Every incorporated business owner faces this question each year. There is no single right answer, but the trade-offs are clear.
Paying yourself a salary
- Deductible to the corporation
- Creates RRSP contribution room
- Builds Canada Pension Plan (CPP) benefits, but you pay both the employee and employer contributions
- Requires a payroll account, monthly remittances and a T4
- Gives you employment income that lenders recognize easily for mortgages
Paying yourself dividends
- Not deductible to the corporation, which pays tax first
- Taxed personally at lower rates thanks to the dividend tax credit
- No CPP contributions and no RRSP room
- Simpler: no payroll, just a T5 slip at year-end
Why many owners use a mix
A combination can give you RRSP room and some CPP coverage while keeping payroll costs down. The best mix depends on your personal income needs, other income, retirement goals, family situation and how much the corporation earns.
Watch out for
- Paying dividends to family members: the tax on split income (TOSI) rules may apply
- Taking money out without recording it, which can create a shareholder loan that becomes taxable
- Large passive investments in the corporation, which can reduce the small business rate
We model salary and dividend options with our clients every year before year-end. Book a free 15-minute consultation to review yours.
This article is general information, not tax advice. Rules and amounts change; contact us about your situation.