Salary vs. Dividends in Canada: How to Pay Yourself as an Owner

If you own a Canadian corporation, you can pay yourself by salary, dividends, or a mix. The right choice depends on cash flow, RRSP room, CPP, and your personal tax bracket. Here’s a guide to decide, fast.

Salary: When it shines

• Builds RRSP room for next year.
• Contributes to CPP (future benefits).
• Deductible to the corporation (reduces corporate taxable income).
• Predictable paycheque and easier budgeting.

Watch-out: payroll setup and remittance deadlines; EI usually not required for >40% owners.

Dividends: When they shine

• No CPP/EI withholdings; lighter admin.
• Flexible timing (often after year-end once profits are known).
• Dividend tax credit helps at personal level (eligible vs. non-eligible).

Watch-out: paid from after-tax corporate profits; no RRSP room created; requires resolutions and T5 slips.

The common winner: a mix

• Base salary (to create RRSP room + minimal CPP).
• Top-up dividends after draft year-end numbers are in.
• Adjust the mix annually to match profits and cash needs.

Quick decision cues

• Prioritize retirement saving → lean salary.
• Prioritize simplicity/cash extraction → lean dividends.
• Want balance + flexibility → choose a mix.

Common pitfalls

• Paying only dividends and later realizing no RRSP room was created.
• Missing year-end payroll remittances on bonuses.
• Issuing dividends without proper resolutions/T5s.
• Mixing up eligible vs. non-eligible dividends.

Year-end checklist (owner-managed corps)

• Forecast corporate profit; decide target salary/bonus.
• Confirm EI exemption (common for >40% owners).
• Decide on eligible vs. non-eligible dividends.
• Align with RRSP/TFSA goals and cash needs.
• Paperwork: resolutions, T4/T5, payroll remittances.

FAQs

What’s “most tax-efficient”?
   It depends on profits, province, and your personal bracket. Many owners use a mix.

Do dividends create RRSP room?
   No, only salary/bonus does.

Do I pay CPP on dividends?
   No. CPP applies to pensionable employment earnings.

Can I switch during the year?
   Yes, owners often finalize the mix at year-end.

 

What to do next

1. Pull a draft year-end income statement.
2. Model salary vs. dividends vs. mix using your brackets.
3. Choose, document, and schedule remittances.
4. Talk to RHN. We’ll run the numbers and handle slips/resolutions.

 

This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation. Please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.

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