Salary vs Dividends Calculator

One of the biggest decisions someone with a corporation needs to make is choosing how to pay themselves from their corporation. You can’t just take money from your corporation to spend however you want. You typically have two options: salary or dividends. Each has its own set of benefits and drawbacks, and the best option depends on various factors such as your income needs, tax attributes of your corporation, and long-term financial goals. 

Most accountants will say ‘it depends’. But what exactly does it depend on?  You will hear that ‘it’s whatever you prefer.’ In reality, most people prefer to increase their wealth. In which case, there is one that is usually better for your long-term goals depending on your facts. 

In this guide, we’ll explore the differences between salary and dividends, their respective advantages and disadvantages, and how they affect your overall tax strategy. We’ll also cover income splitting, CPP contributions, and tax attributes such as CDA, ERDTOH, and GRIP, which can influence your decision. At the end, we provide a flow-chart to guide you on how to decide. 

The Golden Rule of Thumb 

If you’re looking for a quick answer, then generally, salary is typically better than dividends because of the RRSP room. The value of RRSP room is significant so long as you (eventually) take advantage of it by (eventually) contribute to your RRSP. 

However, there are special tax attributes your corporation might have which may make dividends preferable. You should consider paying dividends instead of salary if your corporation has any of the following: 

• Capital Dividend Account (CDA) 
• Eligible Refundable Dividend Tax on Hand (ERDTOH) 
• Non-eligible Refundable Dividend Tax on Hand (NERDTOH) 
• General Rate Income Pool (GRIP) 

Generally, you get these tax attributes when you invest in your corporation. 

This was a quick cheat-sheet. The actual answer to your question is more complicated. That’s why we have the rest of the article. 

What Are Salary and Dividends? 

If you’re incorporated, you can’t use your corporation’s money for personal expenses. To pay for personal expenses like your mortgage, rent, or childcare, you need to use personal money. If you don’t have any money personally, you need to take money out of the corporation either through salary or dividends. 

• Salary: This is a payment you receive as an employee of your own corporation. Just like a traditional job, your salary is subject to tax deductions, and your corporation needs to issue you a T4 slip (a type of tax form) at the end of the year. 
• Dividends: Dividends are payments made to shareholders from the after-tax profits of the corporation. As the shareholder of your own corporation, you can pay yourself dividends, which are reported on a T5 slip (another type of tax form). 

Many people mistakenly sometimes just pay themselves as a contractor. This means they don’t process their pay through payroll, and they don’t declare a dividend. This is not allowed. It can also bring interest and penalties with respect to HST/GST obligations. 

Salary vs Dividends: Key Differences 

Both salary and dividends are ways to pay yourself, but they are taxed differently, and each has unique pros and cons. Understanding how each works can help you optimize your personal tax situation. 

Benefits of Paying Yourself a Salary 

1. RRSP Contribution Room: Salaries generate RRSP contribution room, allowing you to save for retirement in a tax-deferred account. The value of RRSP contributions is huge for those that invest in stocks, bonds, GICs, etc. 
2. CPP Contributions: Paying yourself a salary requires contributions to CPP. Many people see this as a bad thing because it means less cash for them. However, there are many benefits to CPP. It is a form of life and disability insurance. But more importantly, it provides a guaranteed income in retirement. It is also inflation adjusted. That means if inflation is high, your OAS income in retirement will increase accordingly. 
3. Lower corporate taxes: Salary is an expense to a corporation. This means they reduce a corporation’s income and a corporation’s tax. However, keep in mind that this reduction is usually made up for with increased personal taxes.  
4. Personal Tax Deductions: You may be able to take advantage of several tax deductions, such as childcare and moving expenses, if you pay yourself a salary. Generally, these expenses cannot be deducted against dividends but can be deducted against salary. 
5. Better for Canada Child Benefit (CCB) & Old Age Security (OAS): CCB is a government benefit based how much children you have. OAS is a government benefit for people 65 & older. They are both government benefits that decrease as your income decreases. Salaries generally means less income shows on your tax return. This is because dividends have a ‘gross up’ which means if you receive $100 of dividends, your tax return will actually show $115 of dividends. Since your tax return is showing more income, your CCB or OAS is reduced when compared to salaries. 
6. No Personal Tax Instalments: If someone has $3,000 or more of tax owing on their personal tax return, this generally means they need to make tax payments during the year for the following year. This is called tax instalments. The CRA does not want to wait until the end of the year to collect your taxes, so they make you prepay during the year. This is common for dividends. For people that pay salary, taxes are being deducted in each paycheque. They generally will not have tax owing at tax time unless they earn other income outside of their salary. This means business owners that pay themselves salary generally don’t need to worry about making personal tax instalments. 
7. Manage lifestyle inflation: As people earn more, they tend to spend more. The key to building wealth is to ensure you are saving enough. Paying a salary gives you a set amount to spend each month. Often times, people who pay themselves through a dividend see the dividend as all their money. They end up spending more than they should. This is why paying salary as behavioural benefits, it helps manage spending. 

