When you own an incorporated business in Canada, you have two main options for paying yourself: salary or dividends (or a combination of both). The choice you make can have a big impact on your taxes, RRSP room, CPP contributions, and even mortgage qualification.
Here’s what you need to know to make an informed decision.
Option 1: Paying Yourself a Salary
A salary is treated just like employment income — your corporation pays you a set amount and issues a T4 slip at year-end.
Advantages of Salary:
- Creates RRSP Contribution Room – You can contribute 18% of your earned income to your RRSP, which can reduce your personal taxes.
- CPP Contributions Build Retirement Income – Both you and your corporation contribute to the Canada Pension Plan, giving you future retirement benefits.
- Stable Income for Loans & Mortgages – Lenders often prefer T4 income when approving financing.
- Reduces Corporate Taxable Income – Salaries are a deductible expense for your corporation.
Disadvantages of Salary:
- Higher Immediate Taxes – Salaries are taxed at your personal marginal tax rate.
- CPP Costs – You (and your corporation) must pay both the employee and employer portions of CPP, which can be significant.
Option 2: Paying Yourself Dividends
Dividends are paid out of your corporation’s after-tax profits and reported on a T5 slip. They are taxed differently from salary due to the dividend tax credit.
Advantages of Dividends:
- Lower CPP Costs – You don’t pay CPP on dividends.
- Potentially Lower Taxes – In certain income ranges, dividends can result in less overall tax.
- Simpler Administration – No payroll deductions or remittances are required.
Disadvantages of Dividends:
- No RRSP Contribution Room – Dividends don’t count as “earned income” for RRSP purposes.
- No CPP Retirement Contributions – You’ll need to save for retirement in other ways.
- Variable Impact on Benefits – Dividends may reduce access to certain personal tax credits or government benefits.
Option 3: A Combination of Salary and Dividends
For many business owners, the best approach is a blend:
- Pay yourself enough salary to create RRSP room and maximize CPP contributions.
- Take additional income as dividends to reduce payroll costs and take advantage of the dividend tax credit.
This strategy can help you:
- Balance personal and corporate taxes
- Maintain retirement savings options
- Control cash flow flexibility
Which Is Best for You?
There’s no one-size-fits-all answer — the right mix depends on:
- Your personal income needs
- Your corporation’s profit level
- Your retirement savings goals
- Your eligibility for tax credits and benefits
💡 Pro Tip: The choice between salary, dividends, or both can save (or cost) you thousands each year. Having a tax professional run the numbers can ensure you’re paying yourself in the most tax-efficient way possible.
📞 Ready to optimize how you pay yourself? Contact MIMAKALI today for a personalized salary vs. dividend strategy tailored to your business.