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Should you pay yourself a salary, dividends, or a mix of both? This guide breaks down the pros and cons of each option for Canadian business owners.
Salary
The steady route: You’re on your company’s payroll
PROS:
- Builds RRSP and CPP
- Looks good for lenders
- Steady, predictable income
CONS:
- Higher payroll costs (CPP, EI)
- Must remit monthly
- Less flexible if cash flow dips
Dividends
The flexible route: You’re taking profit distributions
PROS:
- Low personal tax rates
- No payroll remittances
- Flexible timing
CONS:
- No CPP and RRSP room
- Income can fluctuate
- T5 filing required
So which is better?
There’s no one-size-fits-all answer, but there are smarter ways to choose.
If your business has steady, predictable cash flow:
Salary gives you long-term benefits and financial stability
If your profits are inconsistent or seasonal:
Dividends give you flexibility to draw income only when it makes sense
Hybrid
An alternative option - this lets you:
- Keep lenders happy
- Save for retirement
- Control when to take income
- Optimize overall tax
Pay yourself a base salary to build RRSP and CPP benefits, then top up with dividends once you see how the year shapes up.
When deciding, ask yourself
- How stable is my company’s cash flow?
- Do I need RRSP or CPP benefits for retirement?
- Am I planning to apply for financing soon?
- Do I prefer simplicity or flexibility in tax planning?
