Salary vs. Dividends for Incorporated Contractors
If you own an incorporated trades business, how you pay yourself matters. Murtagh & Co. explains the salary vs. dividends decision, the T4 vs. T5 filing difference, and the hidden costs of getting it wrong.
Salary or Dividends? The Decision Every Incorporated Contractor Needs to Make.
If you run an incorporated trades business, you are not just an employee of your company, you are also its shareholder. That means you have a choice most employees never get: how you pay yourself.
Salary and dividends are the two primary ways to get money from your corporation into your personal account. They are taxed differently, they carry different obligations, and the right mix depends on your personal situation. Most incorporated trades owners default to one or the other without understanding the full picture.
Here is what you need to know.
What Is a Salary?
A salary is employment income paid by the corporation to you as an employee. It is subject to CPP contributions and income tax withholding. The corporation deducts the salary as a business expense which reduces corporate taxable income. You receive a T4 slip at year end and report the income on your personal T1 return.
Salary generates earned income, which matters for two reasons. First, it creates RRSP contribution room equal to 18% of earned income from the prior year. Second, lenders (banks, mortgage brokers, equipment financiers) use earned income to qualify you for financing. A T4 is a straightforward income document that lenders understand and accept.
The trade-off is CPP. Both you and the corporation contribute to CPP on your salary. As an owner-operator, you pay both the employee and employer portion - effectively doubling the CPP cost compared to a regular employee. In 2024, the combined CPP contribution on a salary near the maximum is significant.
What Is a Dividend?
A dividend is a distribution of after-tax corporate profits to shareholders. The corporation has already paid corporate tax on those profits, so dividends receive preferential personal tax treatment through the dividend tax credit - designed to avoid double taxation.
For many incorporated contractors, dividends can result in a lower overall personal tax rate than salary - particularly at moderate income levels. There is no CPP on dividends, which eliminates that additional cost. And the paperwork is relatively simple once the process is set up.
Declaring a dividend requires a formal resolution by the corporation and a T5 Statement of Investment Income slip filed with CRA by the end of February following the tax year. This is a step many incorporated trades owners skip - either because they don't know it's required or because they don't have an accountant managing it. Filing a T5 is not optional. It is a CRA requirement.
The trade-off with dividends is what you give up. No CPP contributions means no CPP retirement benefit accruing. No earned income means no RRSP room generated. And dividend income is treated differently by lenders - some will accept it, others want to see T4 employment income, and the qualifying amount may be calculated differently depending on the institution.
The Hidden Cost of All Dividends and Zero Salary
Taking all dividends and zero salary is one of the most common compensation mistakes incorporated trades contractors make. It looks attractive on paper, no CPP and potentially lower tax rate, but the long-term costs are real.
No CPP contributions means no CPP retirement income. For a trades contractor who spends decades building a business and then sells or winds down, the absence of CPP accrual can create a meaningful gap in retirement income.
No earned income means no RRSP room. The RRSP is one of the most powerful tax deferral tools available to Canadian business owners. Going all-dividends eliminates it entirely.
And when it comes time to buy a home, upgrade equipment through a business loan, or access financing of any kind - lenders want to see earned income. A history of dividend-only compensation can complicate or limit your borrowing options.
The Right Answer Is Usually a Blend
For most incorporated trades contractors, the optimal compensation strategy is a blend of salary and dividends. A modest salary covers CPP contributions and generates RRSP room. Dividends top up personal income in a tax-efficient way. The exact split depends on your corporate profits, personal income needs, marginal tax rates, and long-term financial goals.
This is not a one-size-fits-all calculation. The right blend changes as your business grows, as tax rates change, and as your personal situation evolves. It is the kind of decision worth reviewing annually rather than setting and forgetting.
How Murtagh & Co. Can Help
At Murtagh & Co. Financial Services we work with incorporated trades contractors across the Okanagan on owner compensation planning as part of the annual corporate tax process. We review your salary and dividend mix each year, model the tax impact of different scenarios, file your T5 slips on time, and make sure your compensation strategy actually works in your favour - both at tax time and for your long-term financial picture.
If you are incorporated and have never had a conversation about how you are paying yourself, that is one of the most valuable conversations we can have. Reach out for a free initial consultation at info@murtaghco.ca. No pressure, no jargon - just a straightforward conversation about where your business stands.
Murtagh & Co. Financial Services serves trades and construction businesses in Kelowna, West Kelowna, Lake Country, Vernon, Penticton, and across BC remotely.