Why To Pay Yourself Salary From Your Corporation

You primarily take money out of your corporation using salary, dividends, or both. In the preceding post, I discussed how and when to pay different types of dividends to maximize your combined corporate and personal cash flow. However, most incorporated business owners also benefit from paying themselves a salary. Similar to a regular employee. Learn why paying yourself a salary from your corporation is beneficial and where that fits in with paying yourself dividends.

Paying Salary Is Relatable

This may sound silly, but getting paid a salary is relatable. The average person gets paid that way. This does have some practical advantages in that other institutions know that too.

Banks Understand Salary

For example, if you apply for a mortgage or loan, then having been paid some salary is more readily accepted by the lender than getting dividend income. You can still get a mortgage without it, but it is more complicated.

Voters & Governments Understand Salary

Tax changes that impact people collecting salaries are less likely to be as punitive compared to those fat-cat business owners collecting dividends. That is a naive view, but the average person does not understand tax integration. Complicated, poorly understood, and used by a minority of the voting public makes for a ripe tax target.

Similarly, when the Canadian Government came out with support for small business owners during the pandemic, they were based on the salary payroll. They did change that to account for dividends, but that was delayed and the bar was higher. No one knows what the future holds, but you can bet that if it matters, those using a salary will be favored.

Paying salary also opens the door to tax shelters that are used by the average Canadian. Again, that means they are more likely to be beneficial and less likely to get torpedoed by legislative changes.

Corporate & Personal Taxation of Salary

A corporation’s active income is taxed based on the net income. The revenue minus the expenses. Paying salary, whether to yourself, your spouse, or an unrelated employee counts as a deductible business expense. Dollar for dollar. So, when your corporation pays a dollar of salary, that is a dollar of corporate revenue that has no business tax on it. In addition to the salary, the associated Canada Pension Plan (CPP) and Employment Insurance (EI) costs are also business expenses and deductible dollar for dollar.

The salary that you receive is taxed as regular personal income. Just like any employee, the government collects an estimate of your taxes at the source with each paycheck. That means less personal cash flow now, but it also means no or lower additional quarterly tax installments. So, one benefit of paying yourself a salary is a regular predictable personal cash flow. That matches the reality of life where we have many regular predictable expenses, like housing, food, insurance, etc. Automating that with a regular salary helps to keep it simple.

Tax Integration of Salary vs Dividends

When you pay yourself a salary from your corporation, the total corporate taxes (zero) and personal taxes are the same as if you had earned the money directly. The alternative is to have the income taxed at the business rate and then pay yourself a dividend from the money that is left. When adding up the corporate business tax and your personal tax, it should be the same as if you had earned the money directly or paid a salary. That is a concept called tax integration and it is a core principle of our taxation system.

pay myself self-employed

Imperfect Tax Integration Favors Paying Yourself Salary

Unfortunately, tax integration is not perfect in practice. There is a complex method to “gross up” personally received dividends (multiply them by 1.15 or 1.38) to simulate what the business originally earned. That higher level of income is then subjected to the personal income tax brackets, and that is followed by the application of a tax credit (to account for the taxes paid by the business). It makes your head spin, but the net effect is what matters. Spoiler alert: it does not favor flowing money as business income and dividends, except in a small business in Saskatchewan or a large corporation in New Brunswick. I have summarized the effect of tax integration in the top tax bracket by province below to illustrate. For a really detailed look, check out Canadian Tax Tables.

Why the advice to just pay dividends instead of salary?

Tax integration favors salary over dividends. Still, using some dividends to empty your corporate notional accounts and get the tax refunds usually makes sense as described in my previous post. For most, that is a small proportion of dividends compared to a larger salary until later in their career when the corporate investment income is large. However, there are still those who advocate for just paying dividends. No salary. Regardless of notional accounts. There are a couple of lines of reasoning behind that advice. I believe that one is flawed and one is legitimate.

Income Splitting With Salary vs Dividends

Income Splitting Using Dividends

A legitimate reason to use mostly dividends is if you can income-split using dividends. Spreading your income as equally as possible between spouses lowers the overall household tax bill. Since the amount of dividend you can pay a shareholder is not tied to a market rate, you could literally split your income evenly and dramatically reduce the household tax bill. Unfortunately, the TOSI rules of 2018 put an end to that for most service-based businesses, including professional corporations. There are still a few exceptions.

Income Splitting Using Salary

You can pay a salary to a lower-income spouse that works for your corporation. However, it must be at the market rate that you would pay a third party. For a simple business model, that usually limits you to ~$20-30K/yr. Still, there are also other benefits & pitfalls to having someone with a vested interest in handling your billing and bookkeeping. You could possibly pay more if they have special skills or a personnel management role.

