Salary or Dividends: How Owner-Managers Pay Themselves

Once you have a corporation, you have a choice most employees never face: how to pay yourself. Salary and dividends are both entirely legitimate, and neither is universally better. They simply have different consequences.

Paying yourself a salary

Salary is treated as employment income. The corporation deducts it as a business expense, which reduces corporate taxable income, and you report it personally.

• Creates RRSP contribution room. Dividends do not. If you are building retirement savings through an RRSP, this matters.
• Requires a payroll account with the CRA, along with source deductions withheld and remitted on schedule.
• Means CPP contributions, and as both employer and employee the corporation pays both halves. That is a real cost, though it also builds your CPP entitlement.
• Produces a T4 each February.

Paying yourself dividends

Dividends are a distribution of profit the corporation has already paid tax on. They are not a corporate expense.

• No CPP contributions, which lowers immediate cost but also builds no CPP entitlement.
• No RRSP room created.
• No payroll account or source deductions, so the administration is lighter.
• Reported on a T5 slip, and because no tax is withheld at source, you may need to make personal tax instalments.

Why many owners use both

A mix is common. Enough salary to create RRSP room and support a mortgage application, with dividends layered on top, often suits owner-managers better than committing entirely to one method. The right balance depends on how much you need personally, whether you want CPP, your corporation’s profit level, and what other income you have.

The part people underestimate

Whichever route you choose, the paperwork is not optional. Salary means remittances on time, every time, and payroll penalties are among the steepest the CRA charges. Dividends mean proper corporate records and T5 slips, and enough set aside personally to cover a tax bill nobody withheld for you.

This is a decision worth revisiting each year rather than setting once and forgetting. We look at it as part of corporate year-end work, and handle the payroll side if salary is part of the plan. Get in touch to review your situation.