The Owner-Manager Compensation Decision: Salary, Dividends, and the Third Option

Every year, owner-managers of Canadian private corporations face the same question: how should they extract income from their company? The conventional framing presents two options — salary or dividends — and invites a comparison based on the current year's marginal tax rates.

This framing is incomplete. It treats the compensation decision as an annual event rather than what it actually is: a structural position that compounds across years and interacts with every other element of the owner's financial architecture.

The salary path creates RRSP contribution room, triggers CPP contributions (both the employee and employer portions), and produces a deductible expense for the corporation. The dividend path avoids payroll obligations, accesses the dividend tax credit, and leaves corporate retained earnings available for investment or future distribution.

But the third option — the one most often overlooked — is the deliberate combination of both, designed as an integrated system. A base salary sufficient to maximise RRSP room, combined with dividends calibrated to the owner's marginal rate, combined with retained corporate earnings invested through the corporation. Each element serving a distinct purpose within a unified structure.

The optimal mix depends on variables that extend well beyond the current tax year: the owner's age, retirement timeline, existing RRSP room, the corporation's small business deduction limit, passive income thresholds, and the intended succession or transition strategy for the business itself.

This is why the compensation decision cannot be made in isolation. It is a load-bearing element of the owner's entire financial architecture — and it deserves to be engineered with that understanding.