Frequently Asked Tax & Accounting Questions

Which is better, salary or dividends?

If you pay yourself salary, the amount is a deductible expense to your company and is taxable in your hands. You will be required to deduct income tax and CPP premiums from your salary. 

Alternatively, you can have the income taxed in your corporation and then pay the after-tax earnings to yourself, as dividends, which are not deductible for the corporation. Dividends are payments made to company shareholders from the profits of the company. If the company has not made a profit over a given period then it cannot pay a dividend. 

You’ll face tax on the dividends paid to you, but at a lower tax rate than salary. Why? Since, the corporation has already paid tax on the income when dividends are received, the amount is “grossed up” and then you are entitled to a dividend tax credit (to provide a tax credit for the approximate tax that was paid by the company).

Pros and Cons when considering Salary or Dividends 

Salary Pros  
  • Salary will count as earned income for pension contributions and dividends will not.  
  • Help with financing purposes. If you are planning on applying for a line of credit or a mortgage, then paying yourself a salary will help you qualify.  
  • Salaries paid by the company are an expense to the company and can reduce net income and corporate taxes payable. 

Salary Cons 
  • Can be used only to pay employees of the company. 
  • Salary requires you to deduct income tax and CPP premiums and dividends do not. 
  • Have the burden to do payroll. (For example, manage payroll remittances to the Canada Revenue Agency, preparation of T4 slips, calculation of source deductions, etc.) 

Dividends Pros 
  • Can be paid to individuals who are not employees of the company (They must be shareholders). 
  • More tax efficient; dividends are taxed at a lower rate than salary. 
  • Dividends are administratively simple, you only need to file a T5 with CRA by February 28 of the following year. 

Dividends Cons 
  • You can only pay dividends out of profits made by the company (If there is no balance in retained earnings, dividends can’t be paid out). 
  • Directly reduces the equity of the company. (For example, when a dividend of $100,000 is declared and paid, the corporation’s cash is reduced by $100,000 and its retained earnings is reduced by $100,000). 
  • Dividends are not an expense of the corporation and, therefore, dividends do not reduce the corporation’s net income or its taxable income.

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