider the Tax credits & Deductions that apply to CPP as well as Tax integration which favours Salary in most provinces.

What's the next tax amount?

3) By our calculations a business owner at the highest personal tax rate with a small business deduction corporoation in 2025 is estimated to have just under $6,000 retained in their corporation if they chose dividends.

NOT $8,848.

Then you need to still get the money out of the corp.

??♂?

Misconception 3: How to consider CPP as an investment.

2 key points here:

1) People point to the CPP premiums and say "If I invested that money myself I would be better off in retirement."

This ignores inflation indexing, guarantee of payments, & mortality pooling. All important for retirees.

2) The REAL (that is - inflation adjusted) IRR on taking Full CPP at 65 and dying at 85 is 2.1%.

Taking CPP at 70 and dying at 95? Real IRR of 3.11% (Shout out to Ben for the math on this).

It also allows you to take more risk with your other investments.

Pretty solid.

Misconception 4: That's still a "bad investment".

1) Let's never forget risk, reward, & behaviour.

2) People that say that typically haven't considered taxes on investments in the corp.

3) This ignores other benefits of salary like creation of RRSP room.

More research ahead!

Curious on reading a bit more about this?

Check out our article on Advisor.ca

https://www.advisor.ca/practice/planning-and-advice/should-business-owners-avoid-cpp-by-paying-themselves-dividends/