When you are an owner-manager of an incorporated business, a major question arises year after year: how should you compensate yourself? Salary? Dividends? A mix of both? Each option has its advantages and limitations, and the right choice always depends on your personal situation and your business objectives.
Salary: Stability and Social Benefits
Receiving a salary is similar to the compensation of a ‘traditional’ employee.
- You contribute to the Québec Pension Plan (QPP), which protects your retirement.
- You accumulate contribution room for an RRSP, a powerful tool for saving for the future.
- You can benefit from certain social protections such as the QPIP (parental leave) or even employment insurance, depending on the case.
- Salary is a deductible expense for the company, which reduces corporate tax.
Disadvantage: Social contributions (QPP, QPIP, etc.) increase the total cost for the business.
Dividends: Flexibility and Favorable Taxation
Dividends are paid from the company’s after-tax profits.
- They often help reduce the overall tax paid, thanks to the integration mechanism (even if the balance is not always perfect).
- No social contributions: everything you receive is net for you (after personal tax).
- It’s more flexible: you decide when to declare a dividend, which allows you to adjust according to your liquidity needs.
Disadvantage: No QPP contributions or RRSP room. You must therefore plan your retirement differently. Furthermore, it does not constitute an expense for your business.
The Hybrid Approach: Often the Best Solution
In most cases, the best choice is a balance between salary and dividends.
- A minimal salary allows you to contribute to the QPP and retain your RRSP room.
- Dividends complement this to take advantage of favorable taxation and avoid paying too many social contributions.
This combination must be calculated based on:
- your personal needs (lifestyle, projects, retirement)
- the company’s finances (profits, cash flow)
- your family situation (income splitting with a spouse, allowances, tax credits)
Conclusion: A Decision to Plan
There is no single answer to the question ‘salary or dividends?’. The best strategy depends on your reality. The important thing is to plan each year, taking into account your needs and your company’s actual figures.
At CMG Solutions, we don’t just produce your financial statements. We help you transform your figures into informed decisions — including the crucial one of your compensation.