Learn how to choose between salary and dividends for your Canadian small business to optimize taxes and retirement planning.
One of the most important decisions you’ll make as a business owner is how to pay yourself. Choosing between salary and dividends affects your taxes, retirement savings, and overall financial strategy. Here’s what you need to know to make the right choice.
Understanding the Tax Implications
The way you take money from your business changes what you owe:
- Salary is taxed personally but reduces corporate income
- Dividends come from after-tax profits but may qualify for dividend tax credits
A balanced approach often works best. For example, taking enough salary to maximize RRSP contributions while using dividends for additional income.
Personal vs Corporate Tax Efficiency
Your decision impacts both personal and business taxes:
- Salaries create business deductions but increase personal tax
- Dividends don’t provide corporate deductions but may lower personal tax
- The optimal mix depends on your province and income level
Retirement and CPP Considerations
Don’t forget about your future:
- Salary builds CPP contributions (dividends don’t)
- RRSP contribution room grows with salary income
- Dividends may help preserve corporate assets for retirement
A Toronto consultant we worked with chose $60,000 in salary (to maximize CPP/RRSP) and $40,000 in dividends, saving $8,000 annually compared to all dividends.
Real-World Example: $200K Revenue Business
Let’s examine a common scenario:
- All salary ($100,000): $28,000 personal tax + $5,500 CPP
- All dividends ($100,000): $21,000 personal tax (no CPP)
- Mixed approach ($60k salary/$40k dividends): $25,000 tax + $3,300 CPP
The mixed approach often provides the best balance of tax savings and retirement benefits.
Need Help Deciding What’s Right for You?
Choosing between salary and dividends isn’t one-size-fits-all. At IDM Professional Accounting, our fractional CFO services analyze your specific situation to create the optimal compensation strategy.
Book a consultation today to develop a personalized plan that maximizes your income and minimizes taxes.
