Salary vs. Dividends: How You Pay Yourself Matters
For incorporated business owners, deciding how to pay yourself is an important part of your overall tax and financial strategy.
The choice between salary and dividends is often framed as a tax question, but there is more to consider. Each approach can affect cash flow, retirement planning, personal finances, and longer-term goals.
What does salary offer?
Salary is treated as employment income and generally requires payroll deductions and remittances, including income tax and Canada Pension Plan (CPP) contributions.
In return, salary generates Registered Retirement Savings Plan (RRSP) contribution room and CPP contributions can build future retirement benefits. A consistent history of employment income may also be helpful when applying for personal financing.
What do dividends offer?
Dividends are paid from a corporation’s after-tax profits and do not require the same payroll deductions as salary.
They can be simpler to administer and provide flexibility in how corporate earnings are distributed. However, dividends do not generate RRSP contribution room or CPP contributions, which can affect longer-term retirement planning.
It doesn’t have to be one or the other
For some business owners, the right approach may be a combination of salary and dividends.
The appropriate mix depends on factors such as your personal income needs, corporate earnings, existing savings, retirement plans, and broader financial goals.
Your compensation strategy can also affect personal financing, income planning between years, and access to other tax and retirement planning strategies.
Your strategy should evolve
What works today may not be the right answer next year. As your business performance, personal circumstances, and financial goals change, it makes sense to revisit how you pay yourself.
Paying yourself isn’t simply about moving cash out of your corporation. The goal is to structure your compensation in a way that supports your current needs while keeping your longer-term plans in sight.
Davidson can help you evaluate the options and develop a compensation strategy that considers tax efficiency, flexibility, and your broader financial goals.
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.
