If you run an incorporated business in Kitchener, one of the most important decisions you make each year is how to pay yourself. The choice between salary and dividends has significant tax implications, and the optimal answer changes depending on your income level, personal circumstances, and corporate profitability.
Salary: The Basics
Paying yourself a salary means the corporation deducts the amount as a business expense, reducing corporate taxable income. You personally receive the salary, pay personal income tax, and make CPP contributions as both employee and employer. A salary creates RRSP contribution room (18% of earned income), a major long-term advantage for retirement planning.
Dividends: The Basics
Dividends are paid from after-tax corporate income. The corporation pays corporate tax first, then distributes profits to shareholders. Dividends in Canada benefit from the dividend tax credit. They do not generate RRSP room and do not require CPP contributions, which can be an advantage or disadvantage depending on your situation.
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Which Is Better for Kitchener Business Owners?
There is no universally correct answer. The optimal mix depends on:
- How much income you need personally vs. what you can leave in the corporation
- Whether you want to maximize RRSP contributions (see our RRSP vs TFSA guide)
- Whether CPP contributions are valuable to you (they affect your future CPP benefit)
- Your spouse's income and whether income splitting through dividends is possible
Our small business accounting team in Kitchener runs a full salary vs. dividend analysis for incorporated clients as part of annual tax planning. The difference can be thousands of dollars per year, making the exercise well worth the time.