Salary vs. Dividends: How Should You Pay Yourself as a Business Owner?
For Canadian business owners operating through a corporation, a critical financial decision is determining how to compensate yourself: salary, dividends, or a combination of both. This decision impacts not only your tax liabilities, but also your retirement planning, cash flow, and long-term financial strategy.
At Booboo Accounting Services in Richmond Hill, we specialize in guiding incorporated professionals and small business owners through this important choice, ensuring it aligns with your business goals, tax strategy, and personal financial needs.
Understanding the Basics
🔹 Salary (Employment Income)
A salary is a regular wage paid by your corporation to you as an employee. It is treated as a business expense and is subject to payroll deductions, including CPP and income tax.
Key Benefits:
Generates RRSP contribution room
Builds CPP retirement income
Recognized by financial institutions (e.g., for mortgages)
Deductible to the corporation
Considerations:
Requires setting up a payroll account and remitting monthly deductions
Triggers employer and employee CPP contributions
Higher compliance and bookkeeping effort
🔹 Dividends (Investment Income)
Dividends are payments to shareholders from after-tax corporate profits. They are not considered earned income and are taxed at a lower rate due to the dividend tax credit.
Key Benefits:
Lower personal tax rates on eligible dividends
No CPP contributions required
Simpler to distribute (no payroll setup needed)
Considerations:
Does not create RRSP room
Reduces future CPP entitlement
Can complicate mortgage qualification
Not deductible to the corporation
Salary vs. Dividends: A Strategic Comparison
| Feature | Salary | Dividends |
|---|---|---|
| Tax Deductible to Corporation | ✔ Yes | ✘ No |
| CPP Contributions | ✔ Required (employer & employee) | ✘ Not Required |
| RRSP Contribution Room | ✔ Generates Room | ✘ Does Not Generate Room |
| Administrative Requirements | ✔ Requires Payroll Setup | ✔ Simple Distribution via T5 |
| Qualifies for Loans/Mortgages | ✔ Easily Recognized | ✘ May Be Less Predictable |
| Impact on Cash Flow | ✔ Predictable | ✔ Flexible |
Which Option Is Best for You?
Choosing between salary and dividends depends on several personal and business factors, such as:
Your current tax bracket
Desired RRSP contributions
Long-term retirement planning
Corporate profitability and cash flow
Mortgage or lending considerations
Administrative capacity of your business
For many incorporated business owners, a combined approach — drawing a modest salary to generate RRSP room and contribute to CPP, with the remainder paid as dividends — offers an optimal balance of tax efficiency and retirement security.
Professional Tax Planning Starts Here
At Booboo Accounting Services , we don’t believe in one-size-fits-all solutions. Our team will work with you to develop a custom compensation strategy based on your unique circumstances and future goals.
Whether you’re newly incorporated or re-evaluating your current payment structure, we’re here to ensure your income strategy is tax-efficient, compliant, and aligned with your long-term plans.
Book a Free Consultation Today
Let us help you structure your compensation in a way that supports both your personal financial health and the success of your business.