📬 Should You Pay Yourself Salary or Dividends? Let’s Break It Down.
As an incorporated professional or entrepreneur, one of the most important financial decisions you’ll face is how to pay yourself: salary, dividends, or a blend of both. Each option comes with its own tax implications, retirement planning consequences, and cash flow considerations.
In this edition, we break down the pros and cons of each approach, eligibility for key benefits, and sample tax outcomes to help you make a more informed choice.
💼 Option 1: Pay Yourself a Salary
A salary is treated as employment income, and your corporation gets a tax deduction for it.
✅ Pros:
Creates RRSP Contribution Room: 18% of your (previous years) earned income (up to annual limits).
CPP Benefits: You (and your company) contribute to the Canada Pension Plan, which may provide retirement and disability benefits.
Stable Cash Flow: Predictable monthly payments.
IPP (Individual Pension Plan) Eligibility: If you're over 40 and earning consistently high salaries, an Individual Pension Plan becomes viable.
Helps with Financing: Lenders prefer stable income when assessing creditworthiness.
🚫 Cons:
CPP Costs: Both you and your corporation must contribute (11.9%+ combined in 2025, up to the annual max).
Higher Payroll Admin Costs: You need to register for a payroll account and remit deductions monthly.
Immediate Personal Tax Liability: Salaries are taxed as you receive them.
📈 Option 2: Pay Yourself Dividends
Dividends are paid from after-tax corporate profits and taxed at preferential rates personally (thanks to the dividend tax credit).
✅ Pros:
No CPP Contributions: Saves money upfront.
Lower Admin Costs: No payroll account needed; simple to declare a dividend.
Flexible Timing: Can be declared at any time, ideal for managing personal tax brackets.
Tax Deferral: If corporate taxes are lower than your personal tax rate, leaving income in the corporation may reduce your total tax bill in the short term.
🚫 Cons:
No RRSP Room Created: Dividends don't count as earned income.
No CPP = No Retirement Benefit: You’re on your own for retirement savings.
Not IPP Eligible: IPPs are based on salary history.
Less Attractive to Lenders: Irregular income can hurt borrowing power.
Corporate Tax First: You pay corporate tax before paying dividends.
🤝 Option 3: Use a Combination Strategy
Many business owners opt for a blended approach: salary to build RRSP room and contribute to CPP, and dividends to optimize tax efficiency.
When does this work best?
You want the retirement and RRSP benefits of a salary but still want to take advantage of the lower tax rate on dividends.
You're planning for an IPP later in life.
You want to manage cash flow efficiently over multiple years.
📊 Quick Tax Example: Salary vs. Dividend (2025)
Let’s say your corporation earned $150,000 before taxes.
Scenario A: All Salary
The full $150,000 salary becomes a deductible expense
Corporate taxes saved = $18,300 (as salary is fully deductible to the corporation)
Personal income tax (Ontario) ≈ $41,500
CPP/EI Premiums ≈ $5500
RRSP room created = $27,000
Net after-tax (approx): ~$103,000
Retirement benefit: CPP + RRSP
IPP eligible: ✅
CPP eligible: ✅
Scenario B: All Dividends
Total Dividend Received: $131,700 (after corporate taxes paid)
Corporate tax = ~$18,300
Federal and Provincial (Ontario) Taxes Paid ≈ $24,500
RRSP room created: $0
CPP contributions: $0
Net after all tax (approximately): ~$107,200
Retirement benefit: You must self-fund
IPP eligible: ❌
CPP eligible: ❌
⚖️ Integration
In the Canadian tax system, the concept of integration is designed to ensure that a business owner pays roughly the same total tax whether they receive income through salary or dividends. While both options have pros and cons, integration aims to balance corporate and personal tax so there's no major tax advantage either way. However, some owners fall into the "dividend trap"—opting for dividends to avoid payroll taxes, only to face limited RRSP room, no CPP contributions, and higher personal tax rates if dividends are not eligible. It's essential to look beyond immediate tax savings and consider long-term financial goals.
🔍 When Is Each Strategy Better?
📝 Final Thoughts
There’s no one-size-fits-all. The optimal approach depends on your goals: tax efficiency, retirement, family planning, or lifestyle. Often, the best answer is a customized mix of salary and dividends. Whether your goal is to maximize CPP & RRSP, maximize short-term tax savings, planning for retirement, maximizing borrowing power etc, the solution will generally depend on what the overall objective is. Speak to one of our Tax Specalists to get a better understanding of all your options and which one will be most suitable for your situation.
📅 Tax planning in August? Absolutely. Mid-year reviews let you adjust before year-end. It’s the perfect time to sit down with one of our tax specialists and align your compensation strategy with your business performance.
Need Help Deciding?
Reach out and let us connect you with a professional who specializes in tax planning for incorporated Canadians.