The Best Way to Pay Yourself: Salary vs. Dividends in Canada
One of the most important questions Canadian small business owners face is: How should I pay myself — salary, dividends, or both?
There’s no one-size-fits-all answer. The best method depends on your income level, business structure, long-term goals, and desire for tax efficiency and control.
In this guide, we’ll break down the differences between salary and dividends, when it makes sense to use each, and how to build a smart compensation strategy that works for your situation.
Why Your Compensation Structure Matters
Choosing how you pay yourself isn’t just about getting money out of the business — it affects:
- How much tax you pay personally and corporately
- What benefits (like CPP or RRSP contribution room) you’re eligible for
- How you qualify for loans, mortgages, or government programs
- How much control you have over your long-term wealth
The right structure gives you flexibility and protects your financial future.
Understanding Salary vs. Dividends
At a high level:
- Salary is paid as regular income, like an employee. It shows up on a T4 slip and is subject to payroll deductions.
- Dividends are paid to you as a shareholder from company profits. They show up on a T5 slip and are taxed differently.
Let’s take a closer look at both options.
Paying Yourself a Salary
Pros:
- Predictable Income: A regular salary makes personal budgeting easier and shows consistency for lenders (e.g., mortgage applications).
- RRSP Contribution Room: Only salary generates RRSP contribution room — a major advantage for retirement planning.
- CPP & EI Eligibility: Salaries trigger CPP and optional EI contributions, helping you qualify for future benefits.
- Corporate Tax Deduction: Your salary is a deductible business expense, which reduces your corporation’s taxable income.
Cons:
- Higher Personal Tax: Salary is 100% taxable to you at your personal marginal rate*.
- CPP Cost: You’re on the hook for both the employer and employee portions of CPP, which adds to your payroll costs.
- More Admin: You’ll need a CRA payroll account, regular remittances, and T4 slips filed annually.
*When you pay yourself a salary, the entire amount is considered personal income, just like a regular employee’s paycheck. That income is taxed according to Canada’s marginal tax rates, which are tiered. So:
- The more you earn, the higher the percentage of tax you pay on each additional dollar.
- For example, the first ~$50K might be taxed at around 20–25%, but income over ~$100K could be taxed at 30–40% (varies by province).
So, if you take a large salary, it can push you into a higher tax bracket, meaning more of your income is taxed at a higher rate — and that’s why it may result in “higher personal tax.”
Paying Yourself a Dividends
Pros:
- Tax Efficiency: Dividends are taxed at a lower rate than salary in many cases due to the dividend tax credit.
- No CPP Contributions Required: This can save you thousands per year, especially if you plan to invest for retirement in other ways.
- Simple to Administer: No payroll setup required — just declare a dividend and issue a T5 at year-end.
- Timing Flexibility: You can pay yourself in lump sums or wait until year-end to declare income.
Cons:
- No RRSP or CPP: Dividends don’t generate RRSP room and don’t count toward CPP. You’ll need to plan for retirement another way.
- Not Ideal for Mortgages: Lenders often prefer salaried income when evaluating you for loans.
Salary vs Dividends in Canada
| Feature | Salary | Dividends |
|---|---|---|
| Tax Deductible? | Yes (for the corp) | No |
| CPP Contributions? | Yes (both portions) | No |
| RRSP Contribution Room? | Yes | No |
| Easier Mortgage Approval? | Yes | Less likely |
| Admin Requirements | Payroll setup, T4 slips | Just a T5 slip |
| Timing Flexibility | Fixed/payroll schedule | Flexible declaration |
Combining Salary and Dividends
Many business owners choose a hybrid approach — paying themselves a base salary and topping up with dividends.
Benefits of Combining:
- Maintain RRSP and CPP eligibility
- Keep personal taxes manageable
- Get the flexibility of dividends with the stability of a salary
- Adjust your mix year-to-year based on how the business is doing
A blended approach offers the best of both worlds — and can be tailored to your business’s cash flow and your personal financial goals.
What About RRSPs?
If building retirement savings is a priority, RRSP contributions are one of the biggest factors to consider.
Since only salary creates contribution room, some owners who prefer dividends may miss out on this tax-deferral tool — unless they supplement with salary or other registered investments.
Also, keep in mind: overfunding RRSPs can cause tax problems later. When you convert RRSPs to a Registered Retirement Income Fund (RRIF) at age 71, forced withdrawals may push you into a higher tax bracket during retirement.
So… Which One Is Right for You?
There’s no universal answer, but here’s a general guideline:
Situation
Earning less than $90K annually Have other income or large RRSPs Want mortgage approval Want long-term control and flexibility Not sure? |
Consider
Salary (to create RRSP room and access CPP) Dividends (to avoid over-contributing and triggering future clawbacks) Salary (stable income looks better to lenders) Dividends (with proper planning) A mix of both |
Final Thoughts
Whether you choose salary, dividends, or a combination, the key is to be intentional — and to plan ahead.
A well-designed compensation structure can reduce your tax bill, improve cash flow, and help you build wealth for the long term.
At Emerald Business Solutions, we help Canadian small business owners find the right balance. We don’t believe in one-size-fits-all advice — we help you choose what works based on your goals.
Ready to build a strategy that works for you? Book a free consultation today.
FAQs
Yes. Many small business owners use a combination of both to balance tax savings, RRSP eligibility, and personal financial goals.
Yes. If you choose to pay yourself a salary, you’ll need to register a payroll account with the CRA and remit deductions like CPP and income tax.
Not necessarily. It depends on your total income, other benefits, and long-term goals. For some owners, a salary actually results in less overall tax.
Yes — but it requires good planning and bookkeeping. Switching mid-year can affect your CPP, RRSP contribution room, and overall tax outcome.
Yes. Dividends are taxable income, but they are taxed at a different rate than salary due to the dividend tax credit.
