Salary vs. Dividends (And What You Need to Know)
If you run an incorporated business in Canada, one of the most important decisions you’ll make each year is how to pay yourself.
Should you take a salary, pay yourself in dividends, or use a combination of both?
There’s no one-size-fits-all answer—but understanding the pros and cons of each approach can help you make a smarter, more tax-efficient decision.
Let’s break it down.
Option 1: Paying Yourself a Salary
A salary is just like it sounds—you receive regular payments from your corporation, and it’s taxed as employment income.
Pros:
- Earn RRSP contribution room
Salary income creates contribution room for your Registered Retirement Savings Plan, which can help you save more for retirement tax-free. - CPP Contributions
You’ll contribute to the Canada Pension Plan (CPP), which means you’ll build up retirement benefits. - Deductible for the business
Your salary counts as a business expense, reducing your corporate tax bill. - Consistent income
Helpful if you’re applying for a mortgage or personal loan.
Cons:
- Payroll responsibilities
You’ll need to withhold and remit income tax, CPP, and possibly EI. - Higher tax rate vs. dividends
Salary is taxed at personal marginal tax rates, which may be higher than the effective rate on dividends depending on your income level.
Option 2: Paying Yourself in Dividends
Dividends are distributions of after-tax corporate profits, usually paid out as needed rather than on a fixed schedule.
Pros:
- Lower tax rate
Dividends are taxed at a lower rate than salary because the corporation has already paid tax on the income. This is known as “tax integration.” - Simplicity
No payroll remittances, CPP, or EI contributions. You can just declare and pay a dividend. - Flexible timing
Dividends can be issued when the company has excess cash flow, giving you more control.
Cons:
- No RRSP room
Since dividends aren’t considered “earned income,” they won’t generate contribution room. - No CPP contributions
Which means no additional retirement benefits through CPP. - Can affect personal tax credits
Dividend income may reduce your eligibility for certain benefits or credits.
What About a Mix of Both?
For many small business owners, the best solution is a hybrid approach. You might pay yourself enough salary to:
- Max out your RRSP contribution room
- Make CPP contributions
- Meet personal financial needs (like qualifying for a mortgage)
Then supplement with dividends to minimize tax and pull out profits efficiently.
This flexible method gives you the best of both worlds—retirement savings, predictable income, and tax efficiency.
An Example
Let’s say you own a successful incorporated business and want to take out $80,000 this year. You could:
- Take it all as salary, reducing your corporate tax bill but increasing payroll costs and personal taxes
- Take it all as dividends, saving on personal tax but missing out on RRSP room and CPP
- Take $50,000 as salary and $30,000 as dividends, giving you contribution room, some CPP benefits, and a lower blended tax rate
Every situation is different—so it’s worth reviewing your goals, income needs, and long-term plans with a professional.
Final Thoughts
How you pay yourself affects more than just your tax bill—it impacts your retirement planning, loan eligibility, and even future benefits. That’s why we recommend reviewing your compensation strategy at least once a year, especially before year-end.
Need help figuring out the best approach for your situation?
At Numberra, we’ll walk you through the numbers and build a plan that fits your goals.
Contact us to schedule a personalized consultation.
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