As a business owner, determining how to pay yourself—through salary, dividends, or a combination of both—is a pivotal decision that impacts your tax obligations, retirement planning, and overall financial strategy. With recent tax changes in 2025, understanding the implications of each option is more crucial than ever.

Understanding the Basics

Salary: This is employment income paid to you by your corporation. It's a deductible expense for the company and is subject to personal income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums.

Dividends: These are distributions of after-tax corporate profits to shareholders. Dividends are not deductible for the corporation and are taxed at the shareholder level, benefiting from the dividend tax credit to mitigate double taxation.

Tax Implications in Nova Scotia (2025)

Recent updates to Nova Scotia's tax landscape have altered the dynamics between salary and dividend compensation:

• Corporate Tax Rates: Effective April 1, 2025, the provincial small business tax rate decreased from 2.5% to 1.5%, resulting in a combined federal and provincial rate of 10.5% for qualifying Canadian-controlled private corporations (CCPCs) on the first $700,000 of active business income .Wikipedia+5CI Financial+5KPMG+5
• Personal Tax Rates: The top combined federal and provincial marginal tax rates for 2025 are as follows:
  • Salary/Interest Income: 54.00%
  • Eligible Dividends: 41.58%
  • Non-Eligible Dividends: 48.28%

These rates highlight the potential tax efficiency of eligible dividends over salary at higher income levels.

Pros and Cons

Salary

Advantages:

• RRSP Contribution Room: Salaries generate Registered Retirement Savings Plan (RRSP) contribution room, facilitating tax-deferred retirement savings.
• CPP Benefits: Contributing to CPP through salary can provide a predictable retirement income stream.
• Deductibility: Salaries are deductible expenses for the corporation, reducing its taxable income.

Disadvantages:

• Higher Immediate Taxation: Salaries are subject to higher personal tax rates compared to eligible dividends.
• Payroll Obligations: The corporation must manage payroll remittances, including CPP and EI contributions.

Dividends

Advantages:

• Tax Efficiency: Eligible dividends benefit from a lower personal tax rate due to the dividend tax credit.
• Simplicity: Dividends do not require payroll remittances, simplifying administrative processes.
• No CPP Contributions: Receiving dividends avoids CPP contributions, potentially increasing immediate cash flow.

Disadvantages:

• No RRSP Room: Dividends do not create RRSP contribution room, potentially limiting retirement savings options.
• Non-Deductibility: Dividends are paid from after-tax corporate profits and are not deductible for the corporation.

Strategic Considerations

Deciding between salary and dividends—or a combination—depends on various factors:

• Income Level: At lower income levels, salary may be more beneficial due to RRSP contributions and CPP benefits. At higher income levels, eligible dividends may offer tax advantages.
• Retirement Planning: If building RRSP savings is a priority, salary is essential. Conversely, if immediate cash flow is more important, dividends may be preferable.
• Corporate Earnings: The corporation's profitability and access to the small business deduction can influence the optimal mix of salary and dividends.
• Administrative Capacity: Managing payroll for salaries requires more administrative effort compared to issuing dividends.

Conclusion

In Nova Scotia's evolving tax environment, business owners must carefully assess their compensation strategies. Balancing salary and dividends can optimize tax efficiency, support retirement goals, and align with personal financial objectives. Consulting with a tax professional or financial advisor is recommended to tailor an approach that suits your unique circumstances.