How does the salary-versus-dividend decision work when my Ontario corporation has multiple shareholders?

With multiple shareholders, the salary-versus-dividend decision becomes more complex because dividends must generally be paid proportionately to all shareholders of the same class. If you have two equal shareholders, a cash dividend pays each of you equally regardless of who did most of the work that year. You cannot unilaterally vary dividend amounts among equal shareholders of the same class without changing the share structure.

One solution is to create multiple classes of shares (often called a freeze or alphabet share structure) so each shareholder holds a separate class. The board can then declare a dividend on one class and not another, allowing compensation to be targeted at those who deserve it for that year. This flexibility comes with TOSI scrutiny if the shareholders are related.

Salary can be varied by shareholder regardless of share structure, since it is employment compensation for services rendered. Two shareholders who both work in the business can draw different salaries based on their respective roles without any share class redesign. For unrelated business partners, salary differentiation is straightforward. For family members, salaries paid to related parties are subject to reasonableness requirements.

A shareholders' agreement should address how compensation will be decided and what happens if shareholders disagree on draws. These governance issues are as important as the tax implications when there are multiple owners.