Salary vs. Dividends: What’s the Smartest Way to Pay Yourself as a Business Owner?

One of the biggest financial decisions Canadian business owners face isn’t about growing revenue or cutting costs—it’s how to pay themselves.

Should you take a salary, declare dividends, or use a combination of both?

At Belmont Business Solutions, we get this question all the time from incorporated clients. The answer depends on your goals, income level, and how you want to structure your taxes.

Here’s a clear breakdown of the pros and cons of each option—and how to make the right decision for your business.

What’s the Difference Between Salary and Dividends?

Salary is paid through payroll and reported as T4 income. It's considered an expense to the business and is taxed at your personal income tax rate.

Dividends are distributions of after-tax corporate profits. They’re not a business expense and are reported on your T5 slip, taxed at a different rate than salary through Canada’s dividend tax credit system.

Option 1: Paying Yourself a Salary

Advantages:

• Contributes to CPP (Canada Pension Plan), which builds retirement income.

• Allows you to qualify for RRSP contributions.

• More predictable income for mortgage approvals or personal financing.

• Seen as legitimate compensation by banks and lenders.

Considerations:

• You’ll need to register for a payroll account and remit payroll taxes regularly.

• You and your business both pay into CPP, which increases costs.

• Higher personal tax rates apply to salary compared to dividends at certain levels.

Option 2: Paying Yourself Dividends

Advantages:

• Simpler to manage, no payroll remittances required.

• Often tax-advantaged for those in lower income brackets.

• You can declare them periodically, which offers flexibility.

Considerations:

• No CPP contributions = no retirement build-up from CPP.

• You can’t contribute to an RRSP based on dividend income.

• Some lenders may view dividend income as less stable or harder to verify.

• Dividends come from after-tax profits—so if your corporation isn’t profitable, there’s nothing to distribute.

The Best Strategy? A Combination

For many business owners, the optimal strategy is a mix of salary and dividends:

• Use salary to contribute to CPP, create RRSP room, and build consistency.

• Use dividends to supplement income more tax-efficiently and reduce payroll burdens.

This blended approach can help you optimize personal taxes, control cash flow, and build long-term wealth.

Key Factors to Consider When Choosing

• Your personal income needs

• How much your corporation is earning

• Retirement planning (RRSP/CPP)

• Mortgage or loan requirements

• Provincial and federal tax brackets

• Whether you're eligible for small business deductions

Let Belmont Help You Build a Smart Compensation Plan

We’ve helped incorporated professionals, contractors, and small business owners across Canada make the most of their compensation strategies. Whether you’re drawing your first payment or restructuring your approach, we can help you:

• Run the numbers on both options

• Set up payroll and automate remittances

• Align your compensation with your business growth

Let’s Talk About How to Pay Yourself Right
📧 info@belmontsolutions.ca
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