Running your business through a corporation gives you a superpower most employees don’t have: you can choose how to pay yourself. In 2025, that choice—salary, dividends, or a smart mix—affects your taxes today, your retirement income tomorrow, your mortgage approval next month, and even whether CRA takes a closer look. This guide breaks it down in plain English, with Bhundhoo Tax’s CPA-level lens for Canadian owner-managers.
First, a two-minute refresher: salary vs. dividends
Salary is employment income. Your corporation deducts it as an expense; you include it on your T1. Paying salary triggers CPP (and sometimes EI), creates RRSP contribution room, and requires payroll compliance (deductions, remittances, T4s).
Dividends are paid from after-tax corporate profits. No CPP or EI is withheld. Dividends are taxed to you with a gross-up and a dividend tax credit; the type depends on whether your corp has “eligible” or “non-eligible” dividend capacity. (CRA defines eligible dividends and how corporations designate them.)
What’s new or critical for 2025 (the facts you need)
CPP 2025: YMPE is $71,300; the base rate is 5.95% for employers and employees (max $4,034.10 each). The CPP enhancement adds a second earnings ceiling (YAMPE) of $81,200.
EI 2025: Maximum insurable earnings (MIE) are $65,700; the employee rate is 1.64% (employer 1.4×). Many owner-managers are non-insurable for EI, but confirm your situation.
RRSP room: Only earned income (like salary) creates room. The 2025 RRSP dollar limit is $32,490. Pure dividends create no RRSP room.
Dividend mechanics: In 2025, non-eligible dividends are grossed-up by 15% with a federal credit of 9.03%; eligible dividends are grossed-up by 38% with a federal credit of 15.02%. Provinces add their own credits.
Context: Small Business Deduction (SBD): Federally, CCPCs eligible for the SBD are taxed at 9% on active business income (up to the business limit; provincial rates add on—Ontario’s lower rate is 3.2%). This context matters because it influences whether more of your profits sit in the corp (fueling dividends) or flow out as salary.
When salary makes more sense
You want RRSP room: Salary builds RRSP capacity; dividends don’t. If you’re targeting tax-deferred retirement saving—or matching employer plans via an IPP—salary helps. (CRA sets the 2025 RRSP limit at $32,490.)
You value predictable cash flow: Salaries smooth your personal cash needs and can align with monthly corporate profitability.
Mortgage or financing on the horizon: Many lenders prefer T4 income history.
You want CPP benefits later: Salary contributions increase future CPP pension entitlements (subject to YMPE/YAMPE).
You have little eligible dividend capacity: If your corp’s income is mostly taxed at small-biz rates, it generally generates non-eligible dividend capacity (less preferred personally than eligible dividends).
You want RRSP room: Salary builds RRSP capacity; dividends don’t. If you’re targeting tax-deferred retirement saving—or matching employer plans via an IPP—salary helps. (CRA sets the 2025 RRSP limit at $32,490.)
You value predictable cash flow: Salaries smooth your personal cash needs and can align with monthly corporate profitability.
Mortgage or financing on the horizon: Many lenders prefer T4 income history.
You want CPP benefits later: Salary contributions increase future CPP pension entitlements (subject to YMPE/YAMPE).
You have little eligible dividend capacity: If your corp’s income is mostly taxed at small-biz rates, it generally generates non-eligible dividend capacity (less preferred personally than eligible dividends).
Salary: what it costs and what you get (2025 snapshot)
When dividends make more sense
You want to avoid CPP cash outlay now: Dividends don’t attract CPP or EI. That can help short-term cash flow—use with care so you’re not under-saving for retirement.
You have GRIP/eligible dividend capacity: If part of your income is taxed at general corporate rates (or via GRIP), eligible dividends can be more tax-efficient than salary at certain income levels.
You prefer flexibility: Dividends are easy to time (e.g., year-end bonus via dividends), but you must manage personal tax installments.
