TL;DR: Paying yourself a salary reduces your corporation’s profit, creates RRSP room, and builds CPP. Dividends are simpler to pay, avoid CPP, and can be tax‑efficient—but watch the income‑splitting and TOSI rules.
TL;DR: Many owners mix both. Pick salary for stability and benefits, then top up with dividends to clear cash and manage taxes.
In a Canadian‑controlled private corporation (CCPC), you can take money out as salary (employment income) or dividends (a return on ownership). Salary is deductible to the corporation and taxed to you as regular income.
Dividends come from after‑tax corporate profits and are taxed to you at dividend rates. With good tax integration, total tax is often similar over time—but the differences in CPP, RRSP room, and admin make the choice meaningful.
How salary works for Canadian owner‑managers?
Salary or bonus is a business expense for the corporation. That lowers corporate taxable income and helps keep profits within the small business limit. You’ll need a CRA payroll account (and Revenu Québec if you have Quebec payroll), calculate withholdings, and remit source deductions on schedule.
Key effects of salary:
Taxed to you at personal marginal rates.
Generates RRSP contribution room (18% of earned income, up to the annual limit). Triggers CPP/QPP contributions by both you and the corporation, which can increase future pension benefits.
Most owner‑managers who control their corporation aren’t insurable for EI under standard rules, so EI premiums often don’t apply. There are exceptions and special programs—confirm your situation with a pro.
How dividends work and what they cost in tax?
Dividends are paid from after‑tax corporate profits and are not deductible to the corporation. They’re reported on a T5 slip and taxed to you using the dividend gross‑up and credit system. Dividends do not create RRSP room and don’t require CPP/QPP or EI premiums. For Canadian resident owners, there’s no withholding at source (non‑residents face withholding).
Eligible dividends, typically from profits taxed at the general corporate rate or from a GRIP balance.
Your accountant can track what type you can pay. Mixing them incorrectly can lead to higher personal tax than needed.
Tax differences: corporate and personal rates
Canada’s tax system aims for “integration” so that, in theory, salary vs dividends should yield similar total tax when you look at corporation + individual together. In practice, differences arise because:
Corporate tax rates vary by province and whether you’re under the small business limit. Passive investment income can also reduce access to the small business rate.
Personal marginal rates vary by province and income level, and dividend tax credits differ between eligible and non‑eligible dividends.
Timing matters. Keeping profits in the corporation defers your personal tax until you pay yourself.
Result: there isn’t a one‑size‑fits‑all answer. Small differences in rate or timing can tip the scale, especially at higher incomes or when passive investment income is significant.
CPP and RRSP room: why salary often helps
Salary builds two safety nets: RRSP room and CPP/QPP contributions. If long‑term retirement savings are a priority, paying yourself enough salary to reach your desired RRSP room can be smart. CPP/QPP contributions add cost today but can increase your future pension; dividends avoid this cost but don’t build CPP/QPP entitlements.
For some owners, the forced saving effect of CPP/QPP and RRSP room is a feature, not a bug. For others, avoiding CPP/QPP and investing inside the corporation or personally is preferred. It hinges on your retirement plan, discipline, and cash flow needs.
Dividends, TOSI, and income splitting rules
It used to be easier to sprinkle dividends to adult family members to lower overall tax. Not anymore. The Tax on Split Income (TOSI) rules can tax certain dividends to related adults at the top rate unless an exclusion applies, such as:
Excluded business: the family member is actively engaged on a regular, continuous, and substantial basis (often interpreted as roughly 20+ hours per week) in the business in the year or in any five prior years.
Excluded shares: generally for individuals 25+ who own at least 10% of votes and value in a corporation that is not a professional corporation and not primarily a services business.
Reasonable return: based on labour, capital contributed, risks assumed, and other factors.
Paying a reasonable salary to a spouse or adult child who actually works in the business is usually cleaner than dividends because employment income isn’t caught by TOSI. Document duties, hours, and pay rates.
Cash flow, admin, and payroll remittance tips
Salary means ongoing payroll: set up accounts, calculate deductions, remit on time (often by the 15th of the next month, though CRA may give you a different schedule), file T4s by the end of February, and handle provincial items like workers’ compensation and, in some provinces, employer health taxes. Quebec has separate remittances (QPP, QPIP, provincial tax) through Revenu Québec.
Dividends are simpler operationally: board resolution, record the payment, and issue a T5 by the end of February. No withholdings for resident owners. But because there’s no tax withheld, plan for personal tax instalments.
Provincial nuances: Quebec, Ontario, BC, more
Provincial rules affect your choice:
Quebec: QPP and QPIP apply to salary, with their own rates and remittances. Dividends and dividend credits differ slightly, but integration is broadly similar.
Ontario and BC (and some other provinces): employer health taxes may apply once payroll exceeds certain thresholds. Salary increases these payroll costs; dividends do not.
Personal tax brackets and credits vary by province, which can tilt the salary vs dividend balance at the margins.
If you operate across provinces or have Quebec payroll, coordination matters to avoid penalties.
Mixing salary and dividends: a simple framework
Many owner‑managers blend both. A practical approach is:
Decide how much personal cash you need after tax.
Pay yourself enough salary to create the RRSP room you want and to cover CPP/QPP if you value that future benefit. This also reduces corporate income to your target (for example, to stay within the small business limit).
Top up with dividends to extract surplus cash in a flexible way, considering the type available (eligible vs non‑eligible) and your personal tax bracket.
If you have passive investment income in the corporation, dividends can sometimes trigger a corporate dividend refund, improving the numbers—worth modelling.
Year‑end planning: bonuses, dividends, and cash
Bonuses can be accrued at year‑end and still deducted by the corporation if paid within 180 days after year‑end. That lets you manage corporate tax in one year and personal tax cash flow in the next. Make sure the bonus is authorized and paid on time.
Dividends are taxable to you in the calendar year they’re paid. Time them carefully if you’re near a bracket change. Keep proper resolutions and ensure your T5s and T4s are filed by the end of February. If you rely mostly on dividends, set aside tax throughout the year and watch for CRA personal instalment requirements.
Checklist: choosing salary, dividends, or a mix
Retirement plan: Want RRSP room and CPP/QPP credits? Lean salary.
Admin tolerance: Payroll complexity vs simple dividend resolutions and T5s.
Family involvement: Paying family? Use reasonable salary or ensure TOSI exclusions for dividends.
Corporate goals: Keep income under the small business limit? Salary helps. Need to trigger a dividend refund? Dividends help.
Province: Consider QPP/QPIP (Quebec) and employer health taxes (e.g., Ontario, BC).
Personal tax instalments: Dividends may require quarterly instalments; salary usually doesn’t.
When to call a CPA or bookkeeper for advice?
Call a pro if you’re paying family, operating in Quebec, earning passive investment income inside the corporation, approaching the small business limit, or planning a major change (new province, sale of shares, or a big dividend). A CPA can model options using your actual numbers and avoid TOSI or remittance pitfalls. A good bookkeeper keeps payroll and dividend paperwork tidy so slips match what was actually paid.
Ready to get help? Browse Tech Help Canada’s Business Directory to find vetted Canadian CPAs and bookkeepers who understand owner‑manager pay planning in your province.
