What is the basic difference between paying myself a salary versus dividends from my Ontario corporation?

When your corporation pays you a salary, it is a deductible business expense that reduces the corporation's taxable income. You receive employment income, pay personal tax, and both you and the corporation contribute to CPP. The corporation must withhold and remit income tax and CPP through a payroll account.

When the corporation pays you a dividend, there is no corporate deduction — the corporation has already paid corporate tax on those profits, and then pays the after-tax amount to you. You receive a dividend and report it on your personal tax return, where the dividend tax credit system credits you for the corporate tax already paid. Dividends do not generate CPP contributions and do not count as earned income for RRSP purposes.

The after-tax result of the two methods should theoretically be similar because of the integration principle — the combined corporate and personal tax on income earned and distributed through a corporation is meant to approximate the tax on the same income earned directly. In practice, exact integration depends on income levels and rate changes, so most owner-managers use a combination of salary and dividends optimized with their accountant each year.