Do dividends mean I skip CPP?

Yes, and that cuts both ways: no contributions now, and lower CPP benefits later. Plan for retirement savings another way if you rely mainly on dividends.

Can I just take money out when I need it?

Money taken without being recorded as salary or a dividend may be treated as a shareholder loan, which has its own tax rules. Record every draw properly.

Does this apply to a sole proprietor?

No. A sole proprietor is taxed on the business profit directly and takes draws. Salary and dividends only apply to an incorporated business.

← Answers

Should I pay myself salary or dividends from my Canadian corporation?

Often a mix. Salary is a deductible expense for the corporation, builds RRSP room and means paying CPP, which also earns you CPP benefits. Dividends come from after tax profit, carry no CPP and create no RRSP room, but can be simpler. The right split depends on your income, your plans and your province, so decide it with an accountant each year.

How salary works

You pay yourself through payroll with source deductions, the corporation deducts the salary as an expense, and you get a T4. Salary creates RRSP contribution room and you pay both halves of CPP, which counts toward your CPP pension later.

How dividends work

The corporation pays tax on its profit, then pays you a dividend from what is left. There is no CPP and no payroll to run, and the dividend tax credit reduces your personal tax. But dividends create no RRSP room.

Why many owners use a mix

A salary that covers your living costs and builds RRSP room, with dividends on top when the year has gone well, is a common approach. The best mix changes as your income and plans change.

Decide it before year end

Salary has to run through payroll during the year, so the choice is easier to make early. Review it with your accountant each year rather than leaving it to habit.

Also asked

Do dividends mean I skip CPP?: Yes, and that cuts both ways: no contributions now, and lower CPP benefits later. Plan for retirement savings another way if you rely mainly on dividends.
Can I just take money out when I need it?: Money taken without being recorded as salary or a dividend may be treated as a shareholder loan, which has its own tax rules. Record every draw properly.
Does this apply to a sole proprietor?: No. A sole proprietor is taxed on the business profit directly and takes draws. Salary and dividends only apply to an incorporated business.

Written for your trade

This is the kind of thing Solomon works through with owners using their own numbers. See how it works →