Owner Salary vs. Dividends – Which Is Better for Business Owners?

For business owners in Canada, one of the most important questions is: Should you take a salary or dividends? Each option carries different implications for taxes, retirement benefits (CPP), and personal cash flow. This article on TikiTax.net will break down the pros and cons of salaries versus dividends, helping you choose the strategy that best fits your financial situation.

1. Owner’s Salary

Advantages:

• Tax-deductible business expense: Salaries paid to the owner are recognized as legitimate business expenses, reducing the company’s taxable income.

• CPP contributions: Receiving a salary ensures you contribute to the Canada Pension Plan (CPP), which helps increase retirement benefits later on.

• Stable income record: Employment income can help you qualify more easily for loans, mortgages, or lines of credit.

Disadvantages:

• CPP cost: Business owners must pay both the employee and employer portions of CPP, which increases overall costs.

• Personal tax rates: Salaries are subject to personal income tax, which can sometimes be higher than the effective tax rate on dividends.

2. Dividends for Business Owners

Advantages:

• Tax-preferred income: Dividends are often taxed at lower rates due to Canada’s tax integration system.

• No CPP contributions required: This saves costs since you don’t need to pay into CPP.

• Flexible profit distribution: Businesses can distribute after-tax profits to owners more flexibly.

Disadvantages:

• Not deductible for the business: Dividends are paid from after-tax corporate profits, so they don’t reduce business taxable income.

• No CPP or RRSP contribution room: Taking only dividends means missing out on CPP benefits and limiting RRSP contribution eligibility.

3. Salary vs. Dividends – Which Should You Choose?

There’s no one-size-fits-all answer. Instead, many business owners choose a blend of salary and dividends to capture the benefits of both:

• Use salary to build income history, contribute to CPP, and create RRSP contribution room.

• Use dividends to enjoy tax efficiency and flexibility in distributing profits.

4. Expert Advice

The optimal strategy depends on factors like your business size, personal financial goals, and retirement planning. Consulting with a tax professional can help you balance minimizing taxes with maximizing personal income.

Conclusion

Both salaries and dividends come with unique pros and cons. The key is to understand how each affects your taxes and personal finances so you can make the right decision.
👉 Contact TikiTax.net today for expert advice on structuring your salary–dividend mix to help you manage your finances smarter and more sustainably.