Should I Pay Myself a Dividend or a Salary?

by Far East Accounting

When you own an incorporated business, you generally have two main ways to withdraw money for personal use:

1. Salary (employment income)

2. Dividends (investment income)Or, in many cases, a mix of both.

   
   

1. Salary (Employment Income)

✅ Advantages:

• CPP Contributions: Paying yourself a salary means you contribute to the Canada Pension Plan (CPP), which increases your future retirement benefits.

• RRSP Room: Salary creates Registered Retirement Savings Plan (RRSP) contribution room (18% of your earned income).

• Stable Personal Income: Banks and lenders often prefer salaried income when assessing for mortgages, loans, or credit.

• Expense Deduction: Salaries paid are a tax-deductible business expense, which reduces your corporation’s taxable income.

• Employee Benefits Eligibility: Salary makes you eligible for certain federal benefits (EI maternity/paternity leave, disability benefits — if you contribute).

  
  

❌ Disadvantages:

• Payroll Costs: You and your corporation must pay CPP contributions (both employer + employee portions).

• Withholding Requirements: Salary requires payroll setup, with monthly or quarterly remittances to CRA.

• Higher Personal Tax: Salaries are taxed at your personal marginal tax rate, which could be higher compared to dividends depending on your income level.

2. Dividends (Shareholder Income)

✅ Advantages:

• Lower Admin Burden: No need to set up payroll; you can issue dividends through shareholder resolutions.

• No CPP Contributions: More immediate cash in hand since no CPP is deducted (though this may hurt your retirement planning long term).

• Tax Efficiency: Dividends are taxed at a lower rate than salary due to the dividend tax credit (integration of corporate/personal tax).

• Flexibility: You can declare dividends at any time, in any amount, based on available profits.

  
  

❌ Disadvantages:

• No RRSP Room: Dividends don’t count as “earned income,” so you lose the ability to grow tax-sheltered savings via RRSPs.

• No CPP Contributions: This saves money now, but reduces your retirement income later.

• Perception with Lenders: Banks may view dividend income as less stable than salary for mortgage or loan approval.

• Not Deductible: Dividends are paid from after-tax corporate profits — they are not deductible to the corporation like salaries are.

3. Combination of Salary and Dividends

Most small business owners use a hybrid approach:

• Salary: enough to create RRSP room and qualify for CPP.

• Dividends: to supplement income and take advantage of lower dividend tax rates.

This allows you to balance retirement planning, tax savings, and cash flow flexibility.

4. Tax Impact Example

Let’s say your corporation has $100,000 before taxes available to pay you.

• Salary:

  • $100,000 deducted as salary → corporation pays $0 corporate tax (salary is deductible).

  • You pay personal income tax on $100,000 at your marginal tax rate.

  • You generate RRSP room and CPP contributions.

• Dividends:

  • Corporation pays tax first (small business rate in Alberta ~11%).

  • The rest (~$89,000) is available as dividends.

  • You pay personal dividend tax (lower than salary tax).

  • No RRSP room or CPP contributions.

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In theory, Canada’s tax integration system aims to make both options roughly equal in total tax. But in practice, slight differences make one more attractive depending on your situation.

5. How to Decide

Ask yourself:

• Do I want to maximize RRSP and CPP retirement savings? → Lean towards salary.

• Do I prefer simplicity and more cash in hand today? → Lean towards dividends.

• Do I want a balance of tax efficiency and long-term planning? → Use a mix of salary + dividends.

✅ Key Takeaway

There is no one-size-fits-all answer — the best strategy depends on your:

• Current income level

• Retirement plans

• Cash flow needs

• Loan/mortgage applications

• Corporate profits

Most owners benefit from a customized blend of salary and dividends.

👉 It’s highly recommended to work with a tax professional/bookkeeper like Far East Accounting to tailor the right strategy for your business and personal goals.