How to Pay Yourself: Salary vs Dividend Strategy Before Year-End
- Nex CPA
- Nov 17
- 3 min read
If you’re an incorporated business owner in Canada, one of the most important financial questions is: “Should I pay myself a salary or a dividend?”
The wrong mix can cost you thousands. The right one can optimize tax, support your retirement goals, and keep your corporation financially healthy.
Let’s break down the differences and explore real-life scenarios that show how Canadian business owners approach this decision.
Key Factors to Consider
1. Salary (T4 Income)
✅ Pros:
Generates RRSP contribution room
You contribute to the Canada Pension Plan (CPP), building future retirement income
Helps with mortgage approvals and TOSI exemptions
Creates predictability and earned income for certain tax benefits
🚫 Cons:
Must withhold and remit payroll taxes monthly
You (and your company) must contribute to CPP
Can increase your tax bracket faster than dividends
2. Dividends (T5 Income)
✅ Pros:
Simpler to issue — no payroll setup
No CPP contributions
Lower personal tax at moderate income levels (due to the dividend tax credit)
🚫 Cons:
Doesn’t generate RRSP room
Doesn’t contribute to CPP
CRA scrutiny is increasing if used aggressively (especially for family members)
3. Mixed Strategy: The Best of Both Worlds?
Most clients at Nex CPA end up using a mix of salary and dividends, because:
Salary gets you RRSP room and CPP benefits
Dividends optimize overall tax efficiency
The blend allows flexibility to manage personal and corporate cash flow
Real-Life Pay Scenarios
✅ Scenario 1: Solo Consultant, $120K Profit
Goal: Simple tax-efficient strategy with RRSP growth
Strategy: $60K salary + $40K dividend
Why: Gets full RRSP room, avoids higher personal tax brackets, pays some CPP but not maxed
✅ Scenario 2: Growth-Stage Founder, $250K Profit
Goal: Retain cash in the company, invest in hiring
Strategy: $40K salary + $60K dividend
Why: Just enough salary for RRSP but keeps most funds in the corporation
✅ Scenario 3: Owner Approaching Retirement
Goal: Maximize CPP and personal income smoothing
Strategy: $66,600 salary (max CPP) + balance in dividends
Why: Ensures full CPP later, manages marginal tax rates, triggers partial RRSP contribution room
Each of these approaches is tailored. There’s no one-size-fits-all — which is why we run the numbers for every client.
Don’t Forget the Corporate Side
Your compensation also affects:
Corporate income tax (wages are deductible, dividends aren’t)
Cash flow timing
Taxable income thresholds for the Small Business Deduction (SBD)
Sometimes, it’s better to retain earnings in the corporation, especially if you’re reinvesting in growth or acquisitions. Other times, a bonus might lower the company’s tax bracket.
We model both sides of the equation — corporate and personal — to help you decide.
Why You Need to Decide Before December 31st
Some strategies — like paying a bonus, issuing dividends, or adjusting your shareholder loan balance — must be executed before the calendar year ends to count for 2025.
Waiting until tax season is too late.
Not Sure What’s Best for Your 2025 Compensation?
We help Canadian business owners across industries structure their compensation strategically, not just for tax savings — but for long-term success.
Whether it’s your first time deciding or you're just due for a refresh, let’s walk through it together.
We’ll run the numbers and show you the best path.
About Nex CPA
Nex CPA is a boutique Canadian digital accounting firm that provides online accounting solutions by combining technology and forward-thinking businesses. Tailored for the modern entrepreneur, we provide an easy, automated and client-focused service so you can focus on working 'on' the business and not 'in' the business.
For more information, email us at info@nex.cpa
