Salary vs. Dividends: How Should You Pay Yourself as a Business Owner?

As a business owner, deciding how to pay yourself is a critical financial decision that affects your taxes, cash flow, and long-term financial planning. The two primary ways to compensate yourself are through salary or dividends—each with its own tax implications and benefits. Understanding the differences will help you optimize your compensation strategy while staying compliant with Canadian tax laws.

What Are Salary and Dividends?

Salary

A salary is a regular, earned income paid to you as an employee of your corporation. Just like any other employee, you receive a paycheck, from which income tax, CPP (Canada Pension Plan) contributions, and other deductions are withheld.

Dividends

Dividends are payments from after-tax corporate profits to shareholders. Unlike salary, dividends do not require CPP contributions or payroll deductions, but they are taxed differently when received personally.

Pros and Cons of Salary vs. Dividends

✅ Benefits of Paying Yourself a Salary

• Consistent income for personal financial planning.

• Reduces corporate taxable income, lowering corporate tax liability.

• Builds CPP contributions, helping secure retirement benefits.

• Generates RRSP contribution room for tax-deferred savings.

• May be required if applying for mortgages or loans (lenders prefer T4 income).

❌ Drawbacks of Salary

• Requires payroll remittances, which adds administrative work.

• Higher personal income tax rates than dividends in some cases.

• Both employer and employee must pay CPP contributions.

✅ Benefits of Paying Yourself Dividends

• Lower personal tax rates due to the dividend tax credit.

• No CPP contributions, reducing overall tax costs.

• Simpler administration—no payroll setup or remittances.

• More flexibility in timing payments based on business profits.

❌ Drawbacks of Dividends

• No CPP contributions, which may impact your retirement savings.

• Does not generate RRSP contribution room.

• Income is less predictable, making personal financial planning harder.

• Not considered earned income, which can affect government benefits like child tax credits.

Salary, Dividends, or a Mix?

Many business owners choose a combination of salary and dividends to balance tax efficiency and retirement planning. A common strategy is to:

1. Pay a base salary to maximize RRSP contribution room and CPP benefits.

2. Supplement income with dividends to take advantage of lower tax rates.

The ideal mix depends on:

• Your personal financial needs.

• The business’s profitability.

• Tax planning opportunities.

Consult Us!

Choosing how to pay yourself is not a one-size-fits-all decision. Factors like corporate profits, personal tax brackets, and future retirement plans all play a role. Working with an accountant ensures you optimize your compensation strategy while staying compliant with Canadian tax laws.

At ModernAxis, we specialize in tax planning for business owners, helping you structure your compensation for maximum financial benefits. Contact us today to develop a strategy that works for you!

Final Thoughts

Both salary and dividends offer unique advantages, and the best approach depends on your financial situation. By understanding the tax implications and planning accordingly, you can reduce taxes, secure retirement benefits, and optimize cash flow for both you and your business.

Would you like a personalized salary vs. dividend analysis for your business? Book a consultation with ModernAxis today!