How to Pay Yourself as a Business Owner: Salary vs. Dividends

Onyx Accounting
Jun 18
2 min read

One of the biggest perks of running your own incorporated business is the flexibility to decide how you pay yourself. But with that flexibility comes a key question: Should you take a salary, dividends, or a mix of both?

Each option comes with its own tax implications, benefits, and drawbacks. Choosing the right strategy can make a significant difference in how much tax you pay and how you plan for the future.

Let’s break down the basics so you can decide what works best for your business and personal financial goals.

Option 1: Paying Yourself a Salary

When you pay yourself a salary, you’re treating yourself like an employee of your corporation. The company deducts income tax, CPP (Canada Pension Plan), and possibly EI (Employment Insurance) from your paycheques, and issues you a T4 slip at the end of the year.

Pros of Taking a Salary:

RRSP contribution room: Salary is considered earned income, so it builds room for Registered Retirement Savings Plan contributions.
CPP contributions: Paying into the CPP can help you receive benefits when you retire.
Steady income: Helps with personal budgeting and qualifying for loans or mortgages.
Business expense: Your salary is a deductible business expense, reducing your corporation’s taxable income.

Cons of Taking a Salary:

More paperwork: You’ll need to run payroll, remit deductions, and file T4 slips.
CPP costs: You (as the business owner) must pay both the employer and employee portions of CPP, which can add up.

Option 2: Paying Yourself Dividends

Dividends are paid from the company’s after-tax profits and are not considered earned income. Instead of payroll deductions, you receive dividend payments and report them on a T5 slip.

Pros of Taking Dividends:

Simpler administration: No need to set up payroll or remit CPP/EI.
Lower CPP costs: You don’t have to contribute to CPP when taking dividends.
Lower personal tax rates (in some cases): Dividends are taxed at a lower rate than salary due to the dividend tax credit.

Cons of Taking Dividends:

No RRSP room created: Since dividends aren’t earned income, they don’t help you build RRSP contribution space.
No CPP contributions: Which means no access to future CPP benefits.
Unpredictable income: May be harder to qualify for loans or mortgages.

Which One Should You Choose?

There’s no one-size-fits-all answer. The best approach depends on:

Your income needs
Your long-term retirement goals
Whether you want to invest in RRSPs
How profitable your corporation is
Whether you're planning to reinvest profits or take them out

Many business owners choose a mix of salary and dividends to balance tax savings, retirement planning, and personal cash flow. For example, you might take enough salary to maximize your RRSP room, and pay the rest in dividends to reduce payroll taxes.

Talk to a Pro Before You Decide

Choosing the right pay strategy requires careful planning and knowledge of current tax rules. An accountant can help you calculate the most tax-efficient way to pay yourself—and ensure you're staying compliant with CRA regulations.