Episode 248: Stop Taking Dividends (Until You Hear This)

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Are dividends really the smartest way to pay yourself from your corporation—or could they be quietly costing you more over time?

If you’re an incorporated Canadian business owner, chances are you’ve heard that dividends are the more tax-efficient option. But that idea can be misleading when you look at the full picture. This episode breaks down why the real decision isn’t just about this year’s tax bill—it’s about RRSP room, CPP, corporate tax thresholds, investment discipline, and building a better long-term wealth strategy.

You’ll learn:

• Why the “dividends save tax” belief is mostly an illusion once you understand tax integration.

• When salary becomes the stronger move, especially as corporate income rises above key thresholds like $500,000.

• The practical income benchmarks that can help you decide when to use salary, dividends, or a blend of both.

Press play to find out how to pay yourself more strategically—and stop leaving money on the table.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

For Canadian business owners, the real question is not just salary vs dividends Canada, but how to build a complete Canadian business owner tax strategy that supports financial freedom Canada, long-term corporate wealth planning, and a clear path to building long-term wealth Canada. Whether you are deciding on salary or dividends incorporated business, comparing dividends vs salary Ontario, or figuring out how to pay yourself from corporation Canada, the answer depends on tax integration Canada, CPP and dividends Canada, RRSP room salary vs dividends, and how close you are to the $500,000 small business limit Canada. A strong small business owner tax planning Canada approach should also connect personal vs corporate tax planning with tax-efficient investing, corporation investment strategies, corporate structure optimization, and business owner tax savings, while aligning with your bigger Canadian wealth plan for financial independence Canada, early retirement strategy, and even a modest lifestyle wealth goal. From RRSP optimization and optimizing RRSP room to passive income planning, capital gains strategy, estate planning Canada, legacy planning Canada, and retirement planning tools, smart entrepreneurs need financial systems for entrepreneurs that balance real estate investing Canada, real estate vs renting, financial diversification Canada, investment bucket strategy, financial buckets, and financial vision setting. That is the kind of practical roadmap Canadian Wealth Secrets helps uncover for the Canadian entrepreneur finance community through actionable wealth building strategies Canada and smarter Canadian tax strategies.

Transcript:

Kyle Pearce: If you’re paying yourself only dividends from your corporation because you think it saves tax, you’re not alone. Most incorporated business owners in Canada believe that they’ve cracked the code — dividends. No CPP, less personal tax, it feels clean, feels efficient, but here’s the truth. Dividends don’t actually save you tax. Not once you understand integration. And the real cost of dividends only usually has nothing to do with today’s tax.

Kyle Pearce: In the next few minutes, I’m gonna show you exactly why the dividend tax savings is mostly an illusion, when salary clearly wins, when dividends can make sense, and the exact income levels where the strategy should change, and finally, the magic numbers that make the decision a little easier to think about.

Kyle Pearce: Hi, I’m Kyle Pearce, President of Corporate Wealth Management at Canadian Wealth Secrets, where we help Canadian business owners develop healthy wealth planning systems for liquidity and growth now, strong retirement cash flow for later while leaving a legacy that lasts.

Kyle Pearce: This video is for the Canadian business owner who’s incorporated and may feel like they’ve been picking a salary or a dividend because your accountant said it’s easier, or you heard maybe dividends are more tax efficient, or you’ve just been doing the same thing for years and haven’t thought to change it. Let’s go ahead and fix that.

Kyle Pearce: Here’s the myth. Dividends are more tax efficient than salary. They’re actually not. They just make your personal tax return look better. Because when you take a dividend, your corporation already paid part of the tax before the money ever reached you. This is the core design of Canada’s tax system. It’s called integration. And the goal of integration is simple — whether you earn income personally or earn it in a corporation and then pay yourself, the total tax should end up roughly the same.

Kyle Pearce: It’s not perfect, but it’s close. And this is why the dividend tax rates are lower. They’re reduced to compensate for the corporate tax that’s already been paid by your corporation. Let’s do a simple example. Your corporation earns $100,000.

Kyle Pearce: If you take salary, the corporation deducts it, corporate taxable income drops, and you pay personal tax on that salary. Now if you take a dividend, the corporation pays corporate tax first, then pays the dividend to you, and you pay dividend tax personally. And when you add corporate tax and the personal tax paid on a dividend, it’s extremely similar to the tax you would have paid on your salary. So dividends aren’t actually a discount — they’re a balancing mechanism. This is called integration and it’s one of the most misunderstood concepts in the Canadian Income Tax Act.

Kyle Pearce: Now let’s talk about the real reason why people choose dividends and why it’s not actually tax savings. There are some hidden costs which a lot of people might think is tax, but ultimately is really just CPP being deducted.

Kyle Pearce: So if tax paid on a dividend and a salary is roughly equal, then why do entrepreneurs seem to love dividends so much? Well, there’s two reasons. One is convenience. There’s no payroll, no remittances. It’s simple. It’s easy. And then the second one is to avoid having to pay CPP, the Canada Pension Plan. Dividends actually allow you to avoid contributing to CPP. You don’t have to pay on the employer side and you don’t have to pay on the employee side.

