Incorporated? How you pay yourself changes your tax.
When your company earns a profit, you can take it out as salary, as dividends, or a mix. Each is taxed differently.
How it works, in three steps
- 1The company pays tax on its profit first. Active business income is taxed in the corporation, often at a low small-business rate on the first $500,000 federally. Provincial rates and rules vary.
- 2Salary is deducted by the company. It is taxed to you like any job income. It also builds RRSP room and means paying into the Canada Pension Plan.
- 3Dividends come from profit the company already paid tax on. You get a dividend tax credit, but dividends do not build RRSP room or CPP pension.
The system is designed so the total tax is close either way, but it is not identical. The gap depends on your province, your income and what else you value, such as RRSP room.
A common way to think about it
Salary buys long-term benefits, which are RRSP room and a CPP pension. Dividends give you flexibility about when you take money out. Many owners use a mix, and the right mix depends on your income, your province and your plans.
Which way does it lean?
It leans salary if you
- Want RRSP room and a CPP pension
- Prefer a steady, predictable income
It leans dividends if you
- Do not need more RRSP room
- Want to choose when and how much you take
- Would rather avoid payroll and CPP contributions
The honest catches
- Family members are restricted. Paying dividends to a spouse or adult children is limited by the "tax on split income" rules.
- Rules change. Rates, credits and limits are updated, so check the current year.
- This is not modelled here. TaxOptima calculates the personal side of dividends only. Ask an accountant to compare the two for your case.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
See the tax on the dividends you take
Enter the cash dividends and your province to see the personal tax after the dividend tax credit.
Open the Dividend Tax Calculator