Salary vs Dividends – How to Pay Yourself (Guide from Canadian CPA)

If you’re incorporated and wondering how to take money out of your corporation, you’re not alone. I get this question every day from new business owners, and it always sounds something like:

“Should I pay myself a salary or just take dividends? And...what are dividends?”

And honestly? The answer is, it depends.

What’s the Difference?

Salary:

• Paid just like an employee.
• Your corporation deducts income tax, CPP, and issues a T4 to employee (you).
• You (employee of your own company) get RRSP contribution room and contribute to CPP.
• Your company gets to "write off" your salary as an expense, lowering corp. taxes.
• You AND your company pay "both halves" of your CPP, the employee half and employer half.

Dividends:

• Paid out of after-tax profits of the corporation.
• No CPP contributions.
• No RRSP room growth.
• You get a T5, and pay personal tax at a lower rate due to dividend tax credits.

Simple idea: salary = earned income, dividends = investment income.

Which One is "Cheaper"?

This is where Reddit threads like this one go into debate.

If you only look at tax, dividends can seem cheaper, no CPP, lower personal rate. But taxes aren’t everything.

A $60,000 salary and a $60,000 dividend are not apples to apples. Salary reduces your corporate tax bill, dividends don’t. CPP isn't “wasted money” either, it gives you future retirement benefits. There’s also RRSP room to think about.

Why Salary Might Make Sense

• You want RRSP contribution room.
• You want pay stubs to apply for loans, mortgages, rent, etc.
• You want to maximize CPP for retirement (yes, it’s forced savings).
• You want to look good on paper for lenders and mortgage applications.
• You want to contribute to EI, either for yourself (if eligible) or employees.

Why Dividends Might Make Sense

• You’re trying to keep it simple, no payroll account, no remittances.
• You don’t need RRSP room or don’t care about CPP.
• You want to avoid the admin of a T4.
• You have surplus cash in the company and just want it out.

The “Magic Ratio” Myth

Reddit is full of people talking about the “magic” 60/40 split (60% salary, 40% dividends) as some kind of golden rule. But there is no magic. Just math.

That mix made sense in past years when balancing CPP vs tax rates landed nicely at 60/40. But tax laws and personal situations shift. What works for one person may be suboptimal for someone else.

Real Talk From My Experience

In real life, here’s what I often recommend:

• If you’re under 40 and want to build RRSP room, take salary.
• You can cash out your RRSPs when you retire or when you decide to take a year off and travel.
• If you’re approaching retirement or already maxed out CPP, consider dividends.
• If you’re saving for a house and need proof of income for your mortgage broker, salary might be better.
• If you’re just starting out and want the easiest setup, take dividends, but track things carefully.

Common Mistakes to Avoid

1. Assuming dividends mean no taxes – CRA still wants their cut.
2. Taking dividends when your corp isn’t profitable – you can’t pay dividends from losses.
3. Forgetting to file T5 slips – just like salary needs a T4, dividends need a T5.
4. Mixing personal and business cash – you still need to record it properly, even if it’s just “your own money.”

A Quick Note on Reasonable Compensation

If you ever plan to sell your business, or you’re applying for SR&ED tax credits, or you want to show real labour inputs for tax planning, be careful. Dividends don’t count as compensation in some of these scenarios. Salary often paints a clearer picture.

What I Tell My Ottawa Clients

A lot of the small business owners I work with looking for a CPA in Ottawa end up doing a blend. Maybe salary to build RRSP room, but a top-up dividend in December to clear out some retained earnings. Others stick to salary only for simplicity.

There’s no perfect answer, but the most important thing is: have a plan.

Final Thoughts

Salary or dividends? It’s not about which one is "better", but which one is better for you. Your cash flow, your goals, your retirement plans, your admin tolerance.

Need help running the numbers and figuring out a plan? That’s what I do.

Shoot me a message and let’s talk through your options, whether it’s your first year in business or your tenth.

Further Reading:

• CRA Guide to Dividends
• Wealthsimple on Dividends
• Reddit Thread on the Magic Ratio

Want to keep your salary-dividend strategy clean, smart, and CRA-proof? Let's talk.

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