The ability to set your own salary is a benefit that draws many Canadians to starting their own business. But it is also a benefit that can lead to confusion and frustration as you try to decide exactly how you can extract funds.
When it comes to paying yourself, there are two options:
Salary – paid out of the corporation’s net income, this is a deductible employment return
Dividend – paid out of the corporation’s after-tax retained earnings, this is an investment return
You can also take a combination of both.
What you choose to take depends entirely on what is important to you. Both salary and dividends have pros and cons, and the tax savings differ depending on what you are looking to get.