Salary vs. Dividend (and Bonus) in Canada, Explained Like We’re Having Coffee
A friendly guide for incorporated owners and companies in Q4 2025
If you own an incorporated business in Canada, you’ve probably heard the never-ending debate: salary or dividend…or both? It can feel like choosing a phone plan: the options blur together, the terms are confusing, and you just want to know “which one is best for me?”
Let’s clear the fog, with plain language, everyday examples, and a decision process you can actually use. We’ll share smart tax planning tips throughout this guide. Consider this your most important conversation, explained simply over a virtual coffee. (And yes, Solstice Partners will run the numbers for you so you don’t have to squint at tax tables.)
The 1-minute version
- Salary: The company deducts it. You pay personal tax and contribute to CPP. Salary builds RRSP room and helps with things like childcare deductions.
- Dividend: Paid from after-tax corporate profits. No CPP, no RRSP room. Usually simpler paperwork, sometimes lower overall tax at certain income levels.
- Bonus: A salary by another name, often accrued near year-end and paid within the required timeframe so the company gets the deduction in the right year.
There isn’t a universal winner. The “best” answer depends on your income target, cash flow, RRSP goals, family situation, province, and whether you want CPP benefits later.
The Bucket Analogy (why the mix often wins)
Imagine two buckets that both feed your household:
- Personal bucket (Salary/Bonus): Company gets a deduction; you pay personal tax; you build RRSP room and CPP credits.
- Corporate bucket (Dividends): Company pays corporate tax first; you then take dividends from what’s left. No CPP, no RRSP room, but sometimes a smoother total tax bill.
Smart owners use both buckets, not always 50/50, but intentionally chosen. The mix is how you tune your tax, retirement, and cash flow.
When salary (or bonus) tends to make sense
- You want RRSP room (for deductions now and investment growth later).
- You want to maximize CPP (it’s not everyone’s favourite, but it’s a real future benefit).
- You need employment income to claim certain deductions/credits (e.g., childcare).
- You’re planning to qualify for a mortgage soon (lenders like T4 slips).
Plain example:
You aim to take about $90,000 home personally. Paying much of that as salary builds roughly 18% RRSP room on your earned income (up to the annual limit). That’s a lever future-you will appreciate.
When dividends tend to make sense
- You want simplicity (no payroll, CPP, or remittances).
- You prefer not to pay CPP and would rather self-invest those dollars.
- Corporate profits are healthy and you’re below a level where dividends become less attractive in your province.
Plain example:
You only need $45,000–$55,000 personally this year. Taking most of it as dividends may keep paperwork simple and total taxes reasonable, especially if your company retains profit for growth.
The blended approach (why we often recommend it)
- Pay a base salary to unlock RRSP room and keep CPP credits alive.
- Top up with dividends to reach your household cash target without bloating payroll.
- Use a year-end bonus to fine-tune the company’s profit (and your personal tax) once we see the real numbers.
This keeps doors open: retirement savings, mortgage friendliness, corporate flexibility, and a tidy audit trail.
Family members and “paying the team” (keep it reasonable)
If your spouse or adult child genuinely works in the business, reasonable salary for real work is allowed. Keep time sheets or simple role descriptions.
Dividends to family can be fine in some cases, but rules exist to prevent income splitting when no real contribution is made. We’ll keep you compliant and efficient.
Shareholder loans (don’t let this surprise you)
If you take money out of the company casually, it usually lands in a shareholder loan account. If not handled properly, it can become taxable to you.
We’ll either:
- Clear it with a declared dividend or salary/bonus, or
- Repay it correctly and document the timing.
Buying equipment and big expenses (timing matters)
If you plan to buy a vehicle, machinery, or computers, Q4 is when we decide “buy now or wait”. The goal: claim the right write-offs (CCA) sooner without forcing a cash crunch. We’ll model both sides in plain figures.
A simple decision map (words, not flowchart)
1. How much do you actually need personally?
If it’s modest this year, dividends may cover it simply.
If it’s higher, a base salary plus dividend top-up can trim total tax.
2. Do you value RRSP room and CPP?
If yes, salary/bonus is essential (at least to a set level).
If no, consider leaning more toward dividends, but know what you’re giving up.
3. Mortgage or lending on the horizon?
If yes, T4 income helps. We set a clean salary number early.
4. How profitable is the company this year?
Big profit? A bonus can reduce corporate tax now, and you manage personal tax thoughtfully.
Lean year? Dividends may be enough; keep cash in the corporation for stability.
5. Any money already drawn personally?
If you’ve used the corporate card for personal stuff, we’ll fix the shareholder loan before it bites.
Three plain-English scenarios
Scenario A: The Builder
- You need $60k personally; company is growing and cash-hungry.
- Plan: $45k salary (RRSP room + lender-friendly), $15k dividend, keep the rest in the company.
- Result: Balanced taxes, future savings room, business cash preserved.
Scenario B: The Optimizer
- You need $90k personally; company profit is strong.
- Plan: $65k salary (RRSP room + CPP credits), year-end bonus if we need more deduction, small dividend if needed to top up.
- Result: You hit your cash target, reduce corporate tax efficiently, and keep your retirement math happy.
Scenario C: The Simple Life
- You need $40k personally; company had a modest year.
- Plan: Mostly dividends, minimal salary (or none) this year; review again next year.
- Result: Fewer moving parts, fine at lower income levels, revisit when profits jump.
Payroll, slips, and timing (the admin in human words)
- Salary and bonus mean payroll, CPP, tax withholdings, and T4 at year-end. We run this for you so nothing gets missed.
- Dividends mean T5 slips. Simple, but still needs dates and resolutions.
- Bonuses can often be accrued at year-end and paid shortly after; the company gets the deduction in the intended year if you follow the timing rules. We calendar this for you.
Mistakes we quietly fix all the time
- Owners with no RRSP room for years because they only paid dividends.
- Shareholder loan balances turning into unexpected taxable income.
- Dividends paid without minute book entries or T5s.
- Missing payroll remittances on “informal salaries” (CRA does not enjoy informal).
- Buying vehicles or equipment without checking CCA class and tax impact.
What working with Solstice Partners looks like (simple promise)
- A 45-minute owner strategy: tell us your household cash need and goals.
- A salary/dividend/bonus model in plain numbers (“if you do X, here’s your take-home and next April’s tax”).
- Paperwork done properly: resolutions, payroll, slips, and minute book updates.
- Quarterly check-ins so we’re not cramming everything into December.
You run the business. We’ll make the money mechanics calm and compliant.
Quick Owner Checklist (print this)
- Decide your personal cash target for the next 12 months
- Choose a base salary (for RRSP/CPP/lender needs)
- Plan dividend top-ups only as needed
- Clean shareholder loans before year-end
- Decide “buy now or later” for major assets
- Book a 30–45 min review with Solstice Partners
Ready to set your mix and finish 2025 strong?
Message Solstice Partners. We’ll run the numbers, set the paperwork, and make your choice easy.
