As a Canadian business owner, deciding how to pay yourself—salary, dividends, or a combination of both—is a key tax planning consideration. The right strategy can help you minimize taxes, maximize cash flow, and meet your financial goals.

In this blog post, we’ll break down the pros and cons of paying yourself a salary versus dividends, tax implications, and how to choose the best option for your business.

1. Salary vs. Dividends: What’s the Difference?

Salary

• Salary is employment income paid by your corporation.
• It is deductible as a business expense, reducing your corporation’s taxable income.
• You must remit payroll deductions to the CRA for income tax, CPP (Canada Pension Plan), and EI (optional for owners).

Dividends

• Dividends are payments made to shareholders from the corporation’s after-tax income.
• They are not deductible as a business expense, meaning your corporation pays tax on the profits before dividends are distributed.
• Dividends are taxed at a lower personal rate due to the dividend tax credit.

2. Key Differences: Salary vs. Dividends

Feature	Salary	Dividends
Tax Deductibility	Deductible as a business expense	Not deductible
CPP Contributions	Required (employee and employer)	Not required
RRSP Contribution Room	Increases RRSP room	Does not increase RRSP room
Personal Tax Rate	Taxed as regular income	Taxed at a lower rate
Cash Flow for Business	Reduces corporate cash flow	Leaves more cash in the business
T4 or T5 Slips	Reported on T4	Reported on T5

3. Tax Considerations: Salary vs. Dividends

a) CPP Contributions

• Salary: You and your corporation must contribute to CPP. For 2024, the maximum contribution is $7,735.05 (combined employee and employer portions).
• Dividends: No CPP contributions are required. This can save cash now but may reduce your retirement benefits later.

b) RRSP Contribution Room

• Salary: RRSP contribution room is based on 18% of earned income up to a maximum ($31,560 for 2024).
• Dividends: Do not generate RRSP room, as they are considered investment income.

c) Personal Tax Rates

While salaries are taxed as regular income, dividends benefit from the dividend tax credit, which lowers your overall tax rate.

Example (Ontario, 2024):

Income Type	Amount	Tax Payable
Salary	$100,000	~$26,000
Dividends	$100,000	~$20,000

Dividends may offer tax savings, but they come from after-tax corporate income, meaning your corporation has already paid tax on the profits.

4. Pros and Cons of Salary vs. Dividends

Salary: Pros

• Reduces corporate taxable income.
• Generates RRSP contribution room.
• Contributes to CPP, increasing retirement benefits.
• Consistent income can help with mortgage approvals and other credit needs.

Salary: Cons

• Requires payroll remittances (CPP, income tax).
• Higher upfront tax burden for both you and your corporation.

Dividends: Pros

• Lower personal tax rates due to the dividend tax credit.
• No payroll remittances or CPP contributions.
• Greater cash flow for your corporation.

Dividends: Cons

• No CPP contributions, reducing retirement income.
• Does not create RRSP contribution room.
• Not deductible as a business expense.

5. Combined Strategy: Best of Both Worlds

Many business owners use a combined strategy of salary and dividends to achieve optimal tax savings and financial benefits.

Example Strategy:

• Pay yourself a salary up to the CPP maximum to create RRSP contribution room and ensure CPP benefits.
• Distribute the remaining income as dividends to take advantage of the lower personal tax rates.

This approach balances current tax savings, retirement planning, and cash flow management.

6. Which Option is Right for You?

The best approach depends on your specific circumstances:

• Retirement Planning: If you value CPP contributions and RRSP room, salary may be better.
• Cash Flow: If you want to retain more cash in the business, dividends are more efficient.
• Tax Optimization: A combination of salary and dividends often provides the best balance.

7. Why Work with a Tax Professional?

Choosing between salary and dividends requires careful tax planning and consideration of your personal and business goals. A tax professional can:

• Analyze your income and tax situation to determine the most tax-efficient strategy.
• Optimize your mix of salary and dividends to minimize taxes.
• Ensure compliance with CRA rules for payroll remittances and corporate distributions.

Conclusion

Deciding how to pay yourself—through salary, dividends, or a mix of both—is a crucial part of tax planning for Canadian business owners. Understanding the pros, cons, and tax implications of each option can help you optimize your income while planning for the future.

If you need help determining the right strategy for your business, contact us today! Our team of tax experts will work with you to create a tailored compensation plan that minimizes taxes and supports your financial goals.