How to pay yourself: salary or dividends

Once the business is incorporated, the money in the company bank account is not yours. It belongs to the corporation, and there are two proper ways to move it into your hands. You can pay yourself a salary, or the corporation can declare a dividend on the shares you hold. Most Ontario owner-managers use some of both.

Below is what each one is mechanically, the filings that follow, and what should decide the split. For the arithmetic at your income level, run your figures through our salary vs dividends calculator.

What a salary is

A salary is employment income. The corporation hires you the way it would hire anyone else, withholds income tax and CPP from each payment, adds the employer's share of CPP, and sends the total to CRA. The gross amount is a deductible expense, so it reduces corporate taxable income dollar for dollar.

A bonus is salary paid in a lump and follows the same rules, with one extra timing point covered below. Owner-managers who control more than 40% of the voting shares are generally not in insurable employment, so EI premiums usually are not payable on their own pay. They still are on everyone else's.

What a dividend is

A dividend is a distribution of the corporation's after-tax profit to its shareholders. It is not an expense and it does not reduce corporate tax by a cent. Nothing is withheld at source, so the full amount lands in your account and the tax is settled later on your personal return.

A dividend attaches to a share class rather than to a person, so everyone holding that class receives their proportion. That is why the share structure has to be right before dividends start flowing.

Paying a salary: the steps

1. Open a payroll account with CRA, an RP account attached to your business number. It has to exist before the first remittance.
2. Calculate the deductions for each pay run: income tax, CPP on both the employee and the employer side, and EI where it applies. CPP has a basic exemption, a first earnings ceiling and a second higher ceiling added by the CPP enhancement, all reset every January.
3. Remit the withheld amounts plus the employer portion. Regular remitters are generally due by the 15th of the month following the month you paid. Larger payrolls remit more often and some small employers qualify to remit quarterly. Late remittances draw an automatic penalty on top of interest.
4. Issue a T4 and file the T4 Summary by the last day of February for the preceding calendar year.
5. Check WSIB and Ontario employer health tax. Whether either applies depends on your industry and your Ontario payroll. Both sit outside CRA and both get missed.

A bonus accrued at year end has to be paid within 179 days of the corporation's year end for the corporation to keep the deduction in that year. Miss the window and the deduction slides into the following year, the opposite of what the accrual was for.

Paying a dividend: the steps

1. Confirm the corporation can legally pay it. Under Ontario corporate law a dividend cannot be declared if it would leave the corporation unable to pay its liabilities as they come due, or if it would put the realizable value of its assets below its liabilities and stated capital.
2. Pass a directors' resolution declaring the dividend, naming the share class, the amount per share and the payment date. It is kept in the minute book, and it is the document CRA asks for when a payment is questioned.
3. Transfer the money. No source deductions, no remittance, no payroll run.
4. Issue a T5 to each shareholder and file the T5 Summary by the last day of February following the calendar year in which the dividend was paid.
5. Get the type right. Income taxed at the small business rate produces non-eligible dividends. Income taxed at the general rate feeds the general rate income pool and supports eligible dividends, which carry a larger gross-up and a larger credit. The wrong designation on the T5 produces a personal reassessment, and an over-designated eligible dividend carries a corporate penalty.

The filings each route creates

Both slip deadlines land in the same week, in the middle of personal tax season, which is why they are the two owner-managers most often file late. The CRA deadline checker lays out the dates for your year end.

RRSP room and CPP: the real cost of dividends

Only salary counts as earned income for RRSP purposes. Room accrues at 18% of the prior year's earned income up to an annual maximum that CRA indexes, and dividends generate none of it. If your retirement plan runs through registered accounts rather than money left inside the corporation, several dividend-only years leave a gap that compounds.

CPP is the other side. Salary means contributions on both the employee and the employer side, and for an owner-manager both halves come out of the same pot. The corporation deducts its share, and on your personal return part of your own contribution is a credit and part is a deduction. What the money buys is an indexed pension for life. Whether the trade is worth it depends on your age, what else you have saved, and how long you expect to keep drawing from the business.

Salary carries weight outside the tax return too. Mortgage and equipment underwriting is built around T4 income, so owners taking dividends exclusively find the process slower and the paperwork heavier for the same money. The childcare expense deduction is tied to earned income as well.

Where dividends win

Dividends buy flexibility. One can be declared and paid the day you need it, in whatever amount the retained earnings and the solvency test support, with no payroll calendar and no remittance schedule. A dividend is also taxed in the calendar year it is paid to you whatever the fiscal year end is, which smooths personal income across two calendar years more easily than a payroll cycle does.

The catch: nothing is withheld, so the tax arrives as a lump on filing, and once your balance owing crosses CRA's threshold you are required to pay personal instalments quarterly from then on. Owners who move from salary to dividends without setting money aside meet that in their second year.

Why most owners land on a mix

The corporate deduction is why the two are not interchangeable. Salary comes off corporate income before tax, so it can keep the company under the small business limit. A dividend comes out of profit already taxed in the company. Canadian tax reconciles the two through integration: the personal gross-up and dividend tax credit recognise the corporate tax already paid, so the total lands close to what you would have paid earning the income personally. Integration is close rather than exact, and the gap is usually a point or two of total tax either way. That is real money on a large draw and it is still rarely the deciding factor.

The common pattern we set up is a salary large enough to generate the RRSP room the owner intends to use and to support any lending plans, with dividends on top for whatever else the household needs and the corporation can afford. Where a spouse or adult child holds shares, the tax on split income rules apply to dividends unless a specific exclusion is met, so the family side is usually handled through reasonable salaries for work actually performed instead. Clinic and med spa owners have a further set of considerations around associate pay and professional structure, which we cover in salary vs dividends for Ontario injectors and med spa owners.

What changes the answer from year to year

The mix that suited a $90,000 year does not automatically suit a $400,000 year, and the rules move underneath you as well. Ontario cut its small business corporate income tax rate in 2026, which leaves more after-tax money inside the company. Ontario is also reducing its dividend tax credit from January 2027, which raises the personal tax on money taken out as a dividend. Those two changes pull in opposite directions, so confirm the current figures before setting next year's mix instead of repeating last year's.

Passive investment income inside the corporation or an associated company can grind down the small business limit, which changes the value of leaving profit in. A year of profit well above the business limit shifts the calculation toward salary. So do household events: a home purchase, a parental leave, a child starting daycare.

The shareholder loan trap

Many owners do neither of the above and simply take money out when they need it. Those withdrawals land in a shareholder loan account. If the balance is owed to the corporation and is not repaid by the end of the corporation's next fiscal year, the amount can be included in your personal income in the year you took it, and a taxable interest benefit can apply in the meantime.

This is the most common cleanup we do on a new corporate file. The fix is to decide during the year what the draws will be and declare dividends or run payroll to match them, rather than reverse-engineering an answer at filing time. Setting the bookkeeping and payroll up properly is part of bookkeeping, HST and payroll, and we revisit the split while the year is still open, because bonuses, dividends and instalments all have timing rules that reward being early. That review sits inside our corporate and personal tax work.

All of our corporate and personal tax work

General information only, current at August 2026. Tax rules change and GST/HST status is fact-specific. Confirm your own position before relying on anything here.