Kyle Pearce: This feels like free money, but CPP is not a tax. It’s longevity insurance. It’s inflation protected, government backed, stable lifetime income. And most business owners who avoid CPP never actually replace it by taking those same contribution funds and putting them into some other investments. So you have to be careful if you do opt for a dividend over CPP.

Kyle Pearce: Now the second hidden cost that almost no one talks about is that dividends create no additional RRSP contribution room. RRSP room requires earned income and that can be done through a salary, not a dividend. So if you have no salary, that means no new RRSP room. That means no tax deduction lever in high income years at a personal level, no tax deferred compounding personally outside of your tax free savings account, and less ability to smooth taxes in retirement. And for many owners, the value of the RRSP room over time can exceed the CPP savings they thought they were gaining.

Kyle Pearce: Now here’s where the conversation gets real. The optimal strategy depends on how much your corporation actually earns, because the corporate tax rate changes dramatically as soon as your corporation earns more than $500,000 of net operating income. That’s the small business limit. And once you understand that, salary versus dividend stops being so confusing.

Kyle Pearce: So let’s look at some scenarios. In scenario A, we’re going to look at a small business earning $500,000 or less, therefore paying at the small business tax rate. In this environment, your corporation’s paying around 9 to 12% depending on your province or territory. In this example, we’re going to assume we’re in Ontario and therefore are paying 12.2% in corporate tax on that active business income.

Kyle Pearce: Let’s look at two different owners with the same lifestyle goal. We’re going to be comparing Sammy Salary and Davey Dividend. Both have goals of after-tax spendable cash of just around $100,000 — in this example it’s actually going to be around $102,600. Same business, same year, same slice of corporate profit being used to fund personal lifestyle.

Kyle Pearce: Now for Sammy Salary, we’re going to be talking about taking a salary, which also means they’re going to be contributing to CPP — both by their corporation, which they own, and personally off of their own paycheque. They’re also going to be receiving RRSP room and we’re going to assume that they’re actually maximizing the use of that contribution room. So in order for Sammy Salary to actually achieve about $100,000 of spendable income after taxes and after all of these deductions, they’re going to have to take about $180,000 in salary.

Kyle Pearce: Now this conveniently is bumping up right against the maximum amount of RRSP contribution room they can receive, at about $32,000. They’re going to be paying CPP and they’re going to be ending with $102,000 and change, $32,000 invested in their RRSP, and they’re also going to have their Canada Pension Plan credits accumulating.

Kyle Pearce: Now on the other hand, Davey Dividend is going to be taking dividends. They’re going to be using the same slice of corporate profit in order to achieve the same goal. Now because the corporation is going to be paying a small amount of business corporate tax first, then Davey is going to have to take less in dividends than Sammy Salary had to take in salary.

Kyle Pearce: Using the same slice of corporate profit, Davey is going to be paying small business corporate tax first and then is going to be taking enough ineligible dividends to net the same $100,000 after tax. And what’s left over is going to stay inside the corporation and is going to be reinvested in similar assets to what was invested in the RRSP for Sammy Salary — roughly $40,000 left inside the corporation to invest from that same slice.

Kyle Pearce: So when we summarize at under $500,000 of net operating income, a salary strategy is going to create RRSP room and CPP credits. Whereas a dividend strategy is going to actually leave more corporate investable dollars inside the corporation. And if those corporate investments are structured for capital gains, you can eventually get additional efficiency through the use of the capital dividend account, where half of capital gains can flow out to shareholders tax free when realized down the road.

Kyle Pearce: So in many cases under $500,000 of net operating income, ineligible dividends can actually win if you actually invest the difference and stay disciplined with your plan.

Kyle Pearce: Now, if we look at a second scenario where a corporation is earning more than $500,000 — and in this case, we’re gonna say this corporation is actually earning more than $680,000 of net operating income — once a business earns more than $500,000, the extra profit is actually taxed at the general corporate rate. Here in Ontario, that’s at about 26.5%. And this is actually going to flip the math a little bit on its head for you.

Kyle Pearce: Now using the same slice comparison, and let’s assume this corporation is earning more than $680,000 of net operating income before paying the shareholder. Sammy Salary can take that same $180,000 and it’s actually going to be deducted from the corporation, and therefore the corporation is not going to have to pay any tax on that slice. This is going to put the company back under the $500,000 limit, therefore avoiding having to pay 26.5% in corporate tax on that same slice entirely. Plus, Sammy is still going to get RRSP room and CPP credits.

Kyle Pearce: Now, Davey Dividend doesn’t deduct salary. So that same slice is actually going to be taxed at 26.5% in corporate tax first before paying out the dividend. Then Davey’s going to take eligible dividends, which lowers personal tax on the dividend, but the corporate tax hit has already happened. So therefore the outcome for that same slice for Davey is that he’s gonna be left with only about $25,000 to invest inside the corporation after paying enough eligible dividends to net the same lifestyle cash.

