Small business owners in Canada often hear that dividends are “taxed less than salary.”
That’s true sometimes — but not always.
Here’s a simple explanation that makes the comparison clear.
1. Salary Taxation
Salary is taxed as regular employment income.
This means:
- Paying CPP contributions (double the cost if you’re self employed)
- RRSP contribution room
- Income tax withheld at source
- Easier for mortgages and loans
- Treated as a deductible expense for the business
Salary is usually better for:
✔ building retirement savings
✔ predictable cash flow
✔ stronger credit
✔ reducing corporate income
2. Dividend Taxation
Dividends are taxed differently because the corporation already paid tax before distributing them. They are paid from after-tax income.
You pay:
- No CPP costs (self-direct the savings)
- Lower personal tax in some brackets
- Less administrative cost (no payroll)
But:
- No RRSP room
- Harder for mortgages from a bank (you’ll need to work with a mortgage broker)
- Lower CPP in retirement
3. Are Dividends Actually Taxed Less?
Sometimes, yes.
For moderate personal incomes, dividends can create a lower combined tax bill.
Sometimes, no.
For higher incomes or long-term planning, salary often wins or is relatively equal in total tax cost.
In Ontario, many business owners end up with a mix for the best result. Founders often start with dividends early on (to keep things simple) and then layer in salary as the business matures.
Dividends can be taxed less — but it depends on your income, goals, and corporate profits. Salary, dividends, or a combination can all work with the right strategy.
Need a personalized salary vs. dividend plan?
Book a consultation with Greg Cowan CPA in Kitchener-Waterloo:
https://www.gregcowancpa.ca