For incorporated business owners in Quebec, there are several ways to pay yourself: salary, dividends, or both. Although this choice might seem straightforward, as an entrepreneur, it can significantly affect your personal finances, your business’s tax obligations, and your retirement plans.
In this article, I outline the pros and cons of each option, including strategies that can help reduce your tax burden and build long-term wealth.
Keep in mind that the optimal compensation strategy depends on many variables, including your company’s profitability, your personal financial goals, retirement planning, and where your business stands in its lifecycle. That’s why it’s essential to consult with qualified tax professionals and your wealth management team before making a decision.
Salary or Dividends: Understanding the Basics
Before diving into strategy, let’s review how salaries and dividends work.
Salary
A salary is regular compensation (including bonuses) paid to an employee, yourself, in this case, for services rendered.
Salary is subject to personal income tax. Through payroll deductions, you also contribute to the Quebec Pension Plan (QPP), Employment Insurance (EI), and the Quebec Parental Insurance Plan (QPIP). It also creates RRSP contribution room and gives access to various tax credits and deductions, such as for childcare expenses.
Paying yourself a salary can also enhance your financial credibility with lenders by demonstrating a stable income.
Source Deductions Paid on Salary
| For the individual | For the business |
|---|---|
|
|
Dividends
Dividends are distributions of a corporation’s after-tax profits to shareholders. While they are subject to personal income tax, they benefit from a dividend tax credit, which lowers the effective tax rate. Dividends usually don’t have payroll deductions. In some cases, your corporation may need to pay a small Health Services Fund (FSS) contribution on them.
Dividends are a way to distribute a corporation’s after-tax profits to one or more shareholders. They are also subject to personal income tax but benefit from the dividend tax credit, which reduces the effective tax rate. For social charges, only a contribution to the Health Services Fund (FSS) is withheld at source for the individual.
Source Deductions Paid on Dividends
| For the individual | For the business |
|---|---|
|
|
Tax Planning Considerations
To help you make the right choice when it comes to paying yourself, it’s important to understand how you and your company are taxed and what the tax implications are for each.
How Does Paying Yourself a Salary Affect Taxes?
Salaries are taxed at progressive personal income tax rates. For example, in 2025, income over $126,000 is taxed at 25.75% in Quebec, while the Canadian Revenue Agency (CRA) applies rates of 20.5% to 26% on income over $57,375. That said, earned income creates RRSP contribution room, enabling tax-deferred retirement savings and eligibility for certain tax credits and deductions.
From a corporate standpoint, salaries are considered business deductible expenses, which reduce taxable income. Moreover, if your company meets certain payroll thresholds—like the 5,500-hour requirement—it may qualify for Quebec’s Small Business Deduction (SBD), reducing the overall tax rate.
How Do Dividends Affect Taxes?
Dividends are not tax-deductible for the corporation, meaning they are paid from after-tax profits. As a result, the corporation pays tax on income before distributing dividends, which does not reduce corporate taxes.
At the personal level, dividends are taxed but benefit from the dividend tax credit. There are four types: eligible dividends, non-eligible dividends, capital dividends (tax-free), and dividends in kind. Most compensation planning focuses on the first two:
- Eligible dividends come from income taxed at higher corporate rates and result in lower personal tax rates.
- Non-eligible dividends come from income benefiting from the SBD and are taxed at a higher rate personally.
In short:
- Eligible dividends = high corp. tax, low personal tax
- Non-eligible dividends = low corp. tax, higher personal tax
Dividends often lead to higher after-tax income if RRSP contributions or QPP participation are not priorities.
Operational Considerations
Beyond tax efficiency, it’s important to understand the operational implications of salary and dividend compensation.
Salaries require a payroll system, registration with Revenu Québec and the CRA, regular remittances, year-end T4 slips, and both employer and employee source deductions. This adds administrative complexity and cost, particularly if your business doesn’t have accounting support.
Dividends, on the other hand, are simpler to issue from an administrative point of view, as they do not require significant source deductions, remittances or regular pay periods, although they must still be declared using appropriate corporate resolutions and recorded in the shareholder’s tax documents using T5 slips.