You want to avoid CPP cash outlay now: Dividends don’t attract CPP or EI. That can help short-term cash flow—use with care so you’re not under-saving for retirement.
You have GRIP/eligible dividend capacity: If part of your income is taxed at general corporate rates (or via GRIP), eligible dividends can be more tax-efficient than salary at certain income levels.
You prefer flexibility: Dividends are easy to time (e.g., year-end bonus via dividends), but you must manage personal tax installments.
Dividends: types you’ll hear about
Eligible dividends: Paid from income taxed at higher corporate rates; receive a larger gross-up and credit personally.
Non-eligible dividends: Typically from SBD-rate income; smaller credit, often higher personal tax burden than eligible dividends at the same pre-tax amount. (2025 gross-up/credit: 15%/9.03% federal.)
The Hybrid Play (Bhundhoo Tax’s practical framework)
Map goals: retirement savings (RRSP/TFSA/IPP), cash needs, lending plans, and risk tolerance.
Set a base salary: Cover RRSP objectives or CPP accrual you want (often between personal basic needs and YMPE).
Layer dividends: Clear out retained earnings, match GRIP capacity, or optimize brackets once the base salary is set.
Watch the SBD: Keep an eye on passive income and associated corporations to preserve the 9% federal SBD rate.
Quarterly tune-ups: Adjust as profits shift, large purchases occur, or your personal life changes (maternity/paternity, home purchase, etc.).
Special rules & traps (read this before you pay family)
TOSI (Tax on Split Income): Dividends paid to related adults can be taxed at top rates unless an exclusion (e.g., excluded shares, reasonable remuneration) applies. Salary paid for actual work is usually outside TOSI, but must be reasonable. Review CRA’s guidance and examples before paying family.
Payroll compliance: If you pay salary, you need a CRA payroll account, on-time remittances, and T4/T4SUM filing. (TurboTax has a clear overview of the admin steps.)
Documentation: Dividend resolutions, director minutes, and T5 slips; employment agreements and timesheets for salaries.
Ontario angle (since many clients are here)
Ontario’s lower corporate rate for small businesses remains at 3.2%, complementing the federal 9% SBD rate—useful context when deciding how much profit to leave inside the company versus pay out.
FAQs we hear weekly
Q: Which is “cheaper”—salary or dividends?
A: There’s no one-size-fits-all. Integration tries to equalize outcomes, but RRSP room, CPP, eligible vs non-eligible dividend mix, and your province can tilt the answer. Start with the hybrid approach and test scenarios.
Q: Do dividends help me get a mortgage?
A: Lenders vary, but many prefer steady T4 income. If a mortgage is imminent, lean toward salary for 2–3 years of history.
Q: If I only take dividends, can I still build retirement savings?
A: Yes—TFSA, corporate investing, or an individual pension plan (IPP). But remember: no salary means no RRSP room. (RRSP limit for 2025 is $32,490.)
Q: Should I pay myself eligible dividends?
A: Only if you have GRIP/eligible capacity. Otherwise you’re likely paying non-eligible dividends, which carry a smaller credit.
A: Many owner-managers are non-insurable for EI, but confirm facts before assuming. For insurable employees, 2025 MIE is $65,700 at 1.64%.
A quick decision checklist
The Bhundhoo Tax approach (how we design your pay policy)
We build a one-page annual Owner Compensation Policy that sets your base salary, target dividend range, RRSP/TFSA/IPP plan, and remittance calendar—then we revisit quarterly. Simple, documented, and lender-friendly.
Final word: pick a plan, then stick to it (and tweak it)
There is a right answer for you—based on age, province, profit level, retirement target, and next 12-month goals. A thoughtful hybrid (salary + dividends) usually wins because it balances tax efficiency with future flexibility.
Thinking through this for 2025? Book a 20-minute compensation planning call with Bhundhoo Tax. We’ll run the numbers, outline your base salary and dividend range, and set up your payroll/dividend calendar—so you can focus on the business.