Salary is employment income paid to the owner-employee and is deductible to the corporation; dividends are distributions of after-tax corporate profit to shareholders, and the right mix between them is a tax optimization decision unique to each situation.
Salary creates RRSP contribution room, pensionable CPP earnings, and a corporate deduction. Dividends do not create contribution room but are taxed at preferential personal rates and avoid CPP contributions at both the corporate and personal level. Neither is universally better. The optimal mix depends on cash needs, RRSP position, retirement plans, corporate tax rate, and province of residence.
A common default is paying minimal salary and maximum dividends to reduce CPP contributions and defer personal tax. That strategy can backfire for owners who want RRSP room for retirement planning or who later realize they have limited CPP entitlement. The decision deserves annual attention, not a one-time answer applied indefinitely.
See also: Owner Compensation Planning · Eligible vs Non-Eligible Dividends · Tax PlanningThe salary-dividend mix is the single most reviewed decision in owner tax planning, and it rarely stays optimal without annual review. See how Wefinx approaches tax planning.