• Should I Pay Myself a Dividend or a Salary?

If you’re a Canadian small business owner with an incorporated company, one of the most important financial decisions you’ll make is how to pay yourself. The two most common options are salary and dividends, but which one is right for you?

The short answer: it depends on your goals and where you are in your business life cycle.

The wrong choice, or simply defaulting to “rules of thumb,” can result in thousands of dollars in lost tax savings each year. This guide walks you through the pros and cons of each option, tax implications, and how to structure the most tax-efficient strategy for your stage of business growth.

Salary vs. Dividends: What’s the Difference?

Salary

A salary is employment income paid from your corporation to you as an employee.

  • Reported on a T4 slip.

  • You pay personal income tax just like any other employee (one level of tax).

  • Deductible to the corporation, reducing corporate taxable income.

Dividends

Dividends are payments to shareholders from a corporation’s after-tax profits.

  • Reported on a T5 slip.

  • Taxed personally at lower rates (with the dividend tax credit), but the corporation already paid corporate tax (two levels of tax).

  • Not deductible to the corporation.

Pro Tip: The Canadian tax system is based on “integration,” meaning total tax should be roughly the same whether you take a salary or a dividend. In practice, integration isn’t perfect—small differences can work in your favour depending on your situation.

Choosing Based on Your Business Stage

The most tax-efficient approach often depends on where your business is in its life cycle and how much retained earnings or passive investments you have.

1. Just Incorporated & Early Stage (Minimal Retained Earnings)

Recommendation: Salary

  • Build RRSP room early—your RRSP is a powerful long-term compounding tool.

  • While CPP returns aren’t huge at this stage, contributing now helps later.

  • Deductible to your corporation, lowering your corporate tax bill.

2. Mid-Stage Business ($500K – $10M in Passive Investments)

Recommendation: Hybrid Compensation

  • Dividends to clear “notional accounts” such as:

    • RDTOH / ERDTOH (refundable tax accounts)

    • CDA (capital dividend account)

  • Salary for the rest: CPP value improves with age and RRSP room remains useful.

3. Large Passive Investment Base (Over $10M)

Recommendation: Mostly Dividends

  • At a 2.5% yield, $10M generates ~$250,000 of passive income annually.

  • This must be paid out to recover refundable taxes, likely putting you at the highest personal tax bracket.

  • Salary becomes less attractive purely for tax purposes at this level.

Pros and Cons

Salary

  • ✅ CPP contributions for retirement.
  • ✅ Earned income creates RRSP room.
  • ✅ Deductible to the corporation.
  • ✅ Consistent income for mortgage approvals.
  • ❌ Payroll setup and remittances required.
  • ❌ Corporation pays employer CPP portion.
  • ❌ No dividend tax credit.

Dividends

  • ✅ No CPP—reducing immediate cash outflow.
  • ✅ Simple admin (no payroll remittances).
  • ❌ No CPP contributions for retirement.
  • ❌ No RRSP room created.
  • ❌ Some lenders view dividend-only income less favourably (consistency helps).
Income Type Personal Tax Corporate Tax CPP RRSP Room
Salary Personal rates apply Deductible to corp Yes Yes
Dividends Lower personal rates (with Dividend Tax Credit) Paid from after-tax corp income No No

Hybrid Strategies: Best of Both Worlds

Many owners blend salary and dividends to:

  • Generate RRSP room and CPP contributions.

  • Pay out corporate refundable taxes efficiently.

  • Optimize cash flow and personal tax.

  • Balance mortgage approval needs with tax savings.

Caution: Dividend income splitting with family members is restricted by the TOSI rules—speak with a CPA before proceeding.

Mortgage & Income Consistency Tip

While many lenders accept dividends, they generally prefer consistency in both type and amount of income. Switching back and forth between salary and dividends from year to year can create issues. If you plan to apply for financing, keep your approach steady for the years the lender will review.

Final Thoughts: Plan, Don’t Guess

Your decision isn’t just about taxes—it’s about your retirement planning, investment strategy, cash flow, and borrowing power.

What works for:

  • A tech founder reinvesting profits may not work for…

  • A consultant who needs maximum take-home pay today.

The right mix changes as your business grows, so revisit your strategy regularly.

Need Help Structuring Your Compensation?

At Virtual Heights Accounting, we help Canadian incorporated business owners optimize income strategies at every stage of growth. Whether it’s salary, dividends, or a hybrid, we’ll tailor the plan to your tax and financial goals.

  • ✅ Salary?
  • ✅ Dividends?
  • ✅ Both?

We’ll guide you.

Virtual Heights Accounting is a virtual accounting, tax and bookkeeping firm, registered as a CPA firm in BC, providing services to clients across Canada.  Interested in signing up? Book us for an introductory call or check out our services here.