If you own an Ontario corporation, one of the first questions you face is how to get money out of it. The two main options are a salary and dividends. Neither is always better.
Salary
A salary is employment income. Your corporation deducts it, withholds tax and remits CPP, and you receive a T4.
Advantages
- Creates RRSP contribution room and builds CPP entitlement.
- Supports childcare expense claims and can help with mortgage applications, since lenders like stable, documented income.
- Available even if the corporation has a loss in the year.
Drawbacks
- Higher CPP cost, because the corporation pays the employer share too.
- Payroll registration, remittances and year-end filings.
Dividends
Dividends are a distribution of after-tax corporate profit, reported on a T5.
Advantages
- Often a lower combined corporate and personal tax cost at many income levels.
- Flexible: you choose the timing and amount.
- No payroll administration.
Drawbacks
- The corporation needs profits or retained earnings to pay them.
- No RRSP room and no CPP contributions, which can weaken retirement planning if you rely on dividends alone.
- Some mortgage lenders and programs treat dividend income differently.
Why a mix is common
Many owners take a modest salary to build RRSP room and CPP, and top up with dividends for flexibility and tax efficiency. The best mix depends on:
- How much cash you actually need personally
- Your other income, such as a spouse's, and other retirement savings
- Whether you plan to borrow for a home or business
- Your corporation's profit level and how much it needs to reinvest
Which option leaves you with more after tax changes with income level, and the numbers shift as rates and rules are updated. That is why we run the actual figures for your situation rather than rely on a rule of thumb.
When to review your approach
- Your corporation's profits have changed significantly.
- You are planning a mortgage or major purchase.
- Your family situation has changed.
- New tax rules or rates have been announced.
- You have not looked at it in more than a year.
For the payroll side, see our article on CPP contributions.
Our corporate tax accountants can compare salary, dividend and mixed approaches for you on a free consultation.
This article is general information, not tax advice for your situation.
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