Small Business Accounting - How to Pay Yourself

If you own a small business that has been incorporated, you have a few options when it comes to how to pay yourself. The two main options are either salary or dividends. Each payment method has advantages and disadvantages so we have compared the two for you.

Salary Payment Advantages
If you decide to go with a salary payment, a big advantage is that you will have personal employment income. With personal employment income, generates contribution room for your Registered Retirement Savings Plan (RRSP) and will require that you pay into the Canada Pension Plan (CPP). Both of these set you up for retirement, giving you a safety net after you have stopped working. When you pay yourself with a salary, that payment, as well as any bonuses, is now a tax deduction for the corporation.

Salary Payment Disadvantages
Being paid a salary and receiving a personal income has its advantages but it also has its disadvantages. Salary is 100% taxable on the personal side, so paying yourself with a salary could potentially increase your tax load. Discuss this with your small business accountant to see if this will be an issue for you. As for CPP, you will have to pay as both an employer and an employee – resulting in a total CPP expense of 9.90% (up to a maximum of $5,128.20 in 2017).

Another disadvantage of receiving a salary payment is that an official payroll account will have to be set up with the Canada Revenue Agency (CRA) and will require the preparation and filing all related paperwork, such as issuing a T4 for yourself and filing a T4 summary, in addition to existing tax filing requirements.

Dividend Payment Advantages
If you are not sold on paying yourself with a salary, a dividend payment method also provides a number of advantages. For one, dividends are taxed at a much lower rate than salary, which can result in you paying less personal taxes. Receiving a dividend and not paying into the CPP also means that you can save money.

The simplicity of paying yourself with dividends is also a huge advantage over salary payments. You write a cheque to yourself from the corporation, update the minute books, complete a director’s resolution, and at year-end issuing a T5 slip for total dividends paid throughout the year. There is far less paperwork and government involvement needed with this payment method compared to salary.

Dividend Payment Disadvantages
Just as with salary payment, there are disadvantages to paying yourself through dividends. You should strongly consider paying CPP even if you receive dividends as the amount you pay directly effects how much you are entitled to receive once you retire. Receiving dividends also means that you are not allowed to contribute to the RRSP as you do not have a personal income, so your planning for your retirement compensation may become confusing.

Receiving dividend payments could also jeopardize other possible personal income tax deductions available to you. There is also the risk that if you become unable to work due to an injury or disability it will become difficult to calculate proper wage replacement because dividends are not seen as earned income.

Which Payment Method?
You might still be wondering which payment method you should choose, as there are advantages and disadvantages to both salary and dividends. The answer is that it depends entirely on your personal financial situation. What is your income level? What are your cash flow needs? What is the corporation’s income? How old are you and what retirement plans do you have? How important are personal tax deductions?


These are just some of the many questions to consider when deciding how to pay yourself from your corporation. The best plan is to talk to a Chartered Accountant that is experienced in small business accounting to see which would work best for you.