How Should You Actually Pay Yourself?
On the two ways incorporated business owners take money home — and why the right answer is probably “it depends.”
Pull up a chair. Let’s talk about something that comes up constantly with incorporated business owners, and that usually gets answered with a lot of jargon and not nearly enough plain English.
How should you be paying yourself?
If you run a corporation — a numbered company or a named Ltd. — you have two main options: salary or dividends. Most owners I talk to have heard both terms. Fewer feel genuinely confident about what each one means, let alone which one is right for them. And that makes sense, because the honest answer is: it depends on your situation. But that doesn’t mean we can’t walk through it clearly.
So let’s do that.
What’s the Difference, Really?
Salary is exactly what it sounds like — you pay yourself like an employee of your own company. Your corporation runs payroll, deducts CPP (Canada Pension Plan) and income tax, and sends those remittances to CRA. You get a T4 slip at year-end — the same kind any employee gets from their employer — and you report that income on your personal tax return.
Dividends work differently. A dividend is a distribution of your corporation’s after-tax profit to you as a shareholder. The company doesn’t deduct CPP or income tax when it pays you. Instead, your accountant issues you a T5 slip, which you report on your personal return. Dividends are taxed at a lower rate than employment income — but there’s a reason for that, and it’s worth understanding.
The short version: dividends come out of money the corporation has already paid tax on. Salary reduces the corporation’s taxable income before that happens. The Canadian tax system is theoretically designed so that the total tax paid ends up roughly the same either way — but in practice, your specific situation changes that math quite a bit.
The Case for Salary
A salary has some real advantages that get overlooked when people focus only on tax rates.
It builds RRSP room. Your RRSP (Registered Retirement Savings Plan) contribution limit is based on your earned income — and salary counts. Dividends don’t. If you’re counting on RRSPs as part of your retirement strategy, you need earned income to contribute.
It contributes to CPP. Paying into CPP through your salary means you’re building entitlement to CPP benefits when you retire. It costs you something now — both you and your corporation pay CPP premiums — but it does create a future income stream.
It’s predictable for personal planning. Mortgages, credit applications, rental applications — they all like to see T4 income. If you ever need to prove income to a lender, salary is the clean, straightforward answer.
The trade-off? Payroll is an administrative commitment. You need to run it at regular intervals, make remittances to CRA on time, and file a T4 summary at year-end. Most bookkeepers — including me — can handle this for you, but it does add to the cost of running your books, and there are real consequences if remittances are late.
The Case for Dividends
Dividends are simpler on the administrative side. There’s no payroll to run, no monthly or quarterly remittances, no T4 slips. Your accountant declares the dividend, issues a T5, and that’s largely it on the paperwork front — a few entries in your books, minimal ongoing work.
They can also be more tax-efficient in certain situations, particularly if your corporation has already paid tax at a low rate, or if your personal income is lower and dividends keep you in a favourable tax bracket.
The flexibility is appealing too. You don’t have to pay yourself a fixed amount on a fixed schedule. You pay dividends when it makes sense for the business and for your personal situation.
But — and this is worth sitting with — you can pay yourself too much. Dividends can only be paid from retained earnings; that is, profit the company has actually earned. Paying out more than the company has earned isn’t just a bad idea — it creates accounting and tax problems that are genuinely painful to sort out. Your bookkeeper and your accountant both need to be keeping an eye on this.
And without salary income, you don’t build RRSP room, and you don’t contribute to CPP. That matters more than people often realize when they’re in the thick of running their business.
What This Means for Your Personal Tax Return
Both salary and dividends show up on your personal return, but they’re handled differently.
Your T4 income (salary) is added to your total income and taxed at your marginal rate — the same way employment income always works.
Your T5 income (dividends) goes through something called the dividend gross-up and tax credit process. It sounds complicated, but what it essentially means is: CRA acknowledges that the corporation already paid some tax on this money, and your personal tax is adjusted accordingly. The result is usually a lower effective rate than you’d pay on the same amount of salary.
The combination of the two is often the most tax-efficient approach — which is why so many incorporated business owners end up doing a mix of both. But the right blend isn’t a formula you can google. It involves your corporate tax rate, your personal income level, whether you have a spouse you can income-split with, your plans for retirement, and a few other variables. This is genuinely where your CPA earns their fee.
How Salary and Dividends Affect Your Bookkeeping
I’d be leaving something out if I didn’t talk about what both of these mean on the bookkeeping side, because they’re quite different — and the difference has a real impact on what you’re paying for and what your books look like.
Salary means payroll. Every pay period, your books need to record the gross salary, the employee’s CPP deduction, income tax withheld, and the employer’s share of CPP. Your bookkeeper submits remittances to CRA — the timing depends on your payroll frequency and how CRA has classified you. At year-end, T4 slips need to be prepared and filed. It’s not overwhelming, but it’s ongoing work, and if remittances are missed or late, the penalties are not gentle.
Dividends are leaner on the bookkeeping side — but they’re not nothing. A dividend requires a proper declaration, a debit to retained earnings, and a credit to your shareholder loan or bank account. Your accountant will issue a T5 slip at year-end. Fewer moving parts, less monthly work, lower bookkeeping costs overall.
That said, I’ve seen situations where owners pay dividends so loosely — pulling money whenever they feel like it, without a proper declaration — that the books become a real puzzle at year-end. How the money comes out matters as much as that it comes out.
Please, Have This Conversation with Your CPA
I mean this genuinely. The salary vs. dividends question is one of the most individual decisions you can make as a business owner. There is no universally correct answer. The right strategy for your neighbour’s corporation might be exactly wrong for yours.
Your CPA (Chartered Professional Accountant) can look at your corporate net income, your personal tax bracket, your retirement goals, and your family situation, and actually model out what different combinations would cost you. That conversation — usually part of year-end planning — is one of the most valuable things you can do for your future self.
My job is to keep your books clean, your payroll running properly, and your numbers in order so that when you have that conversation, everything is accurate and your CPA isn’t spending half the meeting untangling your records. We make a good team that way.
The way you pay yourself isn’t just a tax question — it’s a retirement question, a planning question, and a “how do I want to run my business” question all wrapped into one. Understanding the basics means you can walk into that meeting with your accountant feeling like a participant, not a bystander.
And that’s always worth knowing before you’re sitting across from your accountant at year-end.
Until next time — don’t hesitate to reach out if this raised questions.
— Katrina
The content on this blog is for general informational purposes only and does not constitute accounting, tax, or legal advice. Every business situation is different — please consult your CPA or legal advisor before making decisions based on anything you read here.
