Salary vs. Dividends: How Should You Pay Yourself as a Business Owner?

As a business owner, one of the most common questions we hear is: “What's the best way to pay myself?”

The answer isn't always straightforward. The two most common methods are salary and dividends, and each has advantages and disadvantages depending on your business, personal financial goals, and tax situation.

Option 1: Pay Yourself a Salary

A salary is treated much like employment income. Your corporation pays you wages, deducts income tax, CPP contributions, and remits those amounts to the Canada Revenue Agency (CRA).

Advantages of Salary: Builds RRSP contribution room; contributes to CPP; creates consistent personal income; reduces corporate taxable income.

Disadvantages of Salary: CPP costs and payroll administration requirements.

Option 2: Pay Yourself Dividends

Dividends are payments made to shareholders from corporate profits after corporate taxes have been paid.

Advantages of Dividends: No CPP contributions, administrative simplicity, and flexible timing.

Disadvantages of Dividends: No RRSP contribution room, no CPP benefits, and potential lending challenges.

So Which Option Is Better?

The truth is that there is rarely a one-size-fits-all answer. Many business owners use a combination of salary and dividends to balance tax efficiency, retirement planning, cash flow, and borrowing needs.

Factors to Consider: Age, retirement goals, RRSP planning, financing needs, profitability, available cash flow, and family tax planning opportunities.

The Bottom Line

The most tax-efficient strategy isn't always the best financial strategy. Every business owner's situation is unique, and compensation strategies should be reviewed annually.

Need Help Deciding? At Van Leest & Company, we help owner-managed businesses determine the most effective way to extract profits while balancing tax efficiency, retirement planning, and personal financial goals.