Income Splitting Using a Salary & Dividend Mix

Even if you can income split using dividends, a combination of salaries up to market rates plus some dividends to even the remaining income disparity is likely optimal. The taxes are very similar, but where the remaining money is invested at the end of the day differs. A dividend-only strategy would leave more in the corporation to invest. That is often a reason cited for a dividend-only strategy. However, paying some salary in the mix shifts some of that investment into an RRSP instead. An RRSP is tax sheltered while a corporation is not. Plus, it decompresses the corporation. That could be important to attenuate the inefficiencies that can develop from too much passive investment income in a corporation. A salary also results in contributions to CPP.

Paying Into CPP & EI

Paying Into CPP & EI Leaves Less For You To Invest via the Corporation

Another argument to avoid salary revolves around avoiding payment into CPP and EI. I think that this is a flawed argument.

Employment insurance is an “opt-in” for the self-employed. Most would not opt-in because it is very difficult to claim EI when you are the boss. That leaves CPP as a mandatory monthly expense when you pay yourself a salary. Further, your corporation has to pay the employer contribution while you would pay the employee share. While that may seem like a double contribution to those accustomed to just collecting a paycheque, it has always been part of an employee’s compensation package. Still, that translates into less money left in the corporation to invest compared to paying dividends. That money is invested via CPP instead.

Is paying into CPP bad?

While often referred to as part of “payroll taxes”, the CPP is not really a tax. It is a pension. You eventually get an income stream proportional to your contributions. In fact, it is a defined benefit pension, indexed to inflation, with a survivor and death benefit. The kind of pension that usually makes people envious. Why the hate? Well, it is mandatory and people don’t like mandatory things. However, you don’t usually hear teachers or government workers complaining about mandatory contributions to their pensions. It is just forced saving/investing.

The relevant consideration is whether CPP is a good investment. The dividend-only proponents will argue that you can make a much greater return by investing on your own than by giving that money to CPP to invest. That is true. However, it is not a fair comparison. A higher-risk equity portfolio would likely outperform. As expected. By design, the CPP is a low, safe return, and is well-funded for its liability. That is how pensions work. Compared to other similar “safe” products, like annuities or government bonds, it performs well.

If you plan to have a 100% equity portfolio. Even into retirement – sequence risk and longevity risk be damned. Then sure, avoid CPP and the baseline safety net it provides. Otherwise, you could recognize CPP for what it is and account for that in your overall asset allocation and plan. It is a small amount of money. So, I don’t bother fretting about it. However, if it were an important part of my retirement income, I could be a bit more aggressive with my other investments knowing that the CPP stable income stream is there.

Salary Makes RRSP & IPP Contribution Room

Using some salary & RRSP vs only dividends & corporate investing.

You will also note in the previous example comparing salary and dividends that while the corporation had more retained earnings to invest, the salary also generated RRSP room to take advantage of.

A registered retirement savings plan (RRSP) is an excellent tax deferral vehicle and tax shelter. You get 18% of your salary (up to an annual maximum) as RRSP contribution room. That room accrues until you use it. An RRSP contribution is a dollar-for-dollar deduction against personal income. So, when you pay yourself a salary or a bonus (T4 income lump payment), there is no corporate tax and no personal tax. A 100% tax deferral compared to an ~75-88% tax deferral from leaving money in a corporation and using dividends. Plus, the investments in an RRSP grow tax-free while investment income in a corporation is taxed annually.

One criticism of using an RRSP is that you will be forced to start gradually taking the money out after age 71 and then pay tax on that income. In contrast, a corporation allows you to choose how much to take out each year. That is true. However, what is not being said is that corporate investment income pays ~50% tax upfront and it gets a partial refund when the money is paid out (and personal taxes paid).

So, you can choose to pay 50% or take some money out and spend it. With a large corporate investment portfolio, that will likely be a lot of income. It is not really much of a choice. You will need money to live on and there is no point leaving it all in there until you die and have to pay a larger tax bill whether in an RRSP or a corporation.

Using some salary keeps the door open for an Independent Pension Plan (IPP).

The main limiter of an RRSP is the amount that you can contribute. The max contribution for 2023 is $30780, requiring T4 income of $171K. The unlimited size of a corporation is one of the main reasons why it is the next best tax-deferral vehicle. An IPP is another option that allows the corporation to sponsor a pension plan. That means direct contributions and deductions to the corporation. So, no corporate or personal tax and also tax-sheltered growth like an RRSP.

I will delve into IPPs in another few posts, but the main point for this one is that you must have paid a salary to be able to buy back years of service when you form an IPP. You must also be paying a salary to maximize it further. Through a variety of mechanisms, an IPP offers an option to build a larger tax-sheltered retirement account under the right circumstances. There are trade-offs and limited benefits before you are in your 40s, but paying a salary keeps the door open.

