One of the biggest advantages of incorporating your business in Canada is flexibility in how you pay yourself. As a business owner, you can choose to take money out of your corporation as a salary, as dividends, or sometimes as a combination of both. But which option is best? The answer depends on your personal needs, tax situation, and long-term goals.
At Sandra Healing Accounting Ltd, we guide business owners through these decisions so they can maximize both income and tax efficiency. Here’s a breakdown of the two main options.
Salary (Employment Income)
When you pay yourself a salary, you’re essentially treating yourself like an employee of your corporation.
Key Features:
- Salaries are a deductible expense for your corporation, lowering corporate taxable income.
- You (personally) pay income tax on the salary, just like any employee.
- The corporation must remit payroll deductions to the CRA (income tax, CPP, and possibly EI).
- Salaries create RRSP contribution room, which can be an advantage for retirement savings.
- CPP contributions mean you’ll be eligible for Canada Pension Plan benefits later.
Best for: Business owners who want stable, regular income, CPP contributions, and RRSP contribution room.
Dividends (Shareholder Payments)
Dividends are payments made from after-tax corporate profits to shareholders.
Key Features:
- Dividends are not a corporate expense, so the corporation pays corporate tax first, then distributes profits.
- You (personally) pay tax on dividends, but at a different, generally lower rate than salary due to the dividend tax credit.
- Dividends do not create RRSP contribution room.
- No CPP contributions are required on dividends.
- Payments are usually more flexible — you can pay them out as needed, rather than on a fixed schedule.
Best for: Business owners who want flexibility, prefer lower personal tax rates, or don’t need RRSP contribution room.
Salary vs. Dividends: Quick Comparison
| Feature | Salary | Dividends |
|---|---|---|
| Tax treatment | Deductible from corporation | Paid from after-tax profits |
| Personal tax rate | Taxed as employment income | Lower rate due to dividend tax credit |
| RRSP room | Yes, creates RRSP room | No |
| CPP contributions | Required (employer + employee) | Not required |
| Consistency | Regular, predictable | Flexible, as needed |
| Corporate deductions | Reduces taxable income | No deduction |
Which Should You Choose?
The right approach depends on:
- Your personal cash flow needs
- Retirement and savings goals
- Tax efficiency between your corporation and personal income
- Whether you want CPP contributions or prefer to save for retirement another way
Many business owners use a blend of salary and dividends to balance tax efficiency with long-term planning.
How We Can Help
At Sandra Healing Accounting Ltd, we help business owners make informed decisions about remuneration by:
- Reviewing your personal and business financial picture
- Working with your CPA to determine the most tax-efficient approach
- Setting up systems for consistent, stress-free owner payments
Final Thought
Choosing between dividends and salaries isn’t a one-time decision — it’s part of ongoing tax and financial planning. With the right strategy, you can pay yourself in a way that supports your goals today and your security tomorrow. At Sandra Healing Accounting Ltd, we’ll help you find the balance that’s right for you