Dividends vs Salary in Canada: Avoid This Tax Mistake | FPCBO 135
The Financial Planning Association of Canada | E135
Are dividends always the best way to pay yourself from your corporation? Think again. In this video, we'll explore whether dividends truly offer tax benefits compared to salary. We'll break down the numbers using real examples and explore the implications for your taxes and retirement planning. Learn about the hidden costs and benefits of both options and discover why a mix of salary and dividends might be the best choice for you. Don't let conventional wisdom steer you wrong—watch now to make an informed decision for your financial future.
FPCBO 135 - Dividends vs Salary in Canada: Avoid This Tax Mistake
https://youtu.be/XUbUtj4G9IE
Full Transcript
FPCBO 135 - Dividends vs Salary in Canada: Avoid This Tax Mistake
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[00:00:00] Think dividends are always a smarter way to pay yourself from your corporation. Well think again. You might be surprised to learn that you could be paying more in tax than you think and missing out on key retirement benefits in the process. If you're an incorporated business owner, you typically have two ways to pay yourself a salary like an employee, or dividends as a shareholder.
When you look at the marginal tax rates, dividends seem like the obvious choice. In Ontario, for example, the top marginal tax rate on income hits 53.53% compared to just 47.74% on non-eligible dividends, and 39.34% on eligible dividends. That gap can look tempting, but it doesn't tell the whole story.
Despite what those numbers may suggest, many business owners actually end up worse off when they choose dividends. And in this video I'll walk you through why, using real numbers and examples so you can make a more informed decision for yourself. I. Let's start with what happens if your business pays you a salary of a hundred thousand dollars.
I'll use Ontario rates for now, but I'll [00:01:00] circle back to other provinces later. When you take a salary, your corporation deducts the full a hundred thousand dollars. That means it doesn't pay any tax on that amount. It does, however, have to cover the employer's portion of Canada Pension Plan, which for 2024 was $4,056.
So in total, that a hundred thousand dollars actually cost the corporation $104,056. Now as a recipient of that salary, you'll pay tax on it. And here's what you pay. $14,045 in federal tax, $6,986 in provincial tax, and $4,056 in CPP contributions. But you'll also qualify for the Canid employment amount and save $214 in tax.
That will leave you with $75,127 in your pocket, or about 72% of what your corporation spent. You also earn RSP room, in this case, approximately $18,000, and you continue to build your candidate pension plan pension. Now, let's compare that to taking [00:02:00] dividends. Let's assume again, your corporation wants to spend the same $104,056.
It did last time, but this time it has to pay corporate taxes first. That's because dividends are always paid out of after tax profits. If your company makes less than $500,000 in total taxable income for the year, it's below the small business limit and pays only 12.2% in tax on that amount, leaving you with 91,361 to distribute as a dividend.
When you receive that dividend personally, you'll pay tax on that. You're gonna pay $6,622 in federal tax and $4,808 in provincial tax. You'll end up with 79,931 in your pocket, or about 76.8% of what your corporation spent. That's $5,018 more than with salary. But before you jump to conclusions, here's what most people overlook.
The total tax paid on salary was $20,817. The total tax paid on the dividend scenario, corporate plus personal [00:03:00] was 24,575. That's $3,758 more in total tax than with dividends. Plus, by taking dividends, you didn't contribute to Canada Pension Plan, so your future pension is lower and you didn't generate any RSP room, which limits your future retirement savings and tax planning opportunities.
I. At this point, you might be thinking, but what if my corporation is more than $500,000 in pre-tax profit? Fair question. In that case, corporate tax rates jumped to 26.5%, so let's assume that the entire a hundred four fifty six in pre-tax earnings is taxed at that rate. That would mean you're left with 76,041 to pay out as an eligible dividend.
After personal taxes of $356 federally and $750 provincially, you're left with 75,375 or about 72.4%. That's less than the salary option. And the tax burn is 28,681 in total, which is $7,864 more than the salary path. So yes, you might see more cash in your hands with [00:04:00] dividends at certain levels of income, but you're also paying more tax overall and missing out on retirement building tools like Canada Pension Plan and RSPs.
And this is not just about income levels. Provincial differences matter. Also, the Kenya tax systems based on a principle called integration, mean that your tax bill should be similar regardless if you pay yourself a salary or dividends. But it's not perfect. In 2025, McKenzie Investments published this following table that shows the gap in the top marginal tax rates for income versus dividends.
In some cases, dividends win by as much as 3.3% like in the Northwest Territories, but others lose like in Quebec where it loses by 1.7%, and these numbers. Shifts slightly every year beyond just the tax numbers. There's other factors to think about. Choosing dividends could affect your eligibility towards government programs like Canada Child Benefit and Old Age Security.
In some advanced tax planning strategies like individual pension plans and retirement compensation agreements require employment income to work properly. Dividends do not qualify. [00:05:00] In the end, it's not about choosing just dividends or salary only. Most business owners find the right mix once they understand the trade-offs.
But here's the key message. How you pay yourself isn't just a tax decision, it's a retirement decision. It's a planning decision. It's an investment in your future. If you've been defaulting to what your accountant suggests without stepping back to look at the bigger picture, now is the time to do that.
Take a look at the numbers and rethink your position. Your to yourself and your future to make this choice wisely.