Prefer to listen? This article is based on Episode 6 of our Portfolio Talks podcast. Listen to the full episode here.
If you are an incorporated physician, the question of how to pay yourself is one of the most important decisions you will make in your career. Salary, dividends or a blend of both? Pick wrong, and the compounding effect over 20 or 30 years can quietly cost you hundreds of thousands of dollars in lost benefits, missed contribution room and unnecessary tax.
For most incorporated doctors, the default answer they hear from accountants is “just take dividends, they are more tax efficient.” That answer is so common it has become a kind of industry shorthand. The problem is that it is rarely the full story, and for doctors thinking long term about retirement, parental leave or buying into a practice, dividends-only is almost never the right call.
Here is what you actually need to know.
The Myth: Dividends Are Always More Tax Efficient
Anytime you hear the word “always” in personal finance, it is worth pausing. The idea that dividends are always more tax efficient than salary leans on a CRA concept called integration. Integration is the principle that the combined corporate and personal tax bill should be roughly the same whether you pay yourself in salary or dividends. The CRA designed the system this way on purpose so you cannot game it by picking one path over the other.
What that means in practice is that the headline tax savings of taking dividends-only are often much smaller than people assume. And once you factor in what you give up by avoiding salary entirely, the dividends-only route often costs you more in the long run than it saves you in the short run.
The three biggest things you give up by paying yourself only in dividends are CPP contributions, RRSP contribution room and EI benefits. Each one matters more than people realize.
What You Lose: CPP Contributions
When you pay yourself in dividends only, you do not contribute to the Canada Pension Plan. That sounds like a win on the surface because you save roughly $8,500 a year in CPP premiums (you pay both the employer and employee side as an incorporated professional). But here is what you are actually giving up.
CPP is one of the few sources of retirement income that is fully indexed to inflation, guaranteed for life and backed by a federally managed investment portfolio. The Canada Pension Plan Investment Board is now one of the largest and best-performing asset managers in the world. The old narrative that CPP is a poorly invested bond portfolio is out of date. Since the early 2000s, the CPPIB has shifted into a globally diversified mix of equities, fixed income and alternative assets.
There are also built-in safety nets that come with CPP contributions. If the main income earner passes away early, the surviving spouse receives a survivor benefit. You can delay CPP to age 70 to get a larger monthly payment. You can even donate your CPP later in life for tax credit purposes if you do not need the income.
For doctors worried about longevity risk (and you should be, because Canadians are living longer in less ideal health), a guaranteed inflation-indexed income stream is exactly the kind of foundation a retirement plan needs. Whether you use the money yourself or end up donating it later, building the entitlement during your earning years is almost always worth it.
What You Lose: RRSP Contribution Room
This one is the quiet killer. Dividends do not generate RRSP contribution room. Only earned income (salary, T4 income) does.
If you pay yourself dividends-only for 10 or 15 years, you have built zero new RRSP room over that entire period. That closes off one of the most important tools for getting money out of your corporation and onto the personal side in a tax efficient way. It also means you cannot use your RRSPs to top up an Individual Pension Plan (IPP) later in your career, which is one of the most powerful tax planning moves available to mid-career incorporated doctors.
An IPP is essentially a supercharged RRSP for incorporated professionals. It usually does not make sense until you are in your 40s or older with a long earnings history, but when it does, the numbers are significant. An actuary calculates your past service contributions, which can total a million dollars or more for a physician who has been earning a high income since their late 20s. Your corporation funds the past service buy-back as a tax-deductible expense, which is essentially a massive tax-free sweep from the corporation onto the personal side.
When you retire, the IPP also allows for what is called terminal funding, which can move another large balloon payment from your corporation to your pension plan. Add the lifetime contributions, the past service buy-back and the terminal funding together, and you can be talking about several million dollars of corporate money moved to a tax-sheltered personal vehicle over a career.
None of that is possible if you have been taking dividends only. You need RRSP room, and RRSP room only comes from salary.
What You Lose: EI and Parental Leave
This is the blind spot almost no one plans for until it is too late. EI parental leave benefits are based on insurable earnings, which means you need a track record of T4 income to qualify.
We have seen the difference up close. One client took dividends only and qualified for zero dollars in EI when she went on parental leave. Another client with the same income but structured as a blend of salary and dividends received about $35,000 in EI benefits. Same total compensation, same total tax bill, very different outcome.
For doctors planning to start a family at any point, even five or seven years from now, paying yourself at least some salary keeps the EI door open. And because EI is a special benefit with different rules than regular EI, you can stack it with other income sources, like provincial disability insurance for a C-section in BC, or top-ups from your retained earnings if needed.
