Salary or Dividends: How Should You Pay Yourself?
If you own a business through a corporation, one important decision is how to pay yourself: salary, dividends, or a combination of both.
Each approach has different implications for personal tax, corporate tax, retirement planning, administration, and cash flow. The right choice depends on your circumstances and longer-term goals.
Salary and dividends: the basics
Salary is an expense to the corporation, reducing its taxable income. It is reported as employment income on your personal tax return and generally requires payroll deductions and regular remittances to the Canada Revenue Agency (CRA).
Dividends are paid from after-tax corporate income. They are reported on your personal tax return and generally come with a dividend tax credit to account for corporate tax already paid.
Dividends can involve less payroll administration, but receiving dividend income may create personal tax instalment requirements.
Why choose salary?
Salary can offer several advantages beyond providing regular income:
- Build RRSP contribution room: Salary is earned income for Registered Retirement Savings Plan (RRSP) purposes and can help build contribution room for future years.
- Create a consistent income history: T4 income can be useful when applying for a mortgage or other financing.
- Reduce corporate taxable income: Salary and related remuneration can generally be deducted by the corporation when the applicable requirements are met.
- Support retirement planning: A history of employment income can support strategies involving tools such as an Individual Pension Plan (IPP).
For some incorporated business owners, salary can therefore play a broader role than simply providing cash for personal expenses.
Why choose dividends?
Dividends have their own potential advantages:
- Less payroll administration: Dividends generally do not require the same payroll deductions and remittances as salary.
- No CPP contributions: Dividend income does not create Canada Pension Plan (CPP) contributions.
- Flexible compensation: Dividends can provide another way to distribute corporate earnings to shareholders when appropriate.
Dividends paid to family members require particular care. Canada’s tax on split income rules can apply in many circumstances, so professional tax advice is important before using dividends as part of an income-splitting strategy.
What should you consider?
The decision is about more than comparing this year’s personal tax bill. Consider how each option fits into your broader financial picture.
- Cash flow: How much personal income do you need, and when?
- Administration: Are you comfortable managing payroll deductions and remittances?
- Retirement: Do you want to build RRSP room or explore other retirement-planning strategies?
- Financing: Could a consistent history of employment income help with future borrowing?
- Long-term planning: How does your compensation strategy fit with your corporate tax, retirement, and wealth goals?
For many business owners, the answer isn’t necessarily all salary or all dividends. A combination of the two may better support different tax and financial objectives.
There is no one-size-fits-all answer
The right compensation strategy depends on your corporation, personal cash needs, retirement goals, and wider financial plan. What works well in one year may also need to change as your business and personal circumstances evolve.
Before deciding how to pay yourself, speak with your tax advisor about the salary and dividend mix that makes sense for your situation.
This article is provided for general information only and should not be considered accounting, legal, or tax advice. Your individual circumstances may differ. Contact your trusted advisor for guidance specific to your tax needs.
