Tax Tip Thursday

I get asked this all the time… Should I pay myself salary or dividends?

Paying yourself a salary or dividends from your Canadian corporation each has distinct advantages and disadvantages. Your decision should be based on a mix of tax planning, retirement goals, cash flow needs, and corporate profitability.
Here’s a comparison:

Paying Yourself a Salary

Advantages

1. RRSP Contribution Room
o Salary creates earned income, which generates RRSP contribution room (18% of income up to the annual limit).
2. CPP Contributions (Canada Pension Plan)
o You contribute to CPP, which gives you access to CPP retirement benefits.
3. Stable Income
o Salaries provide regular income, which helps with personal budgeting, mortgage applications, etc.
4. Corporate Tax Deduction
o Salaries are a deductible expense for your corporation, reducing corporate taxable income.
5. Loans/mortgages
o While it may seem that if you make $50k – it should not matter whether it is dividends or salary when you go apply for a mortgage. But it does. Banks still favour Salary/T4 income.

Disadvantages

1. CPP Contributions Are Costly
o As the owner, your corporation pays both the employer and employee portions (totaling over 11% in 2025 up to a cap).
2. Withholding and Payroll Compliance
o Requires regular payroll remittances and T4 filings.
3. Higher Personal Tax Rates
o Salary is taxed at your full marginal tax rate with no dividend tax credit.

Paying Yourself Dividends

Advantages

1. Lower Personal Taxes (Possibly)
o Dividends are taxed at a lower rate than salary because they come with a dividend tax credit. Approximately the 1st $40k is virtually tax free.
2. Simplicity
o No need for payroll deductions or remittances. Just issue a dividend and record it.
3. No CPP Contributions
o Saves both employee and employer CPP payments.
4. Tax Deferral
o You can leave income in the corporation (taxed at a lower rate) and pay yourself dividends later, deferring personal tax.

Disadvantages

1. No RRSP Contribution Room
o Dividends are not considered earned income, so you don’t generate RRSP room.
2. No CPP Contributions
o No future CPP benefits, which can be significant over time.
3. No Deduction for the Corporation
o Dividends are paid out of after-tax profits, so they don’t reduce corporate taxable income.
4. Less Stable Income
o Dividends can be irregular and might be harder to use as proof of income for loans.

Common Strategy: Combine Both

Many owner-managers use a mix of salary and dividends to:

• Maximize RRSP contributions
• Build CPP eligibility
• Minimize total taxes
• Keep corporate and personal cash flow efficient

Final Tips:

• If you need CPP and RRSP, salary is important.
• If you are optimizing after-tax cash, dividends may win.
• If you have a spouse – this is also a consideration
We can help you come up with a strategy that is right for you!

Planning is key when paying yourself from your corporation. Let us help you!  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.