How to Pay Yourself from Your Corporation: Salary or Dividends? – Cardinal Point Private Wealth

If you are an incorporated Canadian entrepreneur or business owner, you probably earn money through a salary or bonus, which is a deductible business expense but fully taxable on your personal tax returns as earned income. Alternatively, you may be compensated through dividends, which are not deductible to the corporation but may offer certain tax advantages at the personal level.

When it comes to tax law, the rules can be complex. However, by understanding how they apply and how the different methods of compensation interact, you can potentially lower your overall tax burden and be better positioned to preserve and grow your wealth.

Summary

This post outlines the two primary ways incorporated Canadian business owners can pay themselves—salary/bonus and dividends—and explains how the Canadian tax system integrates these methods. It also highlights key planning considerations that can affect tax outcomes, cash flow, and long-term financial strategy.

Every incorporated business owner should have an integrated annual remuneration strategy as part of their overall financial plan.
The Canadian tax system is designed to equalize total tax paid, whether income is received as salary/bonus or dividends.
Differences in provincial tax rates and individual circumstances can create advantages or disadvantages.
Remuneration decisions affect not only taxes, but also retirement planning, cash flow, and corporate structure.
Professional advice can help optimize outcomes and minimize tax liability.

Salary/Bonus vs. Dividends

If you are an incorporated Canadian entrepreneur or business owner, there are generally two ways to pay yourself from your corporation.

1. Salary or Bonus

A salary or bonus is a deductible expense to your corporation but is fully taxable to you personally as employment income. Income tax is withheld at source, along with employee and employer contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI) (where applicable), and must be remitted regularly to the Canada Revenue Agency (CRA).
Your corporation can also pay a bonus up to 180 days after its fiscal year-end and still deduct that amount for corporate tax purposes in the fiscal year for which it is declared.

2. Dividends

A dividend is not a deductible expense to your corporation but is taxed differently at the personal level through the dividend gross-up and dividend tax credit mechanism.
No tax is withheld at source, and CPP and EI are not payable on dividend income. As a result, you may need to make quarterly personal income tax installments. Your corporation must also ensure that the dividend is properly declared and recorded by its fiscal year end.

Integration and Provincial Differences

The Canadian tax system is designed for integration, with the goal of equalizing the total tax paid whether income is received as a salary/bonus or a dividend. In practice, the degree of integration varies by province or territory due to differences in tax rates, and there may be small advantages or disadvantages depending on where you operate.
These differences, along with ongoing changes in tax rules and rates, should be evaluated regularly rather than relied on as fixed assumptions.

Key Planning Considerations

The salary/bonus and dividend options have different personal and corporate tax implications. The right approach will depend on your circumstances, but several recurring themes tend to guide the decision.

Corporate Income and the Small Business Deduction

The first $500,000 of active business income (ABI) earned by a Canadian-controlled private corporation (CCPC) is generally eligible for the small business deduction (SBD), resulting in a lower rate of corporate tax. (In Saskatchewan, this limit is extended to $600,000.)
If your corporation earns more than this threshold, the excess income may be paid out as a salary or bonus to reduce exposure to higher general corporate tax rates.

Deferral and Cash Flow Needs

If you do not require funds from your corporation to support your personal lifestyle, income can be retained within the corporation. This defers personal tax until funds are paid out and can result in a meaningful tax deferral over time.

If you do require funds, you must decide whether to pay them as salary/bonus or dividends, taking into account both immediate tax implications and longer-term planning considerations.

Passive Income and Long-Term Planning

The build-up of passive assets inside your corporation can affect access to certain tax advantages. Once passive investment income exceeds $50,000 in a taxation year, the amount of ABI eligible for the small business deduction is reduced, and it is fully eliminated at higher levels.
In addition, excessive passive assets may affect eligibility for the Lifetime Capital Gains Exemption (LCGE). These considerations can also influence longer-term decisions, including how and when you may transition or exit the business, as part of your broader business succession planning.

Creditor Exposure and Corporate Structure

Assets retained within your corporation—whether reinvested in the business or held passively—may be exposed to creditors. The use of a separate holding company, implemented through a proper corporate structure, can help limit the assets exposed to operating risks.

Retirement Planning and CPP

If you do not receive a salary or bonus, you may not contribute to CPP in a given year. This can reduce your future CPP retirement benefits and may also affect eligibility for CPP disability benefits.
These considerations can be addressed through alternative savings strategies or insurance planning, but they should be evaluated as part of your overall approach.

Personal Tax Considerations

Paying a salary or bonus may be beneficial in certain situations. For example, earned income is required to generate RRSP contribution room, to deduct childcare expenses (for the lower-income spouse or partner), and to claim certain employment-related expenses. It may also help manage exposure to Alternative Minimum Tax (AMT).

Shareholder Loans and Expense Management

It is important to distinguish between corporate and personal expenses. If corporate funds are used to pay personal expenses, the amount may be treated as a shareholder loan.
These loans must generally be repaid within one year following the end of the corporation’s taxation year. If not, the amount may be included in your personal income without a corresponding corporate deduction, potentially resulting in double taxation.

Income Splitting Opportunities

You may consider employing your spouse, partner, or children to take advantage of income-splitting opportunities, provided the compensation is reasonable for the work performed. Salaries are generally not subject to the Tax on Split Income (TOSI) rules, unlike certain dividend payments.

Other Ways to Extract Funds

Other methods of accessing corporate funds include returning paid-up capital or repaying shareholder loans from the corporation to you. However, these options are not always available on a recurring basis and should be considered as part of a broader strategy.

Final Thoughts

Incorporated Canadian business owners should have an integrated annual remuneration strategy as part of a broader financial plan. The decision to pay salary, dividends, or a combination of both is not static; it should evolve alongside your business, your personal needs, and the tax environment.

Reviewing your approach regularly can help ensure it remains aligned with your business and personal goals. The team at Cardinal Point works with business owners to integrate these decisions into a broader financial plan.