What Is the Difference Between Salary and Dividends for Tax Purposes?
As a Canadian business owner, you have two main ways to pay yourself: salary (employment income) or dividends (distribution of corporate profits). Each has distinct tax implications, affects your benefits differently, and serves different financial planning goals.
How Does Salary Work for Business Owners?
Salary is a deductible expense for the corporation, reducing corporate taxable income. It's subject to CPP contributions (both employee and employer portions), creates RRSP contribution room (18% of earned income), is taxed at your personal marginal rate, and requires regular payroll remittances.
How Do Dividends Work for Business Owners?
Dividends are paid from after-tax corporate profits. They're not a deductible expense for the corporation, not subject to CPP contributions, don't create RRSP room, and are taxed at preferential rates through the dividend tax credit system.
Which Is Better: Salary or Dividends?
The optimal choice depends on your personal situation. Consider salary if you want to maximize RRSP room, need CPP retirement benefits, have a high personal income already (gross-up of dividends could push you into higher brackets), or need to fund personal expenses that require "earned income" proof. Consider dividends if you don't need additional RRSP room, have other retirement savings (TFSA, non-registered), want to minimize payroll administration, or are in a lower personal tax bracket.
What Is the Optimal Salary/Dividend Mix?
Many accountants recommend a hybrid approach: pay enough salary to maximize RRSP room ($180,556 of salary creates the maximum $32,490 RRSP room for 2025), then take additional compensation as dividends. This balances tax efficiency with retirement planning benefits.