Kyle Pearce: So above $500,000, salary becomes quite a tax shield. The RRSP can then be funded with effectively pre-tax dollars that Davey Dividender is not going to have access to. Those tax dollars that he’s paid inside the corporation at the high corporate tax rate are now gone. And keep in mind there’s still CPP which is being contributed to, and that becomes more of an additive portion instead of feeling like such a negative in the first scenario. Now while eligible dividends help, meaning Davey Dividender is going to pay less tax at a personal level, there’s still less money available to him based on that one single slice of cash.

Kyle Pearce: So let me give you a clean set of rules to think with. Rule number one is to stop asking which pays less tax. Instead ask which choice creates the best system for retirement income, investment flexibility, and long-term after-tax wealth. Can I create a system for all of the benefits?

Kyle Pearce: Rule number two. When earning less than $500,000 of net operating income inside the business, you may want to think about dividends as a strong strategy, especially if you’re going to be disciplined enough to invest the retained earnings properly and disciplined enough to hang on through market volatility. But if you’re not disciplined, CPP can act as a forced stable diversifier.

Kyle Pearce: Rule number three. For those earning over $500,000 of net operating income, you want to start thinking about utilizing a salary strategy because now it’s a strategic move that can help you eliminate how much of that 26.5% in corporate tax you need to pay on that same slice of the pie. It also creates RRSP room, which allows you to get all of that tax back for the dollars that you put into that bucket. And finally, it brings CPP into the plan without even really noticing it. And at that point, dividends only usually becomes too expensive over time.

Kyle Pearce: Now there are some magic numbers, some anchors that will help you know when to do what. The first magic number is $40,000. If you’re taking zero taxable income personally, you’re wasting low brackets that never come back. So if you have no income coming from other sources, you always want to make sure that you’re taking at least $40,000 — specifically if your business is earning less than $500,000 of net operating income. That $40,000 mark is going to put you at about 12% in tax at a personal level, so you might as well take it so that you can net zero on any additional taxes but also free up some capital from your corporation.

Kyle Pearce: Now the second magic number is around $70,000 — it’s actually around $72,000. This is roughly where CPP maxes out. Now this does vary year by year, but if you do want CPP benefits for the diversification play, this is the salary range to be thinking about in order to max out your CPP benefits while also getting 18% of that amount as RRSP contribution room.

Kyle Pearce: Now the third magic number is in the range of about $130,000 to $135,000 being taken as a salary. This is the way to skim off the top when the corporate income spills over $500,000. Here in Ontario, 26.5% is what we’re currently paying on every dollar above $500,000 in the corporation. So we might as well take a salary of at least that average tax rate in order to release those funds. We’ll have essentially paid the same amount of tax anyway but have those dollars in our personal pocket. It’s also going to open up that RRSP room and it gives you an opportunity to actually get some of that tax back if you do choose to use that bucket.

Kyle Pearce: And the fourth and final magic number is just north of $180,000 as a salary. This is the zone where you maximize the RRSP contribution room, because RRSP contribution room caps at 18% of earned income up to the annual maximum, which is about $32,000. And once you understand these anchors, your plan becomes a whole lot easier to build.

Kyle Pearce: Now I want to be honest about something. Under $500,000 the dividend route can win on paper, but we don’t live in a spreadsheet. Behavioral economics tells us that under stress — market crashes, business volatility, life events — people make emotional decisions. And for the dividend approach to work, you have to stay disciplined, avoid accidentally building a corporate portfolio full of interest or dividends that are going to be taxed at the high tax rate, and keep investing through downturns. Whereas CPP, for all of its flaws, does force a baseline of stability and diversification. So the best strategy isn’t just math, it’s math plus behavior.

Kyle Pearce: So here’s the real takeaway. This was never a debate about salary or dividends and which one’s going to save you in taxes. It’s really about understanding when each tool works best. And why picking one approach and never changing it as profits grow is how business owners quietly leave money on the table. Under $500,000, dividends can make sense. Over $500,000, salary becomes very strategic. But again, there is more nuance to it and we do have to think about how we can create behaviors and habits that we can stick to. So for many business owners as income rises, the optimal plan becomes a blend with a system behind it.

Kyle Pearce: If this has helped you rethink how you pay yourself, take one action. Pull out your last corporate year-end financials and answer one question. Are you under or over $500,000 of net operating income? Because that one number changes almost everything in how you want to be paying yourself moving forward.

Kyle Pearce: And if you want help pressure testing your situation with a clean model, we can do that with no hype, just clarity. Be sure to reach out to us over at CanadianWealthSecrets.com forward slash discovery on a free discovery call where we can work with you to build your cash flow and financial freedom blueprint. If you’re interested in doing our four stages health wealth assessment, you can also head on over to CanadianWealthSecrets.com forward slash pathways and you can do that free assessment now. And incorporated business owners, we have a free masterclass for you to check out over at CanadianWealthSecrets.com forward slash masterclass. Alright my friends, we’ll see you in the next video.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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