Quick answer
An owner can take money out of their corporation as a salary, as dividends, or as a mix of the two. A salary goes through payroll and comes with CPP contributions and RRSP room; a dividend is a return on the owner’s investment in the company rather than pay for work, and comes with neither.1,3 Which mix suits an owner depends on their own income, plans and timing, not on a rule of thumb.
What is the difference?
A salary is a wage the corporation pays you as its employee. It runs through payroll: the corporation deducts income tax, CPP and, where it applies, EI from each payment, remits them with its own share of CPP and EI, and reports the year on a T4.4,5 To pay a salary at all, the corporation needs a payroll account, opened before its first remittance is due.6
A dividend is a share of the corporation’s profit paid to its shareholders: a return on their investment in the company, not payment for work.1 Nothing is deducted from it at source, and the corporation reports dividends it pays to individuals on a T5 information return.7
Many owners use a mix, and the mix can change from one year to the next.
How is the corporation’s profit taxed first?
A Canadian-controlled private corporation claiming the small business deduction pays a net federal rate of 9% on its income from an active business, up to its business limit.8,9 That limit is $500,000 a year for a corporation not associated with any other; associated corporations share one.9 Provinces and territories generally add their own lower rate on the same income.8
Salaries and wages, with the employer’s contributions, are a business expense,2 while a benefit the corporation gives you as a shareholder is not.1 So a salary reduces the profit the corporation pays tax on, and a dividend is paid out of what is left after that tax.
How are you taxed on each?
A salary is employment income on your personal return, taxed at your own rates, with tax already deducted from each pay.4
A dividend is taxed on a grossed-up amount, and a dividend tax credit then reduces the tax.10,11 The gross-up and the credit are there to account for the tax the corporation has already paid on that profit.
Dividends paid out of profit taxed at the small business rate are generally “other than eligible” dividends, grossed up by 15% on your return. Eligible dividends, which come from income that did not get the small business rate or another special rate, are grossed up by 38%.10,12
How the corporation’s tax and yours add up, compared with a salary, depends on the province, the year and the amounts, so there is no single answer. And because nothing is deducted from dividends, the tax on them comes due with your return; once the tax owing is large enough, you may have to pay instalments through the year as well.13
What does a salary give you that dividends do not?
- CPP. Salary is pensionable: the corporation deducts your CPP contributions and pays an equal amount itself, as the employer.14 Dividends are a return on investment, and no CPP contributions are made on them.1,15
- RRSP room. Your RRSP deduction limit is based on your earned income for the previous year, up to an annual maximum.16 Employment income counts as earned income, and dividends are not part of the calculation.3,17
- A regular, documented income. A salary arrives on a schedule, with deductions already taken and a T4 at the end of the year.5
EI is usually not part of it. If you control a substantial share of the corporation’s voting shares, your employment is not insurable, so no EI premiums are deducted from your salary; you can still register for EI special benefits the way self-employed people do.18
Both halves of that CPP come out of the same business, one deducted from your pay and one paid by the corporation as the employer. In return they are CPP contributions in your name, which dividends never are.
What do dividends offer?
Fewer moving parts. There is no payroll to run for them, nothing to remit during the year, and no CPP cost to the corporation.
They can also wait. Profit that stays in the corporation is taxed at the corporate rate until it is paid out, which is one of the main reasons owners incorporate. Our guide to being a sole proprietor or a corporation works through one example with the current rates.
Paying dividends to family members who are shareholders is where care is needed. Those dividends can be caught by the tax on split income, a special tax on certain income received from a related business, unless one of its exclusions applies.19
What about money taken out some other way?
Money a shareholder takes from the corporation that is neither a salary nor a dividend does not escape tax. Shareholders are generally taxable on amounts they receive from a corporation, and a loan to a shareholder is generally included in their income unless it is repaid in time.20
When the corporation pays a shareholder’s personal expenses, that is a shareholder benefit, which the corporation cannot deduct as a business expense and the shareholder reports as income.1 Can my corporation pay for my lunch? looks at the most common case.
How do owners decide?
The choice turns on facts only you have: what the business earns and needs to keep, your other income, your household, whether you want CPP contributions and RRSP room, and when you need the money. It can be different every year, and it is easier to decide before year-end than after.
That is a conversation we have with owners. Monthly bookkeeping shows the year’s profit as it builds, we prepare and file the corporation’s T2 return, and managed payroll runs the salary side, T4s included, so whatever mix you choose is set up and reported properly.
Frequently asked questions
Can I pay myself only in dividends?
Yes. A corporation can pay its owner by dividends alone. No CPP contributions are made on that income, and it adds nothing to your RRSP room.3,15
Do I need a payroll account to pay myself a salary?
Yes. A corporation paying a salary is an employer, and an employer registers for a payroll account before the first remittance is due.6
Can I pay dividends to my spouse?
If your spouse holds shares, possibly, but dividends to family members can be caught by the tax on split income unless an exclusion applies.19 Who qualifies for an exclusion depends on the family’s own facts, which is a conversation to have before the dividend is declared.
What if I just take money out of the company account?
Then it is neither salary nor a dividend, and it is generally taxable to you anyway, as a shareholder benefit or a shareholder loan that has to be repaid in time.1,20 It is better recorded as one or the other before year-end than discovered after.
Sources
- Business expenses, Canada Revenue Agency. Accessed .
- RRSPs and Other Registered Plans for Retirement (T4040), Chart 3, Canada Revenue Agency. Accessed .
- Employee or Self-employed? (RC4110), Canada Revenue Agency. Accessed .
- T4 slip – Information for employers, Canada Revenue Agency. Accessed .
- Determine if you need to register (for a payroll account), Canada Revenue Agency. Accessed .
- T5 Guide – Return of Investment Income (T4015), Canada Revenue Agency. Accessed .
- Corporation tax rates, Canada Revenue Agency. Accessed .
- T2 Corporation – Income Tax Guide – Chapter 4: Page 4 of the T2 return, Canada Revenue Agency. Accessed .
- Lines 12000 and 12010 – Taxable amount of dividends from taxable Canadian corporations, Canada Revenue Agency. Accessed .
- Line 40425 – Federal dividend tax credit, Canada Revenue Agency. Accessed .
- General rate income pool (GRIP), Canada Revenue Agency. Accessed .
- Required tax instalments for individuals, Canada Revenue Agency. Accessed .
- About the deduction of Canada Pension Plan (CPP) contributions, Canada Revenue Agency. Accessed .
- Contributions to the Canada Pension Plan, Employment and Social Development Canada. Accessed .
- How contributions affect your RRSP deduction limit, Canada Revenue Agency. Accessed .
- Definitions for RRSPs, Canada Revenue Agency. Accessed .
- Responsibilities, benefits and entitlements for employees and self-employed workers, Canada Revenue Agency. Accessed .
- Line 40424 – Tax on split income, Canada Revenue Agency. Accessed .
This article is general information about how things usually work in Canada, current as of the date it was last updated. It isn’t advice about your own tax or accounting position, which depends on facts we haven’t seen.