As a business owner, deciding how to pay yourself is more than just a personal preference — it’s a tax planning decision with real consequences. The two most common options in Canada are salary and dividends, each with distinct advantages. But which one is right for you?
Let’s break it down.
Option 1: Paying Yourself a Salary
A salary is considered employment income. Your corporation deducts it as an expense, and you report it as personal income on your T1 tax return.
Key Features:
- Creates RRSP room
- Requires source deductions (CPP, income tax)
- Eligible for personal tax credits
- More consistent income reporting (e.g. for mortgage applications)
When to Consider Salary:
- You want to contribute to RRSPs or build CPP
- You need consistent income proof for loans or credit
- You prefer predictable paycheques and withholdings
Option 2: Paying Yourself Dividends
Dividends are distributions of after-tax corporate profits. They don’t create RRSP room and aren’t subject to CPP. But they benefit from preferential tax treatment due to the dividend gross-up and tax credit.
Key Features:
- No CPP contributions required
- Potentially lower combined tax cost depending on income level
- Simpler to administer (no payroll)
- No deduction at the corporate level
When to Consider Dividends:
- You don’t need RRSP contribution room
- You prefer flexibility in how and when you’re paid
- You want to minimize CPP costs
So, Which One Is Better?
There’s no one-size-fits-all answer. The optimal mix depends on your:
- Personal income needs
- Retirement goals
- Family tax planning (e.g. income splitting)
- Corporate profits and tax position
Many owners use a blend of both — a modest salary to create RRSP room and access benefits, plus dividends to minimize overall tax.
What About Tax Efficiency?
In theory, paying salary or dividends should be tax-neutral when combining corporate and personal tax. In practice, small differences in tax brackets, deductions, and credits can tip the balance — especially at different income levels.
Talk to a Professional
Choosing the wrong approach can cost thousands in taxes or lost planning opportunities. We help business owners model different pay structures and identify what’s right based on your unique situation.
Let’s Build a Smarter Compensation Strategy
Book a consultation and we’ll walk you through the numbers.