Key points
- Salary is deductible to the corporation, creates RRSP room and requires CPP contributions.
- Dividends are paid from after-tax profit, need no payroll account and do not create RRSP room.
- The right mix depends on your cash needs, retirement plans and whether family members are involved.
Side by side
| Salary | Dividends | |
|---|---|---|
| Corporate tax | Deductible, reduces corporate income | Not deductible; paid from after-tax profit |
| Personal tax | Taxed as employment income | Taxed with a dividend tax credit that offsets corporate tax already paid |
| CPP | Employee and employer contributions required | None, and no CPP pension credit |
| RRSP room | Created (18% of earned income, up to the annual limit) | None |
| Administration | Payroll account, remittances, T4 | Director's resolution and a T5 slip |
| Proof of income | Straightforward for lenders | Lenders may want two years of history |
Things that change the answer
- Personal services business risk: salary reduces the income exposed to PSB tax rates.
- Family members: dividends to a spouse or adult children may be caught by the tax on split income (TOSI) unless an exclusion applies.
- Retirement savings: CPP and RRSP room have long-term value that is easy to overlook.
- Cash needs: leaving profit in the corporation defers personal tax, but only helps if you do not need the cash.
Many owner-managers use a mix. Model the options with your accountant before year-end, when there is still time to act.
Official sources
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