Benefits of Paying Yourself Dividends 

1. CDA, ERDTOH, NERDTOH, GRIP: Paying dividends makes use of these special tax attributes. These special tax attributes make paying dividends beneficial because dividends could be tax-free, the corporation could get back a lot of taxes when they pay dividends, and dividends could be taxed at a lower rate. 
2. Lower Personal Tax Rates: Dividends are taxed at a lower personal rate than salary, especially eligible dividends. However, this is usually because paying dividends results in more corporate tax. Overall, the amount of tax in both situations is relatively similar. 
3. No CPP Contributions: Paying dividends allows you to avoid CPP contributions, which can save you up to $8,000 per year. 
4. Potential income splitting: In some cases, you may be able to pay dividends to family members who have lower incomes. This is called income splitting. Keep in mind these dividends may be subject to TOSI rules, which can significantly limit income splitting opportunities. 
5. Simplicity: Dividends do not require payroll systems or regular remittances, making them administratively simpler. Whereas managing payroll, remitting payroll taxes, and filing T4 slips can add complexity to your business operations. However, if you already have other employees, you’re already doing this so it is not a big issue. 

The Impact of CPP on Salary 

Many business owners are hesitant to pay CPP because of the annual cost, which can total around $8,000 between employer and employee contributions. However, CPP provides several long-term benefits: 

• Retirement Income: CPP ensures a stable income during retirement, which is particularly valuable if you don’t have significant personal investments. 
• Disability and Life Insurance: CPP also provides disability and survivor benefits, offering additional financial security. 
• Income Splitting: When you retire, you can partially split CPP income with your spouse. 

While many criticize CPP and say they only offer a 2% real rate of return (if inflation is 2%, then that’s approximately a 4% actual return guaranteed), it is sustainable and a reliable source of income in retirement. Also, the 2% real rate of return may not actually be reflective of the return you can get from CPP.

Tax Attributes: CDA, ERDTOH, NERDTOH and GRIP 

If your corporation has specific tax attributes, paying yourself dividends may be more beneficial. These tax attributes can provide tax refunds or allow for tax-free dividends. 

• CDA (Capital Dividend Account): This account allows you to distribute tax-free capital dividends. For example, if your corporation has $100 in capital gains, 33% may be added to your CDA, which can be distributed tax-free. 
• ERDTOH (Eligible Refundable Dividend Tax on Hand): This refundable tax is triggered when you receive dividends from Canadian companies. It’s a temporary tax that can be refunded when dividends are paid. 
• NERDTOH (Non-eligible Refundable Dividend Tax on Hand): Similar to NERDTOH but can only be refunded when the higher taxed dividends (non-eligible dividends) are paid.
• GRIP (General Rate Income Pool): GRIP allows you to pay eligible dividends at lower personal tax rates. For example, a $100 non-eligible dividend may be taxed at 48%, while an eligible dividend may be taxed at 39%. 

