It’s the most common question successful Canadian entrepreneurs ask. You’ve worked hard to build a profitable company, and now you have a “good” problem: how do you pay yourself in a way that is smart, tax-efficient, and compliant?
You’ve likely heard the terms “salary” and “dividends,” but it’s easy to get overwhelmed by the conflicting advice.
Let’s make it simple. As your financial partner, here’s a clear, stress-free breakdown.
The #1 Question for Owners: Should I Take a Salary or Dividends?
First, What Is a Salary?
A salary is straightforward. You are an employee of your own corporation.
- You receive a T4 slip at the end of the year.
- Your company withholds and remits taxes, Canada Pension Plan (CPP) contributions, and (sometimes) Employment Insurance (EI) premiums to the CRA on your behalf.
The Pros:
- Creates RRSP Room: This is the big one. A salary is considered “earned income,” which is what generates your annual RRSP contribution room.
- Predictable: You get a steady, predictable paycheque, which makes personal budgeting easy.
- CPP Contributions: You are building up your future CPP pension.
The Cons:
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Higher Payroll Tax: Your company must pay the employer’s portion of CPP (and potentially EI), which is an added expense.
Second, What Is a Dividend?
A dividend is not a wage; it is a share of the corporation’s after-tax profits.
- You receive a T5 slip at the end of the year.
- There are no CPP or EI deductions on a dividend payment.
The Pros:
- No Payroll Taxes: Your company does not pay the employer portion of CPP, which can save the business money.
- Flexibility: They can be issued when the company has available profit, offering flexibility.
- Lower Personal Tax (Sometimes): Due to the dividend tax credit, the personal tax you pay on dividends can be lower than on a salary, depending on your income level.
The Cons:
- No RRSP Room: This is the most critical part. Dividends do not create RRSP contribution room.
- No CPP: You are not building up your CPP pension.
The "Regal" Answer: It's Not a Fight. It's a Mix. So, which is better? The answer isn't "one or the other." For most successful owners, the best strategy is a strategic mix of both.
The Sweet Spot
The goal is to find the “sweet spot” that serves your personal and business needs.
- We often recommend a base salary that is high enough to generate the RRSP contribution room you want, meet your personal cash flow needs, and make your CPP contributions.
- We then use dividends to distribute the remaining company profits in the most tax-efficient way possible.
This decision is a strategic one, not a simple “filing” one. It depends on your personal tax bracket, your retirement goals, and your company’s cash flow.
This is the very definition of “Tax Strategy.” It’s what we do for our clients every day. Instead of just filing your numbers, we help you build a plan to make those numbers work for you.
Ready to build a smart, tax-efficient plan for your owner's compensation?
We’re here to help. Book your free, confidential consultation today, and let’s make your business work for you.