In addition, dividends offer flexibility in terms of timing and amounts, allowing you to align distributions with your personal financial needs and the profitability of your business. This flexibility can facilitate tax planning and cash flow management.
Overall, Salaries provide stability and access to employment benefits, while dividends offer administrative ease and cash flow flexibility.
Retirement Considerations
The way you pay yourself can have a major impact on your retirement preparation and long-term wealth accumulation.
RRSP Contribution Room
Only earned income, like salary, generates RRSP contribution room. Dividends do not contribute. Maximizing RRSPs offers long-term tax deferral and supports retirement planning.
QPP or CPP Entitlements
Salaries contribute to the Quebec Pension Plan (QPP) or Canada Pension Plan (CPP), which builds future retirement income. Dividends do not, potentially limiting public pension benefits.
Individual Pension Plans (IPPs)
IPPs are defined-benefit pension plans designed for business owners over 40 with stable, high income. They allow greater tax-sheltered retirement savings than RRSPs.
Read more on retirement for business owners.
How to Choose Between Salary, Dividends, or Both?
Choosing between salary and dividends is a decision that requires an analysis of your personal and professional situation and the help of tax planning experts. During this analysis, the following elements should be considered:
- Your personal financial goals: Your need for immediate liquidity, long-term savings, and tax optimization should guide the mix of your compensation. Salaries allow you to contribute to an RRSP and obtain a stable income, while dividends can provide better after-tax cash flow.
- Your company’s profitability: If your company generates stable profits, a base salary may be an attractive option. On the other hand, if profits are inconsistent, flexible dividends may be the best option.
- Eligibility for tax credits and deductions: Certain tax benefits, such as child care expense deductions or RRSP contribution room, require earned income. A salary may make these benefits accessible, but dividends do not.
- Your administrative capabilities: Salaries require a payroll system, deductions at source and periodic declarations, all of which add to your workload. Dividends are easier to distribute, but still require formal documentation and accounting.
- Access to the small business deduction: To benefit from Quebec’s small business tax rate, your company must pay out at least 5,500 hours in wages per year. Paying yourself a salary can help you reach this threshold.
- Social benefits and programs: Programs like QPIP require employment income to qualify.
Comparison Table: Salary vs Dividends
| Factor | Salary | Dividends |
|---|---|---|
| Personal taxation | Higher progressive rates, but access to employment-related credits and deductions | Lower effective rate via dividend tax credit; tax is paid when filing |
| Deductible for the business | Yes – reduces the corporation’s taxable income | No – paid from after-tax profits |
| QPP contributions | Yes – builds retirement entitlements | No |
| Generates RRSP room | Yes – increases retirement savings capacity | No |
| Qualifies for SBD (5,500 hrs) | Yes – helps meet threshold | No |
| Source deductions | Payroll deductions required | None at source; personal tax is paid at year-end; FSS may apply |
| Administrative complexity | High: payroll setup, remittances, T4s | Low – only T5 and corporate resolution |
| Flexible payment terms | Fixed (often monthly or bi-weekly) | High flexibility |
| Access to social programs (e.g., QPIP) | Yes – employment income required | No |
| Short-term tax efficiency | Less efficient unless RRSP/QPP used | Potential for higher net liquidity |
Adopting a Hybrid Approach
Many financial advisors recommend combining salary and dividends to balance the benefits of both. For instance, you might pay yourself enough salary to:
- Maximize RRSP contributions
- Qualify for QPP and social programs
- Reach the SBD threshold
…and take the rest as dividends for tax efficiency and flexibility.
That said, every situation is unique. Given the complexity of tax laws and individual circumstances, I invite you to work with a wealth management advisor and tax experts who will propose customized strategies that take into account not only your financial objectives but also your overall wealth, while respecting Quebec and Canadian tax regulations.
About the Author
Darren St-Georges is a Senior Wealth Advisor at Assante with over 15 years of experience in wealth management in Montreal. Assisted by a team of strategic wealth advisors, he has helped numerous clients, such as dentists, healthcare professionals and business owners, simplify complex financial issues and achieve their financial goals through proven wealth management strategies. Leveraging integrated wealth planning, Darren’s mission is to use his experience and skills to bring financial peace of mind to his clients. Contact Darren for expert wealth management advice.
Follow Darren on LinkedIn.