Should I pay myself extra salary just to get more RRSP room?

To get the maximum RRSP room in 2023, you need to pay yourself $171K of salary. Many people need much less than that to live on. Since paying salary only accrues RRSP room at a rate of 18%, you would lose a lot of tax deferral by paying extra salary compared to just enough to live on and leaving the rest in the corporation. So, just take enough salary to make up for your consumption needs. If you are planning a personal consumption splurge in the next few years, you might take a bit of extra salary to smooth the income.

Pay Yourself the Optimal Mix of Salary & Dividends

This post has outlined the numerous benefits of using a salary. Salary is relatable, predictable, favored by tax integration, can be used for income splitting, and opens the door to RRSP and independent pension plans as tax shelters. In the previous post, the importance of using dividends to save tax and maximize tax deferral using corporate notional accounts was also explained. So, how do these fit together to give your optimal salary and dividend mix?

Dividends To Empty Notional Accounts. Salary To Make Up The Difference.

Ben Felix and Braden Warwick addressed this in their recent paper on optimal compensation for corporation owners. I have also made a simulator that is modifiable for income splitting, different income/spending levels, and different provinces. Plus, some cool outputs like when you’ll reach financial independence. I will link it when I get all the bugs out.

We both came to the same conclusion regarding corporations with access to the small business deduction (SBD). Pay enough of the appropriate dividend types to empty the most valuable corporate notional accounts first. Then make up the difference with salary. All driven by how much after-tax money you need for consumption.

For a corporation without access to the SBD, then it will generate a lot of GRIP over time and its benefits is less since there are not a bunch of ineligible dividends to dispense. So, in that situation tax integration favoring salary bumps it above emptying GRIP. My current approach to the salary & dividend mix is summarized in the algorithm below. With all of the nuances, this should serve as a point for discussion with your accountant. It is not specific advice. I am just a loonie doctor.

salary vs dividend corporation


  1. If there’s a situation with basically no access to the SBD, how does paying out eligible dividends to release excess GRIP take precedence over salary when already at the top bracket? How can this overcome the ~2-7.5% guaranteed loss on tax integration when the dividends being written to deplete the GRIP are having more GRIP being generated by the retained active business income that is not being spent as salary in the same year?

    1. Hey AlphaDoc,

      Great point. I committed an error of focus. All of my simulations etc were using access to the SBD. In that situation, when you have GRIP then the balance of the interaction between some loss to tax integration using dividend vs the loss of GRIP’s advantage over ineligible dividend income that erodes with inflation plus tax deferral came out ahead. However, in the situtation of a corp with no access to the SBD, then the tax integration favoring salary wins out. You are going to get a big GRIP balance regardless and salary keeps that down and the GRIP in that setting isn’t as beneficial because you don’t have a pile of ineligible dividends to get rid of eventually. I just ran it through my simulator and that supports it. So, I will have to incorporate that difference into my algorithm and simulator. I will also need to do some more work – Quebec has some funny nuances with lack of access to the SBD and GRIP.

      I am really glad that you brought this out. It intuitively makes sense. It is kind of funny. My first algorithms had salary before GRIP because it made intuitive sense, but it was after I did longer term simulations (with SBD access) that I bumped it below salary. I definitely need to do some more work on nuances like dividend splitting and some more modelling, but I am going to update the article right away and massage it over time. I try to make these posts “living documents”.

        1. Of course! I love that I have smart readers that catch things and challenge me to make improvements. I just finished (I think) updating the algorithm in my CCPC income-dispenser to reflect this. I am playing around with some modelling. I also found this article – in the appendix section by province, it compares cashflow for corps with 700K income. The way they analyzed it gives a peak at the after-tax cash flow when no SBD access and show more with salary in most provinces.

          1. So it would seem the left side of the algorithm chart (the with SBD side) needs another wrinkle with respect to salary to catch more edge cases, namely a corp with SBD access and net active income above 500k. CDA and e/n RDTOH are good at the top. Salary would take precedence over the use of GRIP alone if corp active income is above 500k with a stop at 500k (or at the SBD limit if it is diminished) for the same reasons of the integration losses in the right side of the chart pulling salary above GRIP use – namely there’s no point generating and consuming GRIP in the same year when salary can avoid that self defeating loop for cheaper in most provinces. After the stop threshold is hit, GRIP would be used and then if more personal cash were needed and GRIP was exhausted salary would have to be taken again.

