Dividends vs. Salary

As a business owner in Canada, one of the most critical decisions you'll make is how to pay yourself. Should you take a salary or pay yourself through dividends? The answer isn't straightforward—it depends on your business structure, income level, and long-term financial goals. Understanding the tax implications of each approach can save you thousands of dollars annually.

Tax Treatment: Salary vs. Dividends

Here's how each is taxed:

• Salary: Fully taxable at your marginal rate, but creates RRSP contribution room (18% of earnings up to $31,560 in 2025).
• Dividends: Eligible for the dividend tax credit, which can result in effective tax rates of 0-25% depending on your income level and province.
• Corporate Tax: Salary is deductible to the corporation, reducing corporate tax. Dividends are paid from after-tax corporate income.

When Salary Makes Sense

Salary is typically better when:

• You need RRSP contribution room for retirement planning
• You want to maximize CPP contributions for retirement benefits
• You need income for mortgage qualification or other credit applications
• Your personal tax rate is already low (under $50,000 annually)

When Dividends Make Sense

Dividends are often more tax-efficient when:

• You're in a higher tax bracket and want to minimize personal tax
• You don't need RRSP room (already maximized or have other retirement plans)
• You want to defer tax by keeping money in the corporation
• You're planning for estate planning and wealth transfer

The Optimal Strategy: A Mix

Many successful business owners use a combination approach: Take enough salary to maximize RRSP contributions and CPP benefits, then take the remainder as dividends for tax efficiency. This "best of both worlds" approach requires careful planning but can optimize your overall tax position.