Apples or oranges. Piece of pie or slice of cake. Toasted or not toasted. If you ask my kids, these can be tough choices. For business owners and incorporated professionals, a similar dilemma comes up often: how to pay themselves—salary or dividend?
Many assume dividends are the better choice because they leave more money in your pocket. While that maybe true, there are other factors that can affect your retirement planning. Let’s take a closer look.
To keep things simple, let’s consider a New Brunswick resident—we’ll call her Diane—who is the sole shareholder of a corporation registered in the same province. She wants a gross annual salary of $150,000 in 2025, with no other sources of income.
Salary Scenario: New Brunswick Business Owner
If the corporation pays Diane a salary, it also has to pay the employer portion of Canada Pension Plan (CPP) contributions—$4,430 in this case. So to pay Diane a salary of $150,000, the company must earn $154,430.
Both the salary and the CPP contributions are tax-deductible for the company. Assuming it has no other income, the corporation wouldn’t owe any income tax.
As for Diane, she’ll pay employee CPP contributions of $4,430 and income tax of approximately $43,864, leaving her with $101,706 after tax.
What About a Dividend Instead?
Now suppose Diane opts for a dividend instead. The corporation would still earn $154,430, but unlike salary, dividends are paid out of after-tax income. If the company qualifies for the Small Business Deduction (SBD), which is usually the case for corporations that have less than $500,000 in taxable income, it would pay 11.5% in tax, or $17,759.
That leaves $136,671 available for Diane as a non-eligible dividend.
Although dividends are taxed more favourably than salary, Diane would still owe about $29,939 in personal income tax, leaving her with $106,732 after tax—more than the salary option.
It seems like an easy choice, right? But let’s dig a little deeper.
Summary Table
| Corporation | Salary Option | Dividend Option |
| Corporate revenue | $154,430 | $154,430 |
| Salary paid | $150,000 | – |
| Employer CPP | $4,430 | – |
| Taxable corporate income | – | $154,430 |
| Estimated corporate tax | – | $17,759 |
| Diane | Salary Option | Dividend Option |
| Gross salary | $150,000 | – |
| Employee CPP | $4,430 | – |
| Non-eligible dividend | – | $136,671 |
| Estimated personal tax* | $43,864 | $29,939 |
| After-tax income | $101,706 | $106,732 |
*The estimated personal tax takes into consideration tax credits for the basic personal amount, CPP contributions, Canada employment and Canadian dividends where applicable.
Although Diane ends up with approximately $5,000 more cash using the dividend option, the main reason for that is the effect of the mandatory CPP contributions on after-tax income.
If there were no CPP contributions (and no corresponding tax credit and deductions), and the company distributed its revenue as salary, the total income tax paid in both scenarios would be nearly the same, differing by only a few hundred dollars. The near-equivalence is due to tax integration, a principle intended to ensure similar overall tax treatment for salary and dividend income.
That said, when a salary is paid, CPP contributions are mandatory. These reduce Diane’s current take-home pay but give her access to a lifelong, inflation-adjusted pension in retirement. Diane’s decision may well come down to whether she values the CPP benefit. Salary also creates RRSP contribution room, offering another retirement planning advantage—one that dividends don’t provide. These retirement tools have value and should be considered when deciding how to draw income from the corporation.
If Diane’s retirement strategy were to include an Individual Pension Plan (IPP), she’d only be eligible if she pays herself a salary.
On the other hand, if she chooses dividends, she could decide to invest the excess $5,000 after-tax income received in a TFSA for retirement. Whether this would provide a better outcome in retirement than CPP depends on many factors, including how the TFSA is invested and future inflation rates that affect CPP payouts. Another thing to consider is whether Diane would have the discipline to invest in her TFSA. Unlike the CPP contributions which are mandatory—essentially a forced saving—there is no obligation to invest in a TFSA, or any other personal investment account.
Every business owner’s situation is unique. It’s important to talk to your accountant before deciding how to pay yourself. But when you do, look beyond just one aspect of the decision, like the current after-tax income. Think long-term, especially about retirement and how it will be impacted by your decision. Working with a financial planner to prepare complete retirement projections will help you evaluate the future impact of receiving a salary or dividends today.
And remember: just like you can enjoy a piece of pie and a slice of cake, it’s possible to use a mix of salary and dividends to suit your needs.
