If you’re an incorporated small business owner in Canada, you’ve probably asked yourself the same question everyone asks:
“Should I pay myself salary, dividends, or a mix of both?”
Both options are legal, both are common, and both have tax advantages, but the best choice depends on your income, preferences, and long-term plans.
Here’s a clear, simple breakdown to help you make the right decision.
1. How Paying Yourself a Salary Works
A salary is treated like regular employment income.
You get:
- A T4 at year-end
- Regular CPP contributions
- Payroll deductions (income tax, CPP)
- Predictable income for mortgages or loans
Pros of salary:
- Helps build CPP for retirement
- Makes RRSP contributions possible
- Looks better for lenders (mortgages, car loans)
- Helps reduce corporate taxes because salary is a business expense
Cons of salary:
- You must run payroll
- You pay both employer and employee CPP
- Slightly more administrative work
Salary is usually better for owners who want:
✔ predictable income
✔ RRSP room
✔ strong personal credit
✔ stable long-term tax planning
2. How Paying Yourself Dividends Works
A dividend is paid from your corporation’s after-tax profits.
You get:
- A T5 slip at year-end
- No CPP contributions
- Lower admin cost (no payroll)
Pros of dividends:
- Simple to pay (no payroll setup)
- No CPP deductions
- Often lower personal tax rate for moderate incomes
- Flexible — can pay yourself whenever needed
Cons of dividends:
- No RRSP room
- No CPP buildup
- Not ideal for mortgages or loans
- Can’t reduce corporate taxes as much as salary
Dividends are usually better for owners who want:
✔ flexibility
✔ low admin
✔ to optimize tax in a good profit year
✔ income below the higher tax brackets
3. Salary vs Dividends: Which Saves More Tax?
The truth?
There is no universal “best.”
The most tax-efficient option depends on:
- Your corporation’s profit
- Your personal income level
- Whether you want RRSP room
- Whether you want CPP
- Loan or mortgage plans
- Your long-term retirement goals
But in Ontario, the general pattern is:
- Low to moderate income: Dividends may save more tax.
- Higher income or long-term planning: Salary or a mix is usually better.
4. The “Mixed Strategy”: The Most Popular Option
Most business owners in Kitchener–Waterloo end up choosing a mix of both salary and dividends, for example:
- A small salary (to create RRSP room + build CPP)
- The rest in dividends (for tax flexibility)
This gives:
- Tax savings
- Predictable income
- Better retirement planning
- Lower corporate tax
- More personal control over cash flow
5. When Salary Is Better
Choose salary if you:
- Want RRSP contributions
- Want to build CPP
- Need strong income proof for a mortgage
- Want consistent cash flow
- Have regular monthly expenses
6. When Dividends Are Better
Choose dividends if you:
- Prefer flexible income
- Want lower admin
- Don’t want to pay CPP
- Already earn enough personally
- Only take money out occasionally
There is no one-size-fits-all answer.
Salary and dividends both work — but the right choice depends on your goals, income, and long-term financial plan.
A quick review with a CPA ensures you’re paying yourself in the most tax-efficient way for your specific situation.
Most small business owners save hundreds (sometimes thousands) each year by planning this correctly.
Need help choosing salary, dividends, or a mix?
Book a consultation with Greg Cowan CPA:
https://www.gregcowancpa.ca
As a local CPA serving Waterloo–Kitchener, Greg helps business owners structure their pay in the most efficient and practical way — with clear guidance, no complex jargon, and a plan that fits your goals.