How do I pay myself from my own Ontario corporation?
As an owner-manager of an Ontario corporation, you have two main options for taking money out of the corporation: salary and dividends. Many owners use a combination of both.
Salary is employment income. The corporation deducts it as a business expense, which reduces corporate taxable income. You personally receive the salary and pay personal income tax on it, plus CPP contributions (both the employee and employer portions effectively come out of the corporation). Salary creates RRSP contribution room, which dividends do not.
Dividends are distributions of after-tax corporate earnings to shareholders. The corporation pays tax on its profits first, then distributes a dividend to you as shareholder. You receive a dividend tax credit on your personal return that partially offsets the double taxation — the Canadian system is designed so that, in theory, a dollar earned through a corporation and paid out as a dividend should face roughly the same total tax as a dollar earned personally. In practice, the results vary.
The "optimal mix" of salary and dividends depends on your personal income needs, RRSP room, the corporation's earnings, Ontario's graduated rates, and other factors. There is no universal answer. Your accountant should model this annually, and a lawyer can ensure the corporate resolutions are in order each time dividends are declared.
Key takeaways
- Owner-managers typically pay themselves through salary, dividends, or a combination.
- Salary is deductible to the corporation and generates RRSP room; dividends are not deductible.
- Dividends come with a dividend tax credit but require corporate tax to be paid first.
- Annual planning with your accountant is important to optimize the mix for your situation.