This is the third post in our series for incorporated people about salary vs dividends. The first part can be found here. The second part is here.

In previous blog posts [ here and here ] we’ve discussed the tax implications for an owner paying themselves via a salary vs dividends. But there are other considerations besides tax.

Specifically, there are benefits available to individuals that are only triggered by salary, not by dividends. Two key examples are RRSP room and the Canada Pension Plan (CPP).

Registered Retirement Savings Plan (RRSP)

RRSP contribution room is important because you can shelter some of your income from tax in the current year and allow your contributions to be invested and grow tax-free until withdrawal. Tax-free is as good as it gets, and untaxed growth can have a huge long-term effect on your investments.

RRSP room increases via earned income, i.e., income earned via a salary or unincorporated self-employment. Dividends have no effect on RRSP room. So if your income is received as a salary or work-for-pay, you get some RRSP room. But if your income is via dividends only, you get no RRSP room.

What do the RRSP figures on my Notice of Assessment Mean?

Sheltering An Income Spike With RRSP Contributions

Canada Pension Plan (CPP)

Similarly, the amount of your income that is considered pensionable includes your earned income, not your dividends. When you begin collecting your Canada pension, your monthly amount will depend on how much pensionable income you’ve earned in your lifetime. A person who earns all their income via dividends is not entitled to Canada Pension Plan payments with regard to that income.

Finding the sweet spot

Both RRSPs and CPP have maximums, meaning there’s a point beyond which increased salary doesn’t provide any additional benefit.

A corporation owner could decide to split their income between salary and dividends to find a good tax balance and still get all the best advantages in terms of RRSPs and CPP.

The precise limits on RRSP room and pensionable income are indexed, which is to say they increase slightly from year to year. As of 2022, pensionable earnings maximize at $64,900. RRSP room maxes out when earned income reaches approximately $162,300.

 

So if you’re looking to split your income between salary and dividends, consider paying yourself a minimum of $64,900 [for 2022] to make sure you’re going to get as much CPP as possible when you retire. And salary anywhere over $162,300 [2022] will not increase your RRSP room any further.