Posted under: Business Owners, IPP, RCA, Uncategorized
Many owners of Canadian private corporations default to paying themselves in dividends. It feels simple, avoids payroll deductions, offers the dividend tax credit, and seems tax-efficient. But as GBL frequently hears from business owners years later — “I wish I’d taken more T4 income.”
Behind this regret lies an overlooked reality: while dividends can appear efficient in the short term, they can limit access to powerful, tax-deferred retirement savings tools such as Registered Retirement Savings Plans (RRSPs) and, more importantly, Individual Pension Plans (IPPs), Retirement Compensation Arrangements (RCAs), and other options such as Health Spending Accounts (HSAs) and Health Benefit Plans (HBPs).
Let’s unpack why the dividends vs salary choice matters more than ever for business owners and incorporated professionals looking to optimize both tax efficiency and retirement wealth.
Dividends are sometimes presented as being subject to less taxation than salary. Under Canada’s “tax integration” system, the combined corporate and personal tax on salary and dividends should be roughly the same. In theory, it shouldn’t matter whether an owner takes salary or dividends. Here’s why:
While the overall tax on a dividend strategy may be slightly lower compared to a salary, a focus on marginally minimizing today’s taxes can inadvertently undermine tomorrow’s opportunities.
A 2023 study by PWL Capital, “Optimal Compensation, Saving, and Consumption for Owners of Canadian-Controlled Private Corporations,” modeled different combinations of salary and dividends for individuals with a corporation living in Ontario.
The findings were intriguing:
In other words, using salary to access IPP deductions and tax deferral opportunities isn’t just prudent — it can be financially superior. Readers may review the research paper here for additional analysis and nuance.
Dividends often seem “clean” because they bypass payroll and CPP contributions. However, this simplicity conceals significant long-term costs:
Including salary in the compensation mix does more than create RRSP room — it unlocks the IPP, the most powerful retirement savings vehicle available to incorporated professionals and business owners.
For many business owners, the result is a larger, safer, tax-sheltered retirement fund, while reducing corporate taxable income today.
At GBL, we often meet business owners and incorporated professionals who express a familiar frustration – “I wish I had paid myself more salary earlier — I can’t make up for those lost years of not creating IPP or RRSP contribution room and after a career of dividends, I’m now stuck with a big tax bill with little opportunity to shelter as I plan for retirement.” That regret is understandable. Once a year has passed without any or sufficient T4 income, the opportunity to generate corresponding IPP contribution room is gone forever.
The cumulative effect can be substantial — tens or even hundreds of thousands of dollars in missed deductions and tax-deferred growth
To be clear, dividends are not the enemy — they have their place in efficient personal compensation and corporate tax management. But the best compensation strategy of owners of corporations is not always all-or-nothing – it is a thoughtful balance.
Choosing dividends over salary might feel tax-efficient today, but it often comes at the cost of long-term retirement wealth.
If you are a Financial Advisor, Accountant, Business Owner, or Incorporated Professional, reach out to GBL to learn more about the benefits an IPP can provide and to complete a complimentary illustration.
Tatenda Mawoyo is GBL’s Manager of Client Relations and Development. Formerly an Actuarial Analyst with GBL, he now handles sales for Western Canada (BC-MB); helping business owners, incorporated professionals, and their advisors and accountants determine if an IPP or RCA is right for them.
Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners across Canada, and corporate pension administration and consulting. With offices in Calgary and Toronto, we have served 7,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs and RCAs, and have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at info@gblinc.ca or 403.249.1820 and follow us to learn how we can help Build Your Future. www.gblinc.ca
