Salary vs dividend: how to pay yourself
When you own your corporation, you choose how to take money out of it. The two main ways are salary and dividends. They are taxed differently, and they do different things to your retirement savings. Here is how to think about it.
Written with Irfan and Rehan at Hawks.
A salary is employment income. The corporation deducts it, runs it through payroll, and you report it on your personal return. A dividend is a share of the company's after-tax profit. It does not go through payroll, and it is taxed at a different rate on your personal return. Most owner-operators end up using some of each.
Should I pay myself salary or dividends?
There is no single right answer. Salary builds RRSP room and CPP and the corporation deducts it. Dividends skip CPP and payroll and are simpler to administer, but build no RRSP room. Most owner-operators use a mix, and the right one depends on how much you need, your other income, and your retirement plans.
Salary and dividends, side by side
| Salary | Dividends | |
|---|---|---|
| RRSP room | Builds it | Builds none |
| CPP | You and the company contribute | None |
| Corporate deduction | Deductible to the company | Paid from after-tax profit |
| Payroll admin | Remittances and a T4 | Simpler, a T5 at year-end |
| Predictable for lenders | Yes, shows as income | Less so |
Do dividends build RRSP room?
No. Only earned income like salary creates RRSP contribution room. If building RRSP room matters to you, that is a point in favour of paying yourself at least some salary.
Do I pay CPP on dividends?
No. Dividends are not subject to CPP. Salary is, which means both you and the corporation contribute to CPP. Some owners value the future CPP benefit; others would rather invest the difference themselves.
CPP is a real cost and a real benefit. Paying it means a pension later. Skipping it means more cash now that you have to invest on your own. Neither is automatically better.
How do I decide the mix?
We start from how much you need to take home, then look at your corporation's income, the small business deduction, your RRSP and CPP goals, and any income you can split with a spouse. The calculator gives a quick first look, and we refine it with your real numbers.
A few things usually tip the decision: whether you want to keep building RRSP room, whether you would rather keep profit in the company and defer personal tax, and whether a lender needs to see steady income. Try the salary vs dividend calculator for a starting point, then we work it through together in advisory and planning.
Paying yourself, answered plainly
Should I pay myself salary or dividends?
Do dividends build RRSP room?
Do I pay CPP on dividends?
How do I decide the mix?
Next steps
Not sure how to pay yourself?
Tell us what you need to take home and how the company is doing. We will work out a salary and dividend mix that fits.