            This would actually unify both sides of the chart if there were a note under the Salary Box above GRIP which said ‘Draw Salary to meet spending but stop when net corp income is at the lesser of 500k or SBD threshold if it exists’. This also ‘solves’ the optimal draw for another edge case of large personal spending and a tiny annual SBD from a group practise that has to share the SBD amongst dozens of practitioners. Grand Unified SBD theory?

            That RBC link appendix above supports the idea with the repeated line “the distribution of salary will come from the corporation’s income subject to the general rate” which seems like a good place to draw salary from.

            This was not addressed in the Felix paper as the active income was set exactly at 500k. I think this all makes intuitive sense as it is trying at all costs to maximize the use of the SBD and its associated deferral where possible while also minimizing the upfront guaranteed integration losses and efficiently funding salary from otherwise general corporate rate funds.

          2. Thanks AlphaDoc. This was actually a point that I went back and forth on. If SBD access, but some income over the threshold – do you “bonus yourself down” or not? If you don’t have GRIP already, and need the money, then you functionally do that by paying salary to meet your need. One dilemma would be do you bonus down just to stay out of the general corp rate even if you don’t need money. That doesn’t work out well because the loss of tax deferral. The third situation (what I think you are getting at) is you can use the money and you have some GRIP. Do you use eligible dividends from the GRIP vs salary to slow down the generation of more GRIP. I actually started with salary first to get to the SBD threshold because it made intuitive sense to me too, but then discovered that it kept coming out suboptimal. It was really annoying because I had spent a bunch of time coding that approach into my simulator and had to change it.

            There are couple of issues at play that aren’t readily apparent. Basically, if you have some GRIP in the corp already and need to pay out money to fund after-tax consumption the choice is salary vs eligible dividend in the current year. You’d have to pay out much more salary (and full personal tax on that) than eligible dividends (with the enhanced credit) to get the same amount of personal after-tax money. So, using the GRIP means less tax paid in the current year and more money left in the corp (more tax deferral). That tax deferral, and the capital gains growth on that, tends to win out over time compared to flowing salary through in the present. Jamie Golombek did a paper that showed that, but I didn’t believe it until I modelled it again myself. Ben and Braden found that also in building their optimal compensation model. I don’t think they explicitly discussed that in their paper (they were probably distilling it down because already a massive and complex paper!). We did chat about it though in the background. In addition to the tax deferral advantage, the other issue is that GRIP is priced in nominal dollars. So, in the future unused GRIP would be less valuable due to inflation and more non-eligible dividends would be required to fund the same after-tax consumption needed.

            Hopefully I understood what you were saying and got it right. This nuance honestly made my head spin and I keep revisiting it.

          3. Yes that third situation was what I was getting at but it does seem a mis-step to ignore the current cost of tax integration.

            I also believe the Golombek paper specifically excludes a personal spending need and is a retained / investing abstraction.

            The simplest example I cannot get around just paying a bonus from General Rate Income is an Alberta Corp with 100k General Rate Income, unlimited GRIP, and a need to spend an extra marginal 52k personally. 48% personal salary tax rate, 23% General Corporate Tax rate, and 34.31% personal eligible dividend tax rate:

            100k Gen Corp Income – can be paid as salary to fund the 52k personal spend.

            Alternatively, 52k personal spend can be funded by 79.2 k of eligible dividends (using your unlimited GRIP). However, in order to fund this 79.2k of retained earnings in the Corp, this must be funded by the entire listed 100k of active income plus another 2.8k in retained earnings from the Corp or a full 79.2k of retained corporate earnings from previous years. If the previous earnings are spent for this, the current year’s active income only replenishes 77k of retained earnings (resulting in the same net loss of previous years retained earnings equal to tax integration % losses).

          4. I think part of what makes this so hairy is whether tax deferral is ultimately tax reduction or not. For example, if the future tax rate is the same then the better tax integration of salary should win. Definitely if the future tax rate is higher. Building a massive corp filled with retained earnings increases that risk. However, if the ultimate tax rate at withdrawal later is lower, then there is also a tax reduction. The same dilemma comes up with using more dividends than needed to release RDTOH to the corp (essentially defer more tax). No easy way to put that in an algorithm. I don’t think I have a right answer but need to think about it some more. I guess the good news is that it is likely to be a small difference.

  2. Hi LD,

    Thanks for aother excellent post, this time giving detailed analysis of Dividends vs Salary! Your “People and Government like salary” was a very interesting perspective for me. Hopefully tax integration rules will not let the dividends be “punished” in the future.

    IPP is an interesting and useful idea. Looking forward to reading your future posts on it.

    Will also search your blog to read about TOSI. I mean I am familiar with TOSI but for your unique perspective and insights!

Leave a Reply

Your email address will not be published. Required fields are marked *