Wealth Update – Dividends vs. Salary

In a recent joint sales call with a young dentist, we learned this client is paying themselves dividends from their corporation to finance his standard of living. It’s been our experience that most accountants will recommend business owners take dividends rather than a salary. The usual arguments that support this strategy are lower taxes owing and not having to pay CPP premiums.

However, is missing out on CPP a good idea?

Let’s consider the scenario where this dentist pays themselves the optimal amount to maximize CPP contributions.

As a refresher, in 2025, the CPP earnings ceiling is $71,300 (Yearly Maximum Pensionable Earnings, YMPE). The contribution rate on these pensionable earnings is 11.9%. As this dentist is self employed, they would pay the full 11.9% or $8,068.20 in CPP premiums. For employees the contributions are split between the employer and employee.

In addition, if this dentist was taking T4 income more than the YMPE ($71,300), they would contribute another 4% on earnings between $71,300 and $81,200, or $792.

Now, let’s contemplate the situation where this dentist only took dividends and never contributed to CPP. To keep the math simple, let’s just look at the amount of CPP income a 65-year-old would receive over 20 years. Currently, the maximum CPP monthly benefit is $1,433, so 20 years x 12 months x $1,433 = $342,920. That’s not an insignificant amount. Moreover, for a couple, it’s $687,840! And, most importantly, this income is guaranteed and indexed to inflation.

If a business owner does decide to go the dividend route, they should consider how they are going to replace the CPP income.

As usual a compromise might be the best solution. The business owner could pay themselves a salary equal to the Yearly Maximum Pensionable Earnings ($71,300 in 2025). This way they contribute the basic maximum to CPP and create some RRSP room. To be precise, 18% of $71,300 is $12,834 in 2025 RRSP room creation (which down the road could be used in the creation of an IPP).

They could also save in the business corporation so that the CPP benefit can be replaced by dividends in the future. Corporate whole life insurance may also fit the bill.

We hope you can share these thoughts with your business owner clients.

P.S. Remember all the great resources in the QFS Investment Toolbox. These can be found at qfscanada.com under the Advisor Portal, within the Advisor Toolbox.