Many incorporated business owners in Canada eventually ask the same question: should I pay myself salary or dividends? The answer depends on several factors, including taxes, retirement planning, cash flow, and long-term financial goals.
Both salary and dividends can be effective ways to pay yourself from a corporation, but each option has different tax and planning implications. Understanding how they work can help business owners make more informed decisions.
For many incorporated business owners, a combination of salary and dividends may provide the best balance between tax efficiency, retirement planning, and personal cash flow.
There is no universal answer that works for every business owner. The ideal strategy depends on:
Because these factors vary from person to person, compensation planning is often most effective when reviewed annually.
Salary is employment income paid from the corporation to the business owner.
When a corporation pays salary:
Salary is considered earned income and is reported on a T4 slip.
Many business owners choose salary when they want:
Dividends are payments made from after-tax corporate profits to shareholders.
Unlike salary:
Dividends are reported on a T5 slip and are taxed personally using dividend tax rules.
Some business owners prefer dividends because they can:
Salary and dividends are taxed differently at both the corporate and personal level. Understanding these differences can help business owners choose the compensation strategy that best fits their financial goals.
| Feature | Salary | Dividends |
| Corporate Tax Deduction | Yes | No |
| CPP Contributions | Generally required | Generally not required |
| RRSP Contribution Room | Yes | No |
| Payroll Remittances Required | Yes | No |
| Reported On | T4 slip | T5 slip |
| Paid From | Corporate revenue | After-tax corporate profits |
While tax integration aims to create similar overall tax results, differences can still arise depending on:
Yes, many incorporated business owners choose to pay themselves using a combination of salary and dividends rather than relying entirely on one method.
This approach may help balance:
For example, a business owner may take enough salary to maximize RRSP room while using dividends for additional flexibility.
A blended strategy is often one of the most common approaches in owner-manager tax planning.
Several important factors should be reviewed before choosing salary, dividends, or a combination of both.
The overall tax impact depends on:
The lowest-tax option may vary from year to year.
Only earned income, such as salary, creates RRSP contribution room. Business owners focused on long-term retirement savings often consider this when deciding how much salary to take.
Salary generally requires CPP contributions, while dividends do not. Some business owners value CPP as part of retirement planning, while others prefer the immediate cash flow savings associated with dividends.
The business’s available cash flow can also influence compensation decisions. Salary creates regular payroll obligations, while dividends may allow more flexibility in timing and amounts.
Long-term retirement goals are an important part of compensation planning. Business owners should consider:
A short-term tax savings strategy may not always align with long-term financial goals. For more on financial planning for retirement, click here.
Salary and dividend planning can become complex, especially when personal taxes, corporate taxes, retirement planning, and cash flow are all involved.
An accountant can help:
Because there is no one-size-fits-all approach, professional advice can help ensure your compensation strategy aligns with both your short-term and long-term financial objectives.
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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.
GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30 provides audits and reviews of financial statements, compilations of financial information, and corporate tax returns. We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.
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