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 may be true, there are other factors that can affect your retirement planning. Let’s take a closer look.
01 Setting the Scene
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.
Diane is a New Brunswick resident and 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. The corporation qualifies for the Small Business Deduction (SBD) — taxable income under $500,000.
02 The Salary Scenario
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.
These contributions 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 that benefit.
03 The Dividend Scenario
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.
Where Does the Money Go?
Visualizing the full flow of $154,430 in corporate revenue — from gross income to personal after-tax take-home — under each compensation strategy.
The Numbers in Detail
A complete breakdown of both scenarios — corporate and personal — for a New Brunswick business owner targeting $150,000 in 2025.
| Line Item | Salary Option | Dividend Option |
|---|---|---|
| Corporate revenue required | $154,430 | $154,430 |
| Salary paid to Diane | $150,000 | — |
| Employer CPP contribution | $4,430 | — |
| Taxable corporate income | — | $154,430 |
| Estimated corporate tax (11.5% SBD rate) | — | $17,759 |
| Dividend available for distribution | — | $136,671 |
| Line Item | Salary Option | Dividend Option |
|---|---|---|
| Gross salary / Non-eligible dividend | $150,000 | $136,671 |
| Employee CPP contributions | $4,430 | — |
| Estimated personal income tax* | $43,864 | $29,939 |
| Total tax burden (corporate + personal) | $43,864 | $47,698 |
| After-Tax Income | $101,706 | $106,732 ↑ |
If there were no CPP contributions, the total income tax paid in both scenarios would be nearly the same—differing by only a few hundred dollars. This near-equivalence is due to tax integration.
What the Spreadsheet Doesn’t Tell You
The ~$5,000 difference in after-tax income is only the beginning. The real decision turns on long-term retirement planning, tax flexibility, and personal discipline.
Salary Advantages
- CPP pension — Contributions reduce current take-home pay but give access to a lifelong, inflation-adjusted pension in retirement.
- RRSP contribution room — Salary creates RRSP contribution room, offering another retirement planning advantage that dividends don’t provide.
- IPP eligibility — If Diane’s retirement strategy includes an Individual Pension Plan (IPP), she’d only be eligible if she pays herself a salary.
- Forced savings discipline — Unlike a TFSA, CPP contributions are mandatory—essentially a forced saving. There’s no obligation to invest in a TFSA or any other personal account.
Dividend Advantages
- Higher immediate take-home — Although Diane ends up with approximately $5,000 more cash using the dividend option, the main reason is the effect of mandatory CPP contributions.
- TFSA flexibility — Diane could invest the excess $5,000 in a TFSA for retirement. Whether this beats CPP depends on how the TFSA is invested and future inflation rates.
- Corporate retained earnings — Profits left in the corporation can be invested at a lower tax rate, compounding over time before eventual withdrawal.
- Income timing control — Dividends offer flexibility to declare income in lower-income years, a planning tool that salary doesn’t provide.
The TFSA vs. CPP Question
Whether investing the extra $5,000 in a TFSA provides 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—unlike mandatory CPP contributions, there is no obligation to contribute to a TFSA.
A Mix Is Often the Answer
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. Every business owner’s situation is unique—it’s important to talk to your accountant before deciding how to pay yourself.
Every Situation Is Different
Look beyond just one aspect of the decision, like current after-tax income. Think long-term, especially about retirement. Working with a financial planner to prepare complete retirement projections will help you evaluate the future impact of receiving a salary or dividends today.
This writing is for general information purposes only. It is not intended to provide legal, accounting, tax or financial advice. For complex matters you should always seek help from a professional. Any opinions expressed are my own and may not reflect those of Louisbourg Investments.
