Should I increase my salary from my Ontario corporation to keep up with inflation?
Inflation affects the salary-dividend decision in a few ways. First, RRSP contribution limits increase annually to reflect inflation. If you want to keep maximizing your RRSP contributions, you may need to increase your salary as the annual RRSP maximum rises. The salary needed to generate maximum RRSP room has increased over time, so a salary set years ago may no longer be sufficient.
Second, personal income tax bracket thresholds in Canada are indexed to inflation, so you will not automatically be pushed into a higher marginal bracket by salary increases that merely keep pace with inflation. However, non-indexed amounts — such as the OAS clawback threshold — can still be affected by salary increases.
Third, CPP contribution rates and the maximum pensionable earnings amount rise each year. More salary means more CPP contributions, and in recent years the CPP enhancement program has increased the contribution rate and ceiling beyond inflation. If you had set your salary to minimize CPP in a prior year, recalculating whether the enhanced CPP credit is worth the additional contribution cost is worthwhile.
Annual salary reviews are good practice for any owner-manager. Your accountant should model the RRSP room, bracket, and CPP implications each year before you decide on your compensation for the coming year.
Key takeaways
- RRSP maximums increase annually — salary may need to rise to maintain full RRSP room.
- Federal tax brackets are inflation-indexed, so bracket creep from inflation is limited.
- CPP contribution rates and ceilings have increased under the CPP enhancement program.
- Review compensation annually — the right salary changes with each year's rules.