Should I pay myself a salary or a dividend? This is a common question that incorporated business owners ponder and ask their accountant about. However, accountants are not up on all the insurance and mortgage rules. And I don’t blame them. Changes with the tax rules, laws and regulations are enough to keep accountants busy enough. This world is getting more and more complex and you increasingly need experts to help you navigate it effectively.
Last month we covered this question from the perspective of an insurance advisor. This month we will take you through the perspective of a mortgage broker. It is not uncommon to see tax returns of business owners where some years they have a salary and some years they will have dividends. Typically, the accountant is changing it based on the tax rates and rules at the time to take advantage of tax laws. However, did you know salaries are preferred in a mortgage application? For salaried owners, the two years of T4s and Notice of Assessments will be enough to establish your income; however, for dividends some lenders require a three-year average. So a two year average will limit your selection of lenders. And what if you were in a transition year where in the last two years, one year you had dividends and one year you were on salary? The rule is a two-year average, so if you have only one, you can be turned down unless you have other things going for you to make it worthwhile for them to make an exception.
So when you are considering buying a property under your personal name, do not switch from salary to dividend or vice versa until you speak with a licensed mortgage broker.
