Salary vs. Dividends: What’s the Best Way to Pay Yourself as a Small Business Owner?

As an incorporated small business owner in Canada, deciding how to compensate yourself — salary, dividends, or a mix of both — is one of the most important financial decisions you’ll make each year. The right approach can reduce your overall tax burden, build retirement savings, and streamline your cash flow. But it’s not one-size-fits-all.

Let’s break down the key differences, tax implications, and strategic considerations.

Salary: Structure and Stability

Pros:

• Creates RRSP contribution room

• Eligible for personal tax deductions (e.g., child care expenses)

• Deductible to the corporation, reducing corporate tax

• Increases pensionable earnings for future CPP benefits

Cons:

• Requires payroll setup, monthly remittances, and annual T4 filings

• Subject to CPP contributions (unless already maxed through other income)

• Less flexible in timing — must follow regular pay schedule

Dividends: Simplicity and Flexibility

Pros:

• Easier to administer — no payroll required, just issue a T5

• No CPP contributions, lowering total tax cost

• Can be paid anytime and tailored to your cash flow

• May offer tax-deferral opportunities if timed strategically

Cons:

• Does not create RRSP room

• Not deductible to the corporation

• May not qualify for certain personal tax deductions

• Marginally less tax-efficient if CPP is already maxed

What’s Right for You?

The ideal strategy depends on several factors:

• Is your CPP already maxed from other income sources?

• Do you want to build retirement savings through RRSPs?

• Are you optimizing for simplicity, or total tax savings?

For example, if your corporate year-end is December 31 and you’ve withdrawn funds throughout the year, you may be able to defer personal tax by declaring a dividend in early January — pushing the income into the following tax year.

Want to know what strategy fits your specific situation? I help business owners tailor compensation plans to minimize tax, build wealth, and stay compliant with CRA.

Final Thoughts

Salary offers structure and long-term benefits like RRSP room and CPP eligibility. Dividends offer ease and timing flexibility. A hybrid approach — part salary, part dividends — may be the golden middle ground.

If you’re not sure where to start, let’s have a conversation. I’ll help you build a compensation strategy that works for you, your business, and your financial goals.