As a small business owner in Canada, getting paid isn’t as simple as cutting yourself a check. You have to think about taxes, cash flow, and how to grow your wealth over time. Because of this, many business owners wonder what the best way is to pay themselves.

Let’s look at a few options, including paying yourself a salary, paying yourself via dividends, or combining the two.

Option 1: Paying Yourself a Salary

A salary means that you’re an employee of your own corporation. The company pays you regularly, with tax and CPP deductions withheld and remitted to the Canada Revenue Agency. You receive a T4 slip at the end of the year.

Benefits of Paying Yourself a Salary
Paying yourself a salary creates RRSP contribution room, while dividends don’t. This matters if you’re building a long-term retirement plan and want access to tax-deferred RRSP growth. You also contribute to the Canada Pension Plan, which gives you monthly retirement benefits starting as early as age 60.

Another benefit may be that a T4 income stream looks better for lenders. If you plan to apply for a mortgage or a loan, a salary can make your finances easier to assess.

A salary is also a deductible expense for your business, which could lower your corporate tax bill.

Downsides of Paying Yourself a Salary
One downside of paying yourself a salary is that your corporation pays both the employer and employee portions of CPP, which adds to your cost.

It also requires regular payroll remittances, which adds a layer of admin work (or accounting fees).

Once you pay yourself a salary, that income is locked in. For example, you can’t retroactively change it based on how the year unfolds.

Option 2: Paying Yourself with Dividends

Dividends are a way to distribute profits to shareholders, including yourself. They’re paid from after-tax corporate earnings, and there are no payroll deductions, CPP contributions, or T4s. Your corporation issues a T5 slip instead, and you report that income on your personal tax return.

Benefits of Paying Yourself with Dividends
Dividends are taxed at a lower rate thanks to the dividend tax credit, which helps offset the tax your corporation already paid.¹ This makes dividends attractive if your goal is tax efficiency.

They’re also simpler because they don’t require payroll setups or remittance deadlines. They provide more flexibility for you to time payments based on your cash flow.

Downsides of Paying Yourself with Dividends
But keep in mind that dividends don’t build RRSP room, and they don’t count toward CPP. So while you save tax now, you’re not building those long-term benefits.

In addition, irregular income can make it harder to qualify for financing.

Option 3: Salary + Dividends (The Hybrid Approach)

For most business owners, the best solution is a mix of the two. A moderate salary provides stability, RRSP growth, and CPP coverage. Dividends then allow you to pull out profits in a tax-efficient way while giving you the flexibility to adapt based on your business’s performance.

Let’s say you pay yourself $60,000 in salary, which is enough to max out your RRSP and contribute to CPP, as the RRSP limit in 2024 was $31,560.² Then, you can take dividends if you need extra income at year-end. This way, you strike a balance between current tax savings and future financial security.

There’s no universal rule for how to pay yourself. It depends on your income, spending needs, savings goals, and how your business is structured. Talk to a qualified accountant or tax advisor who knows small business and can help structure your pay in a way that potentially minimizes tax, builds long-term wealth, and gives you room to grow.

1. https://www.investopedia.com/terms/d/dividendtaxcredit.asp
2. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/contributions-affect-your-rrsp-prpp-deduction-limit.html

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.