Income Splitting and TOSI Rules 

Dividends used to be a popular method of splitting income with family members, but the introduction of TOSI (Tax on Split Income) rules has made this more difficult. TOSI generally applies to income paid to family members who are not actively involved in the business and who have not made significant financial investments. There are exceptions. One exception is for individuals over 65 who are allowed to pay dividends to their spouse. But TOSI generally limits income splitting opportunities. 

So, Should You Pay Yourself a Salary or Dividends? 

Here are some general guidelines: 

• Salary is generally better if you need to create RRSP room, contribute to CPP, or qualify for specific tax deductions like childcare and moving expenses. 

• Dividends may be preferable if your corporation has tax attributes such as CDA, RDTOH, or GRIP, or if you want to avoid CPP contributions and simplify administrative tasks (payroll). Generally, paying dividends to avoid CPP contributions is not the best idea for your long-term wealth. 

However, the actual best option often depends on many things. So we’ve created this flowchart to guide you on what you should do.  

Step 1: CDA and ERDTOH 

First, the CDA and ERDTOH are prioritized. These accounts are basically tax-free money. Your corporation can essentially pay you these amounts with zero or very minimal tax. So it makes sense to pay these amounts, even if you don’t need the income. 

Step 2: Moving expenses and childcare expenses 

Secondly, if you have moving expenses or childcare expenses (and you are the lower income earner), then paying salary makes sense to take advantage of these deductions. There may be some minor tax. But it is generally worth it. 

The next sections (with some exceptions, contact CoPilot Tax if you) should typically only be done if you still need money personally. 

Step 3: NERDTOH and GRIP 

Next, NERDTOH and GRIP are looked at. These would give dividends the edge because NERDTOH gives the corporation nearly 38% of the dividend back. GRIP lets you pay lower taxed dividends. However, there are situations where despite GRIP being generated, salary should still be paid. This is usually when there will consistently be income taxed at a higher rate (generally when the corporation’s income is above $500,000). 

Step 4: Income Splitting 

Next, if you should see the following: 

• If your family member/spouse can receive dividends from the corporation based on their shareholdings. 

• If they are at a lower marginal tax rate than you. 

• If you are comfortable paying a family member/spouse dividends. 

• If paying them a dividend does not violate TOSI rules.  

If the answer to all of the above is yes, then you can consider paying them a dividend. 

Step 5: Pay salary 

If you still require money after all the above, you should pay yourself salary. Most salary vs dividend discussion only focuses on this part. They ignore all the nuances above. But you first need to go through those nuances before you get here. 

Questions or Specific Scenarios? 

• If you don’t need the money right now, should you pay yourself a salary to generate RRSP room?
  • Based on our modeling, unless you have childcare or moving expenses, you likely don’t need to pay yourself a salary. However, roughly the first $15,000 of income you earn is tax-free. You probably want to at least make sure you have $15,000 of income, even if you don’t need the money. 

• What if you have two corporations?
  • Paying salary from two corporations may result in paying CPP twice, without additional benefits. However, it might be worth it for the RRSP room. 

• What if I have another job and a corporation?
  • Similar to the above, your corporation might be contributing paying CPP without any benefit. It still might be worth it for the RRSP room. 

• What are some other key considerations? 
  • When paying salary, sometimes people get lazy on payroll and incur penalties. You have to make sure you are on top of it. 
  • Paying salary may result in additional CRA scrutiny as you now have another return to file (T4 return). 
  • Government grants and credits (i.e. many COVID relief benefits) are typically based on salaries and number of employees. This tilts the scale to salary. 

Contact CoPilot Tax to Optimize Your Compensation Strategy 

Deciding between salary and dividends can be complicated, but you don’t have to navigate it alone. At CoPilot Tax, we specialize in creating tailored compensation strategies for business owners to help you minimize taxes and maximize long-term savings. 

Get in touch with us today to book a free consultation and learn how to optimize your salary vs dividends strategy!