Meet Stephanie, a successful 43-year-old business owner with her plate full of financial goals. She’s a homeowner with a mortgage renewal coming up, two kids to save for (hello, tuition payments), and retirement dreams that include a lakeside cottage.

For the past few years, Stephanie had been paying herself through dividends from her business. 

But as her financial goals evolved, she was wondering if that was still the right strategy.

Would a salary give her more stability today and help her build a secure future?

It’s a dilemma faced by many incorporated small business owners in Canada.

Each choice affects how much you pay in taxes, how you save for retirement, and even how easy it is to qualify for a mortgage.

So, which is better?

Dividend Income: Simple and Flexible

Paying yourself in dividends is straightforward and comes with some perks worth noting.

Since dividend income doesn’t trigger CPP contributions, you keep choose to do other things with that amount today. This can free up funds for other priorities, like growing your business, saving for retirement, or building wealth in a TFSA or corporate account.

Want to adjust your payout based on your needs or corporate profits? Dividends let you do just that. You’re not locked into a fixed paycheck, giving you the freedom to tailor your income to match your goals.

Corporate profits that remain in your business uninvested can continue to grow at a low tax rate of 12.2% until you’re ready to withdraw them.  This gives you an opportunity to reinvest in your business or expand your portfolio with a deferred tax advantage.

The Downside of Dividends

There are some drawbacks to consider when you pay yourself with dividends.

You won’t be eligible for CPP which is an indexed pension for life, which could leave a gap in your retirement income. 

You’ll also lose the ability to generate RRSP contribution room, forfeiting the tax-deferred growth and immediate tax savings RRSPs provide. 

And while dividends may be tax-efficient up front, corporate non-registered investments face a combined tax rate of around 50% on growth when withdrawn, often equaling your personal tax rate.

Salary Income: Steady and Secure

Salary income is predictable, reliable, and comes with some undeniable benefits.

First, lenders love it. Whether you’re applying for a mortgage or business loan, a steady paycheck keeps things simple.And, every paycheck puts a little something into the Canada Pension Plan (CPP). It’s not an expense—it’s an investment in guaranteed income for life.  Between the tax deduction and credit, the contribution is a good chunk lower than you think too!

Speaking of savings, salary generates RRSP room, which has tax benefits now and can give you tax-deferred growth for years to come.

Finally, drawing a salary lets you own a Personal Health Spending Account (PHSA), which allows you to reimburse yourself personally from your corporation for your medical expenses (instead of using your own after-tax dollars, which are taxed at a much higher rate).

Stephanie’s Strategy

For Stephanie, the benefits of a steady salary outweighed the perks of dividend income.

Thanks to her salary, she generates over $30,000 in RRSP room every year. She contributes the maximum to her RRSP, which allows her to invest funds that haven’t been income taxed and those investments grow tax-deferred which provides far greater growth than say a corp non-registered investment where the growth is taxed in the year it’s received. Over the next 20 years, assuming a 6% annual return, this RRSP could grow to over $1,000,000 - all tax-sheltered until she retires!  And like most people who retire, she’s projected to spend far less (bye-bye mortgage & kid expenses) so that income tax she’ll pay then will be far lower than she would pay today if she didn’t invest in an RRSP.

With her salary, Stephanie also automatically contributes to the Canada Pension Plan (CPP). While some see CPP as an expense, Stephanie views it as a secure, inflation-protected pension that will provide her with guaranteed income in retirement.

And when it’s time to renew her mortgage, Stephanie’s steady salary makes it simple to qualify for the best rates.

But Stephanie doesn’t stop there. After maxing out her RRSP contributions, she invests any surplus funds through her corporation. Here’s how it works:

Stephanie’s corporate profits are taxed at just 12.2% before they’re invested. This leaves her with more capital to work with compared to investing personal, after-tax dollars.

While growth in her corporate investments is taxed up-front at around 50%, when she withdraws the funds, the effective tax she ends up paying over time very closely equals her personal tax rate. 

Stephanie plans to withdraw these funds strategically during retirement, when her income (and tax bracket) will likely be lower. This ensures she minimizes her overall tax burden.

Making the Right Choice

​​While paying herself in dividends might seem more advantageous in the present, Stephanie’s choice to embrace a salary gives her more opportunities for growth, tax savings, and long-term peace of mind. For Stephanie, it’s the smart move.

If you own a Canadian incorporated business, how you pay yourself is an important decision that can impact your present and your future wealth. Book a call today, and let’s create a strategy that works for you.