Salary or dividends: how each is paid, and what your books have to show
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The mix is a tax decision for whoever prepares your returns. The mechanics are what the books and payroll have to do for each route.
Download the checklist · text file
Paying yourself a salary
- The corporation deducts the salary as an expense, so it lowers the profit the corporation pays tax on.
- It runs through payroll. The corporation withholds income tax and CPP and remits them to the CRA, with a T4 at year end.
- CPP is charged on pay above the basic yearly exemption of $3,500, up to a yearly maximum, and it builds your CPP pension.
- EI is different. A person who controls more than 40% of the voting shares is generally not in insurable employment, so no EI premiums are charged, though CPP still applies.
- Salary counts as earned income, which creates RRSP contribution room.
Paying yourself dividends
- A dividend comes out of profit the corporation has already paid tax on. The corporation cannot deduct it.
- The directors declare it, and a written resolution records the amount, the date and the shareholders.
- It goes on a T5, due the last day of February, and on your personal return.
- No payroll is needed. No CPP is charged, so no CPP pension is built, and it does not create RRSP room.
- Dividends paid to family members can bring separate tax rules into play. Ask before you do it.
Side by side
| Salary | Dividend | |
|---|---|---|
| Deductible to the corporation | Yes | No |
| Payroll needed | Yes | No |
| CPP charged | Yes, above the basic exemption | No |
| RRSP room created | Yes | No |
| Slip | T4 | T5 |
| Slip due | Last day of February | Last day of February |
| Paid from | Any funds, as an expense | Profit after corporate tax |
Many owners take some of each. How to split it depends on personal tax, the cash you need, your RRSP and CPP goals, and the tax the corporation pays, which is why it is settled with the numbers on the table.
What the books have to show
Money that leaves the company with neither a salary nor a dividend behind it lands in the shareholder loan account. That account has a one-year repayment rule, covered in the guide on mixing business and personal money.
Is it better to pay myself a salary or dividends?
There is no single answer. It depends on your personal tax, how much cash you need, your CPP and RRSP goals, and the tax the corporation pays. The person who prepares your returns can compare the mix with your actual numbers.
Do I need payroll to take dividends?
No. Dividends need a directors’ resolution and a T5, and no payroll account. Salary is the route that needs payroll.
Do I pay CPP on dividends?
No. CPP is charged on salary, not on dividends, so dividends do not build a CPP pension.
Do dividends create RRSP room?
No. RRSP room is based on earned income such as salary, and dividends are not earned income.
Can I take money out of my company without salary or dividends?
It is recorded as a shareholder loan, and a loan not repaid within one year after the end of the company’s tax year can be added to your personal income. Reimbursing business expenses you paid, and repaying money you lent the company, are separate routes.
Mixing business and personal money, including shareholder loans →
What running payroll in BC involves →
Want this handled for you
This is the work we do for clients every month. Tell us what you sell and where your books stand, and a written plan and a fixed monthly price follow within one business day.
info@orbisaccounting.ca