How should I pay myself from my corporation: salary or dividends?

What salary gives you that dividends do not

A salary is deductible to the corporation, so it reduces corporate taxable income dollar for dollar. It also does three things dividends cannot:

• Creates RRSP contribution room at 18% of earned income, up to the annual limit
• Builds CPP entitlement toward your future pension
• Counts as earned income for childcare deductions and certain other credits

The cost is administration: salary requires a payroll account, source deduction remittances by the 15th of each month, and T4 slips by the end of February. It also triggers CPP contributions from both the employee and employer side.

What dividends give you

Dividends are paid from the corporation's after-tax income and are not deductible to the company. In exchange they are simpler and, for many owners, cheaper on the payroll side:

• No CPP contributions, saving both halves of the premium
• No payroll account, remittances or T4 obligations, just a T5 slip
• Taxed at preferential personal rates through the dividend tax credit

The trade-off is no RRSP room, no CPP building, and the loss of the forced-savings discipline that CPP provides. Skipping CPP saves premiums now but reduces your pension later, which is a genuine decision rather than a free lunch.

The integration principle behind it all

Canada's tax system is built on integration: in theory, income earned through a corporation and paid out should bear roughly the same total tax as income earned personally. Where integration is near-perfect, the salary-versus-dividend choice is driven by the non-tax factors above rather than by a large tax gap.

In practice integration is imperfect and varies by province and income level, which creates modest arbitrage in some cases. But chasing that small gap while ignoring RRSP room and CPP usually costs more than it saves.

How the mix is set in practice

A common approach pays enough salary to maximise RRSP room and reach the CPP maximum, then tops up with dividends for additional cash needs. The exact split depends on your spending, your retirement savings strategy, and how much profit you want to leave in the company.

Leaving profit in the corporation and paying yourself less is itself a strategy: retained earnings are taxed at the low small business rate and can be invested or drawn in a lower-income future year. We set the mix annually because the right answer moves with your income and your plans.

Paying family members

Salary to a family member is deductible if the work is genuinely performed and the pay is reasonable for that work, and it can shift income to a lower bracket. Dividends to family members are far more constrained: TOSI applies the top marginal rate unless a specific exclusion is met, such as being over 65, working an average of 20 hours a week in the business, or meeting an excluded-share test.

Documenting real work by family members is a routine CRA review target, so keep records of duties and hours.