As a small business owner in Ontario, deciding how to pay yourself—through salary or dividends—can impact your taxes, CPP contributions, and long-term financial goals. Both options have pros and cons, and often, the best choice is a mix of the two. Here’s a breakdown to help guide your decision.
Paying Yourself a Salary
A salary is a regular wage paid through payroll, with taxes and CPP contributions withheld.
Pros:
-
✅ Creates RRSP contribution room
-
✅ Builds CPP retirement benefits
-
✅ Helps when applying for mortgages or personal loans (shows consistent income)
-
✅ Deductible business expense, which reduces corporate taxable income
Cons:
-
❌ Requires payroll setup and remittances
-
❌ Employer must match CPP contributions (extra cost to the company)
-
❌ Triggers personal income tax withholding at source
Best suited for:
Owners who want steady income, are planning for retirement, or need predictable earnings for personal financing.
Paying Yourself Dividends
Dividends are paid out of after-tax corporate profits and don’t require payroll deductions.
Pros:
-
✅ No CPP contributions required
-
✅ Simple to issue—no need to run payroll
-
✅ Can result in overall tax savings when corporate and personal tax rates are optimized
Cons:
-
❌ No CPP = no contributions toward retirement through that channel
-
❌ Doesn’t create RRSP room
-
❌ Fluctuating amounts may make personal financial planning harder
Best suited for:
Owners who already have retirement plans in place, want flexibility, or are looking to optimize after-tax income.
When a Mix of Salary and Dividends Makes Sense
Many business owners use a combination of salary and dividends to:
-
Balance short-term cash flow and long-term planning
-
Maximize tax efficiency
-
Build retirement savings while minimizing total tax burden
Ask Your Accountant
There’s no one-size-fits-all answer. Your ideal approach depends on your goals, cash flow, and corporate structure. A strategic accountant can analyze your situation and help craft the most tax-efficient compensation plan for your business and personal future. Reach out to us for guidance. We’re here to help.
