Salary vs Dividends: How to Pay Yourself as a Corporation Owner – A Complete Guide by a Montreal CPA Firm Near You

One of the most important decisions for Canadian business owners is choosing how to

pay themselves—salary, dividends, or a combination of both. The question of salary vs

dividends in Canada affects personal tax, corporate tax, CPP contributions, RRSP

room, cash flow planning, and long-term retirement strategies. Many owners assume

dividends are always better because they avoid payroll deductions, while others believe

salary is superior because it creates RRSP room. In reality, the best strategy depends

on income level, profitability, personal tax bracket, hiring needs, corporate structure, and

long-term financial goals. Understanding how to pay yourself as a corporation owner is

essential to minimizing taxes and building stable financial growth. This guide explains

the tax differences between salary and dividends in Canada, how each affects CPP,

RRSPs, benefits, and corporate taxes, and how CRA evaluates owner-manager

compensation.

Legal and Regulatory Framework

Salary is taxed as employment income under section 5 of the Income Tax Act.

Corporations deduct salary payments as an expense, reducing taxable corporate

income. Dividends, on the other hand, are paid from after-tax corporate profits and are

governed by sections 82 and 121, which establish the gross-up and dividend tax

credit system. Eligible dividends receive preferential tax treatment, while non-eligible

dividends are taxed at lower rates due to integration rules. CPP contributions are

mandatory on salary but not on dividends. Salary creates RRSP contribution room

(18% of earned income), while dividends do not. Paying unreasonable salaries or

dividends to family members is restricted under TOSI (Tax on Split Income) rules in

section 120.4. These legal distinctions form the basis of deciding between salary vs

dividends in Canada.

Key Court Decisions

Important court decisions have clarified how owner compensation should be structured.

In Neuman v. Canada, the Supreme Court addressed dividend sprinkling and ruled that

dividends paid to family members must meet legal and tax compliance standards. In

McClarty v. Canada, the court emphasized maintaining corporate formalities when

issuing dividends or salaries. In Krauss v. The Queen, CRA challenged excessive

salaries paid to shareholders; the court confirmed salaries must be reasonable and tied

to actual work performed. In Drew v. Canada, CRA successfully reclassified dividends

as disguised salary when the corporation attempted to avoid payroll taxes. These cases

illustrate that salary vs dividends decisions must be carefully documented and

structured to withstand CRA scrutiny.

Why CRA Targets This Issue

CRA closely monitors owner-manager compensation because incorrect classification

can lead to tax avoidance. Common issues include salary that is too high or too low,

dividends paid without proper corporate resolutions, and attempts to avoid CPP or

payroll taxes through improper dividend strategies. CRA also reviews TOSI compliance

when dividends are paid to family members. When corporations rely entirely on

dividends, CRA may examine whether the structure is intended to avoid CPP or other

statutory obligations. Companies that pay dividends while showing corporate losses, or

pay dividends to shareholders with no involvement in the business, also attract

attention. Understanding salary vs dividends in Canada helps prevent costly CRA audits

and reassessments.

Mackisen Strategy

At Mackisen CPA Montreal, we develop tailored compensation plans for owner-

managers that balance salary, dividends, and tax efficiency. Our process begins with

analyzing the corporation’s profitability, the owner’s personal tax bracket, payroll

obligations, and retirement planning needs. We calculate the optimal salary to create

sufficient RRSP room, maintain eligibility for CPP and other benefits, and minimize

overall taxes. We then determine the ideal dividend structure to supplement income

while reducing payroll costs. For families, we evaluate TOSI rules to ensure all

payments comply with CRA guidelines. We prepare corporate resolutions for dividends,

payroll schedules for salary, and long-term compensation plans that align with business

goals. Our structured approach ensures that business owners pay themselves in the

most tax-efficient and compliant manner.

Real Client Experience

A business owner earning $250,000 declared only dividends for several years and

discovered they had no RRSP room and limited CPP contributions. We restructured

their compensation, adding a modest salary to restore RRSP eligibility while maintaining

dividend efficiency. Another client paid themselves a high salary, pushing them into a

top marginal bracket unnecessarily. We shifted part of the salary to dividends, saving

them thousands in personal tax. In a family business case, dividends were paid to a

spouse who did not work in the company. CRA challenged the payment under TOSI

rules. We corrected the structure and implemented a compliant compensation strategy.

These examples show the importance of understanding salary vs dividends in Canada.

Common Questions

Business owners often ask whether dividends are always better. Dividends reduce

payroll obligations but do not create RRSP room or CPP contributions. Others ask

whether they need a salary to qualify for mortgages. Many lenders prefer salary

because it shows stable employment income. Owners also ask whether they must

choose one method. Most benefit from a mixed strategy. Another question is whether

corporate losses affect dividends. Dividends cannot be paid from losses—they must

come from retained earnings. These questions highlight the complexity of choosing

salary vs dividends in Canada.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

business owners stay compliant while maximizing tax savings. Whether you pay

yourself through salary, dividends, or a combination of both, our expert team ensures

precision, transparency, and protection from audit risk.