Salary vs Dividends in Alberta: How to Pay Yourself

The short version

Salary is a business expense, runs through payroll, and builds CPP and RRSP room.
Dividends come out of after-tax profit, skip payroll and CPP, and build neither.
Many owners use a mix. The right blend depends on your income needs and plans, so model it with your accountant.
Whatever you choose, record it properly: payroll remittances and T4s for salary, resolutions and T5s for dividends.

Once you incorporate, you can't simply transfer money from the business account to your personal one and call it pay. The corporation has to pay you in a way the tax system recognizes. For most small business owners that means choosing between salary vs dividends in Alberta, or some combination of the two.

We're bookkeepers, not tax advisors, so this isn't a recommendation for your situation. What we can do is explain how each option works, what it means in your books, and what questions to bring to your accountant. It applies whether you run a consulting corporation in Downtown Edmonton or a trades company in Spruce Grove.

1How paying yourself a salary works

A salary treats you like an employee of your own company. The corporation deducts your pay as an expense, which lowers its taxable income, and you pay personal tax on it.

Payroll account: the corporation needs a payroll program account with CRA.
Source deductions: income tax and CPP come off each pay. As the owner-employee, you effectively fund both the employee and employer halves of CPP.
EI: usually not payable if you own more than 40% of the voting shares, but confirm your situation.
Remittances: deductions are sent to CRA on a schedule, usually by the 15th of the following month for small employers.
T4 slip: issued by the last day of February for the previous calendar year.

The upside: salary is "earned income," so it creates RRSP contribution room and builds your CPP retirement pension. A steady T4 can also make mortgage applications smoother, since lenders understand it easily.

2How dividends work

A dividend is a share of the corporation's after-tax profit, paid to you as a shareholder. The corporation pays its own tax first, at the small business rate on qualifying active business income, then distributes what's left.

No payroll: no source deductions or monthly remittances.
No CPP: which saves cash today, but you build no CPP benefits on that income.
No RRSP room: dividends aren't earned income.
Dividend tax credit: you pay personal tax on the dividend, reduced by a credit that accounts for tax the company already paid.
T5 slip: issued by the last day of February for dividends paid in the prior year.

Because nothing is withheld, dividends can leave you with a large personal tax bill in April. If your balance owing creeps above $3,000, you'll likely be asked to pay quarterly tax instalments too.

Paying family membersDividends paid to a spouse or adult children who aren't actively involved in the business can be caught by the tax on split income rules and taxed at the top rate. Get advice before you add family shareholders.

3Salary vs dividends in Alberta, side by side

	Salary	Dividends
Deductible to the corporation	Yes	No
Payroll account and remittances	Required	Not needed
CPP contributions	Yes, both halves	None
Creates RRSP room	Yes	No
Tax withheld at source	Yes	No
Slip	T4	T5
Paperwork	Ongoing, every pay	Resolution when declared

Neither column wins outright. Some owners take enough salary to hit a target RRSP room or CPP level, then top up with dividends. Others take dividends only and invest separately. Some leave profit in the corporation in good years to smooth out lean ones. The best mix depends on your income needs, retirement plans, other income, and whether you have a spouse in the business.

Pick a plan in January, not in a panic the week before year-end.

4What your books need either way

This is where bookkeeping matters. The tax result of salary or dividends only holds up if the records support it.

If you take salary

A payroll journal for every pay: gross, income tax, CPP, net
Remittance records that match what CRA shows
A year-end reconciliation so the T4 matches the general ledger

If you take dividends

A directors' resolution for each dividend, kept in the minute book
The dividend recorded against retained earnings, not as an expense
Enough retained earnings to support it; a corporation shouldn't pay dividends it can't support
A T5 that matches the total declared

5The draw that's neither

The most common mess we see isn't a bad choice between salary and dividends. It's no choice at all: the owner simply transfers money out whenever they need it. Those transfers land in a shareholder loan account. If the loan isn't repaid within one year after the end of the corporation's tax year in which it arose, the amount can be added to your personal income anyway, with no corporate deduction to offset it.

The fix is simple. Set a regular pay pattern, record it properly, and have your accountant clear any shareholder balance at year-end by declaring a salary bonus or dividend.

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6Questions to bring to your accountant

A good salary and dividend conversation takes about half an hour if you arrive prepared. Bring current year-to-date numbers from your books and these questions:

How much do I actually need to live on this year? Start from your personal budget, not the company's profit.
Do I want RRSP room? If you plan to contribute, you need earned income from salary to create it.
How do I feel about CPP? Some owners value the guaranteed pension; others would rather invest the money themselves.
Am I applying for a mortgage soon? Lenders often prefer a history of steady T4 income.
Should profit stay in the company? Leaving it invested inside the corporation can defer personal tax, but it has trade-offs of its own.
Is anyone else a shareholder? Family shareholders bring the split income rules into play.

If you haven't incorporated yet and are still deciding whether it's worth it, start with our guide to whether to incorporate in Alberta. Owners in Sherwood Park and St. Albert ask us this often, and the answer really does depend on the numbers.

Plum records owner salary, dividend entries and shareholder loan balances for small corporations in Edmonton, St. Albert, Spruce Grove and Leduc, and our partner CPA can model the salary and dividend mix at year-end. If your owner pay has been more improvised than planned, book a call and we'll help you tidy it up.

7Questions people ask

Is it better to pay yourself salary or dividends in Alberta?

There's no single answer. Salary builds CPP and RRSP room and gives you T4 income for mortgages, while dividends skip payroll and CPP. Many owners use a mix, and your accountant can model the numbers for your situation.

Do I pay CPP if I take dividends?

No. CPP contributions apply to salary, not dividends. That saves cash now but means you're not building CPP retirement benefits on that income.

Do I need a payroll account to pay myself a salary?

Yes. Your corporation needs a payroll program account with CRA, has to withhold income tax and CPP, remit it on time, and issue you a T4 by the last day of February.

Do I need to pay EI on my own salary?

Generally not, if you own more than 40% of the corporation's voting shares. You should still confirm your situation with CRA or your accountant.

What paperwork do I need to pay a dividend?

Your corporation should have a directors' resolution declaring the dividend, record it in the books against retained earnings, and issue a T5 slip by the last day of February the following year.

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.

Salary vs dividends in Alberta: how to pay yourself from your corporation.