Salary vs Dividend - The Age Old Debate (Part 1)

One of the most debated question for business owners is “How should I pay myself - salary or dividends?”

Unfortunately, it doesn't have a simple answer. Both salaries and dividends has different tax and long-term planning implications.

Over the next two articles, we will cover the fundamentals (what every business owners should know) and some strategies / planning you can implement.

See Part 2 here.

Compensation Options

At the most basic level, once a business begins operating through a corporation ("Company"), the earnings belongs to the Company and not to the business owner him/herself.

The owner can then withdraw the funds from their Company in order to fund their personal life through two ways: Salary, dividend or a combination of both.  Each option has different tax implications for both the Company and the owner.

What is Salary?

Salary is employment income paid from the Company to the owner personally.

In practice, any amount of salaries paid to shareholder-managers who are actively involved in the business are generally accepted by the CRA.

Salaries are:

• Considered as an expense to the Company, reducing its taxable income.

  
  

• Taxed personally at individual's marginal tax rate (up to 53.53% in Ontario in 2026).

  
  

• Subject to CPP Contributions.

  
  

• Creates RRSP Contribution Room in the following year.

  
  

• Subject to payroll withholding and remittance requirements.

  
  

What this means:

• The Company pays less corporate tax.

  
  

• You pay personal tax normally.

  
  

• You build CPP pension entitlement and RRSP Room.

  
  

• Additional administrative work is required.

What are Dividends?

Dividends are distributions paid from after-tax corporate profits. In other words, they represent profits remaining after the Company has paid its expenses (including salaries).

Under corporate law, dividends generally cannot be paid if a company has no 'retained earnings’.

They are:

• Not considered as an expense to the Company. Therefore, dividends do not reduce the Company’s taxable income.

  
  

• Taxed personally at a lower rate than regular income. For example, the highest tax rate on dividends range from 39% - 48% depending on the type of dividends in Ontario.

  
  

• Not subject to CPP.

  
  

• Does not create RRSP Contribution Room.

  
  

• Not subject to payroll withholding or remittance.

  
  

What this means:

• The Company pays corporate tax first.

  
  

• You pay personal tax when dividends are received at a lower personal tax rate than salaries.

  
  

• Does not build CPP entitlement nor RRSP Room.

  
  

• Administration is generally simpler than salary.

Tax Integration

Why are dividends subject to a lower personal tax rate? Canada’s tax system is designed so that, in theory, you should pay approximately the same total tax (corporate + personal) whether you take salary or dividends.

This concept is called tax integration.

However, in practice, integration is not perfect and differences in tax rates across different provinces create gaps (among other things).

Importantly, tax integration ignores one of the biggest benefit of a Corporation - deferral of tax.

For example, active business income earned in a corporation may be taxed at approximately 12.2% in Ontario (expected to decrease to 11.2%). If funds are retained and reinvested within the Company, personal tax is deferred until those funds are withdrawn.

Common Misconception

A common assumption is that dividends are always more tax efficient. This is not necessarily true and will really upset your financial advisor.

The decision depends on:

• Your income level

• Your cash needs

• Your long-term planning goals

• Your ability to manage tax and cash flow obligations

  
  

Key Takeaways (Part 1)

• Salary and dividends are taxed differently, but total tax can be similar due to tax integration.

• Salary creates RRSP room and CPP contributions.

• Dividends provide flexibility and simpler administration.

• The right approach depends on your overall financial plan.

Final Thoughts

If you are unsure how you should be paying yourself, I am happy to provide a second opinion.

Warm regards, 

Francis Do, CPA, CA

Have any questions? Please contact Francis Do at Francis@francisdo.com or 416-572-9633.