As a small business owner, deciding how to pay yourself—through salary, dividends, or a mix of both—is a crucial financial decision. The choice impacts not only your immediate income but also your tax burden, retirement savings, and long-term financial security.
So, which is better? Salary or dividends?
The right approach depends on your business structure, financial goals, and tax strategy. This article will break down the pros and cons of each option and help you determine the best way to optimize your income while minimizing taxes.
Salary vs. Dividends: What’s the Difference?
- Salary: A fixed paycheck from your business, taxed as employment income and providing access to government benefits.
- Dividends: Payments from the company’s after-tax profits, taxed at a lower rate than salary but without contributions to social benefits like the Canada Pension Plan (CPP).
Choosing between the two (or combining them) is a strategic decision that affects your cash flow, taxation, and retirement planning.
Advantages and Disadvantages of Taking a Salary
✅ Benefits of Paying Yourself a Salary
✔ Stable, Predictable Income – A salary ensures you receive a steady paycheck, which is useful for budgeting and financial planning.
✔ CPP Contributions – Salary contributions help you qualify for Canada Pension Plan (CPP) benefits, which can be important for retirement planning.
✔ RRSP Contribution Room – Only employment income (not dividends) allows you to contribute to a Registered Retirement Savings Plan (RRSP), a key tax-saving tool.
✔ Easier Mortgage & Loan Approvals – Lenders prefer a steady income over fluctuating dividend payments when assessing loan applications.
✔ Tax Deductible for the Business – Salaries reduce your company’s taxable income, lowering corporate taxes.
❌ Disadvantages of Paying Yourself a Salary
✖ Higher Personal Tax Rate – Salary is taxed at personal income tax rates, which are often higher than dividend tax rates.
✖ Payroll Administration – You must register a payroll account, deduct taxes, and remit payments to the Canada Revenue Agency (CRA), increasing administrative work.
✖ Less Business Flexibility – Salaries must be paid regularly, even if your business experiences cash flow fluctuations.
Advantages and Disadvantages of Paying Yourself Dividends
✅ Benefits of Taking Dividends
✔ Lower Tax Rate – Dividends are taxed at a lower rate than salary due to the dividend tax credit.
✔ No CPP Contributions Required – Unlike salary, dividends don’t require CPP deductions, meaning you keep more money upfront (but also don’t contribute to your CPP retirement benefits).
✔ Less Paperwork & Administration – No need to set up payroll or remit payroll taxes—you can simply declare and distribute dividends.
✔ Flexibility – Unlike a salary, dividends don’t need to be paid on a fixed schedule, allowing you to manage your company’s cash flow efficiently.
❌ Disadvantages of Taking Dividends
✖ No RRSP Contribution Room – Since dividends aren’t considered earned income, you won’t accumulate RRSP contribution room.
✖ No CPP or Employment Insurance (EI) Contributions – Without salary, you don’t contribute to CPP, which can affect your retirement benefits.
✖ Double Taxation Risk – Your company pays corporate tax before distributing dividends, and you then pay personal tax on dividends, leading to potential double taxation.
✖ More Complex Tax Planning – Different dividend types (eligible vs. non-eligible) have different tax implications, requiring careful tax planning.
Salary vs. Dividends: Which is Better?
The best choice depends on your financial priorities:
| If you want… | Consider… |
| A stable income & easier mortgage approval | Salary |
| Lower personal taxes | Dividends |
| CPP contributions for retirement | Salary |
| More flexibility & lower payroll costs | Dividends |
| RRSP contribution room | Salary |
| To reduce corporate taxes | Salary |
Combining Salary & Dividends for Maximum Tax Efficiency
Many business owners choose a hybrid approach, taking a mix of salary and dividends to balance tax efficiency and retirement savings.
A common strategy is to:
✔ Take enough salary to contribute to CPP and maximize RRSP room.
✔ Use dividends to supplement income while keeping personal taxes lower.
This blended approach can provide the best of both worlds—reducing corporate taxes while optimizing personal income tax and retirement benefits.
Choosing between salary and dividends is a critical decision that affects your taxes, retirement savings, and financial security.
📖 Want to learn more about optimizing your retirement? Get your copy of The Art of Retirement—a comprehensive guide to planning for financial freedom.
👉 Schedule your consultation now or order The Art of Retirement today!