The cost of getting this wrong is real. Funding a 12 to 18 month parental leave entirely out of retained earnings is doable, but it is not the same as having a guaranteed income stream during one of the most financially stressful periods of your life.
The Hidden Value of Salary: Corporate Deductions
One angle that often gets missed in the salary vs dividends conversation is what salary does for your corporation, not just for you personally.
Salary is a corporate expense. Every dollar you pay yourself in salary is a dollar of deductible expense for the corporation, which reduces corporate taxable income. For a doctor whose corporation earns above the small business deduction limit (around $500,000 of active business income), paying out additional salary is one of the easiest ways to bring corporate income back under the threshold and stay in the lower corporate tax bracket.
For example, a doctor with $600,000 of corporate net income can pay themselves an additional $100,000 of salary to bring the corporation back into the small business deduction range, which in BC is roughly 11%. You get a dollar-for-dollar deduction inside the corporation, you build RRSP room and CPP entitlement on the personal side and you stay tax efficient at the corporate level. That is a much better outcome than just paying yourself the same money as dividends and leaving the corporation taxed at the higher general rate.
Even the CPP contributions themselves are deductible on the corporate side, which softens the cost of paying salary further than most people realize.
Why Your Accountant Defaults to Dividends
This is worth saying clearly. When accountants recommend dividends-only, it is usually not bad advice. It is a downstream symptom of an upstream problem: bad cash flow planning.
Here is how it typically plays out. A doctor spends money throughout the year directly out of the corporate account through a shareholder loan. By the time tax season rolls around, the shareholder loan balance is $200,000 or $230,000 overdrawn. The accountant has to clear that balance somehow, and the only two options are to declare it as salary or as a dividend.
If it gets declared as salary, the doctor owes personal tax on it. But because the money was already spent throughout the year, there is no cash on the personal side to pay the personal tax bill. So the doctor would need to draw even more from the corporation to cover the tax owed, which creates another shareholder loan problem next year. Dividends solve the immediate cash flow problem because the corporation can pay the personal tax bill on the doctor’s behalf.
So dividends become the default not because they are optimal, but because they are the only option left at tax time. The real fix is not switching to salary on the spot. It is restructuring how cash flows through the corporation throughout the year so that the salary vs dividend decision can be made strategically, not reactively.
Retained Earnings: The War Chest Most Doctors Underuse
If you do choose a dividends-heavy approach, retained earnings inside the corporation become your safety net. The problem we see is that retained earnings are often parked badly, usually in GICs.
GICs feel safe, but inside a corporation they are extremely tax inefficient. Passive income inside a corporation is taxed at roughly 50%. So a 3% GIC return is really a 1.5% after-tax return at the corporate level. After inflation, that is a guaranteed loss of purchasing power year after year.
Retained earnings should be invested in a tax-efficient corporate-class structure that minimizes passive income and lets the money grow. That war chest then becomes optionality. It can fund a parental leave when you need it. It can finance a buy-in to a practice you have been associating at. It can cover a renovation, a vehicle upgrade or an unexpected expense without forcing you to draw a big lump-sum dividend in a high tax year.
The Bottom Line: Build a Plan, Then Flex Around It
The salary vs dividends decision is not a one-time choice. It will likely change as your career changes. Early in your career when you are building RRSP room and qualifying for EI, a higher salary component often makes sense. Later in your career when you have substantial retained earnings and are thinking about an IPP, the blend usually shifts.
The doctors who lose the most money on this decision are the ones who treat it as an absolute. They optimize for paying the lowest possible tax this year and lose hundreds of thousands of dollars in CPP, RRSP room, EI and IPP opportunities over a lifetime. The doctors who do best build a plan that is flexible, revisit it regularly and treat the salary vs dividends question as part of a larger strategy rather than a default setting.
If you are currently doing dividends only and you have no RRSP room, no CPP contributions, no parental leave coverage and no clear plan for getting money out of your corporation in retirement, that is a signal. The fix is not switching everything overnight. It is building a real plan that opens those doors back up before you need them.
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This article is based on Episode 6 of Portfolio Talks, where we go deeper into the salary vs dividends question, including CPP, RRSP, EI and IPP planning for incorporated physicians. Listen to the full episode here and subscribe so you do not miss future episodes built specifically for doctors.
Sources
- Canada Pension Plan (CPP) – Canada.ca – https://www.canada.ca/en/services/benefits/publicpensions/cpp.html
- RRSP contribution room and earned income – Canada.ca – https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp.html
- Employment Insurance benefits and leave – Canada.ca – https://www.canada.ca/en/services/benefits/ei.html
- Small business deduction – Canada.ca – https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html
This content is provided for general informational purposes only. It is not intended to provide investment, tax or legal advice, and should not be relied upon as such.