Salary vs dividends in Canada: how should you pay yourself?
If you own an incorporated company, every dollar you take out leaves either as salary or as a dividend — and the split changes your tax bill, your CPP, your RRSP room and what happens if you have a bad year. There is no answer that fits everyone, but there is a right answer for you, and it comes from your numbers rather than a rule of thumb.
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The short version
What each choice actually does.
- Salary is a deductible expense to the company, builds RRSP room and CPP, and is taxed as employment income in your hands
- Dividends come out of after-tax corporate profit, skip CPP entirely, and are taxed at lower personal rates with a credit
- Integration means the total tax lands in a similar place either way — the difference is in the side effects, not the headline rate
- Most owners end up with a mix, revisited each year at year-end
The decision is rarely about this year’s tax. It is about CPP, RRSP room, mortgage applications and what your company earned — which is why it belongs in your year-end conversation.
What taking a salary does
A salary is employment income. The company deducts it as an expense, runs payroll, withholds tax and remits CPP — both the employee and employer halves, since you are both.
What you get for it
- RRSP contribution room — built only by earned income. Dividends create none.
- CPP entitlement — you are paying in, so you accrue the pension. Whether that is good value is a genuine question: the combined CPP cost on a salary at the maximum is thousands per year.
- Provable income — lenders understand a T4. Owners paid entirely in dividends can find mortgage applications harder, even with a healthy company behind them.
- Fewer surprises — tax is withheld as you go, rather than owed in a lump the following April.
What it costs
Payroll admin every month, both halves of CPP, and less flexibility: salary is set and remitted through the year, while a dividend can be declared when you know what the year actually looked like.
What taking dividends does
A dividend is a distribution of profit the company has already paid tax on. No payroll, no CPP, declared by resolution whenever it suits — often once, at year-end, when the numbers are known.
Why owners like them
- No CPP contributions — several thousand dollars a year stays in your pocket rather than going into the pension. The flip side: no pension accrues.
- Simplicity — no monthly payroll, no remittance deadlines to miss.
- Timing — declare what the year supports, when you know what it supports.
- Lower headline personal rate, because the dividend tax credit recognises tax the company already paid.
The catches
- No RRSP room is created. A dividend-only owner's RRSP room stops growing.
- Tax is not withheld — without instalments, the April bill surprises people, and CRA charges instalment interest the following year.
- Paying family members dividends is heavily restricted by the tax on split income (TOSI) rules. What worked before 2018 mostly does not now.
Salary vs dividends, side by side
| Salary | Dividends | |
|---|---|---|
| Company deduction | Yes — reduces corporate tax | No — paid from after-tax profit |
| Personal tax rate | Employment rates | Lower, with dividend tax credit |
| CPP | Both halves paid; pension accrues | None paid; none accrues |
| RRSP room | Builds it | Builds none |
| Payroll admin | Monthly | None — a resolution when declared |
| Tax withheld | As you go | No — expect instalments |
| Mortgage applications | T4 income, straightforward | Harder to evidence |
| Flexibility | Fixed through the year | Declared when the year is known |
Why most owners end up with a mix
A common shape: enough salary to create RRSP room and keep lenders happy, with dividends topping up the rest of what the year supports. Where the line sits depends on things a calculator cannot see:
- Whether you value CPP — an owner at 60 with full contribution years answers differently than one at 30.
- What the company earned — the small business deduction, and how much profit is staying in to be reinvested or moved to a holding company.
- Plans that need provable income — a mortgage renewal or purchase in the next two years argues for salary now.
- Your spouse's situation — within what TOSI actually allows, not what it used to.
This is a year-end decision, revisited annually — not a setting you choose once. Years change, and the right mix changes with them.
Run your own numbers before you decide
We prepare tax returns and corporate year-ends in Langley, and Greg has done so in the Fraser Valley since 2002 — every file himself. The salary-dividend split is part of the year-end work: what your company earned, what you need personally, and what next year looks like. A 15-minute call is usually enough to see what the decision turns on in your case. The fee is agreed in writing before any work starts.
Related reading: What is a holding company? · Corporate year-ends and T2 filing · Incorporating in BC · Corporate tax deadlines · BC corporate tax calculator