How to Pay Yourself as a Business Owner: Salary vs. Dividends

As a business owner, you may have wondered, “How should I pay myself?” If your business is incorporated, there are two main ways to pay yourself: a salary or dividends. Let’s walk through each option, including their benefits and potential drawbacks.

Salary

A salary is a common method of payment, typically made as regular, periodic payments from a corporation to its employees. By taking a salary, you are essentially becoming an employee of your own business. While payroll software is recommended for handling more complex salary arrangements, a spreadsheet may suffice for simpler, recurring payments. Additionally, you'll need to set up a payroll account with the Canada Revenue Agency (CRA) to manage payroll tax remittance.

Pros	Cons
Salaries are often preferred by banks when applying for loans.	Salary calculations can be complex.
Salary payments are considered personal “earned income,” which increases your RRSP contribution room.	Payroll taxes need to be paid to CRA on a monthly or quarterly basis.
Paying a salary reduces the corporation’s net income, which can lead to lower corporate taxes.	Salary income can result in higher personal taxes.

Dividends

Dividends are payments a corporation makes to its shareholders. If you are the own your corporation then you likely are its main shareholder. Compared to salary, dividends are simpler, as no payroll taxes need to be calculated or remitted to the CRA. However, you'll need to set up an information account with the CRA to file a T5 slip, which reports dividend income.

Pros	Cons
Dividend payments are straightforward and less administratively intensive.	Relying solely on dividend income may make it more challenging to secure bank loans.
No periodic tax payments to the CRA are required.	Dividend payments are not considered “earned income,” so they do not increase your RRSP contribution room.
Dividends typically result in lower personal tax obligations.	Dividends don’t reduce corporate net income, potentially leading to higher corporate taxes.

Conclusion

Each business owner’s situation is unique, and either salary or dividends or even a mix of both can be suitable for paying yourself. If you have questions or need assistance in evaluating the best option for your situation, feel free to reach out.