Dividend or Salary: Consideration for Childcare Expense

A lot of business owners prefer dividend over salary as it is more flexible and waive CPP contribution, however, when your household incur childcare expense, you need to at least pay yourself a portion of salary as compensation.

Childcare expenses can be deducted by a lower income spouse who has earned income, which includes salaries,tips, commissions and business earning from employment or self-employment. If a lower income spouse only earns dividend income, interest, and capital gain, Childcare expenses are not deductible.

Following is the real life client I am faced with recently, names are fake for illustration purpose.

James is a director employed by a manufacturing company and earns employment income around 190K/year, his wife Alice is a business owner who owns a marketing consulting firm. Their only son Lucas is 22 months old, they hire a Nanny to take care of Lucas while Alice works, the total childcare expense was around $12500 in 2025. Since James’ income is enough to support their lifestyle, Alice takes a 25K dividend from her company. She is curious whether she could deduct childcare expenses to minimize her tax liability.

Unfortunately, Alice does not have any active income such as salaries or commissions, she cannot deduct any childcare expenses in this case, I suggest she takes some salary from her company in 2026. The highest amount she can deduct in 2026 would be lower of $8000 or ⅔ of her earned income. Therefore, Alice needs to have at least a $12000 salary to deduct $8000 childcare expense. Alice could choose a combination of salary and dividend if she does not want to contribute too much to the CPP(Canada Pension Plan).

When business owners consider salary or dividend, child care expenses would be an important factor to consider because the deduction could be quite lucrative.