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Salary or dividends: Which one is right for me?

Last updated: Oct. 8, 2021 

There are 3 ways to take money out of a corporation:

  1. By paying yourself a salary
  2. Through dividends (payments declared by the directors of the company and paid to the shareholders/owners of the company)
  3. Through a shareholder loan (must be repaid)

As a business owner/manager, you can pay yourself a salary, dividends, or do a mix of both.

The method you use to pay yourself personally from your corporation has an impact on many different things—and not just your personal income tax owing. While dividends likely create the lowest personal tax liability, they don’t allow you to create contribution room in your RRSP, build up CPP, claim WCB, or take advantage of childcare credits. The form of your personal compensation can affect what you receive from government programs and credits as well as your ability to qualify for loans from lending institutions.

Let’s look at the differences below, and what each option could mean for you when deciding how to structure your compensation.

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Should I pay myself a business salary?

If you decide to pay yourself a salary, you’ll need to register a payroll account with the CRA.

Each time you pay yourself, you’ll need to withhold and remit income taxes to the CRA.

You’re also required to make mandatory payments to the CPP on your income.

If you’re a small business owner and your net income is more than $3,500, you will end up paying double the CPP than you would as an employee, as you are paying both the half of the employer and the half of the employee; however, the employer portion is tax deductible.

Paying yourself a salary would be a good option if you are relying on CPP as part of your retirement savingsyou’re your RRSP contribution room is also built using your business salary.

Click here for a comparison of TFSA vs. RRSP.

Should I pay myself dividends?

Dividends can be paid to shareholders of your corporation.

Dividends are considered investment income instead of business income.

You might pay slightly less personal tax on dividends than on a salary, since you receive a dividend tax credit that you can help lower your overall tax owing..

When you want to prepare dividends for your shareholders, you move the cash from your corporate account to the shareholder’s personal account. You have to prepare and file T5s to the CRA for anyone who receives dividends.

You won’t need to register for payroll and remit source deductions if there are no payroll (salary) payments.

Paying yourself dividends could be right for you if you don’t want forced CPP contributions. Keep in mind dividends also do not build RRSP contribution room, so you’ll want to have your own retirement plan in place.

Taking out a Shareholder Loan

Although shareholder loans are not considered to be a method for paying yourself, they are a way to take money out of your corporation.

Shareholders may use corporate funds for personal uses throughout the year. These amounts are considered loans from the corporation to the shareholder.

As long as the money is repaid before the end of the corporation’s fiscal year-end, you do not have to pay personal tax on the borrowed funds.

Shareholder loans can be enticing for business owners, but they may not be right for your individual situation. Learn more about Shareholder loans, whether or not they’re right for you by visiting the links below or speaking to a tax specialist.

Related: Do shareholder loans count as taxable income?
What is a shareholder loan?

So how should I pay myself as a business owner?

It depends on your individual business and family situation.

Dividends are a more flexible payment option, and you don’t have to pay into CPP so you’ll reduce your costs that way.

However, you’ll need to be careful about contributing to your own retirement savings, and keep in mind that you won’t be creating contribution room in your RRSP by issuing yourself dividends.

Also, dividends aren’t accepted as salary on loan applications if you’re applying for a mortgage or other lines of non-business credit.

There are many other factors, such as other income sources, that can impact whether you should be paying yourself a salary or dividends. Speak to a tax specialist to find out which option is right for you.

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