Is salary or dividends better when my Ontario corporation has a low-income year?

When corporate profits are modest, the salary-versus-dividend question shifts. If the corporation has little income to protect with the small business deduction, the benefit of a corporate deduction from salary is less dramatic. The priority may switch to taking dividends to avoid CPP contributions and the administrative burden of payroll, especially if personal income needs are modest.

At lower personal income levels, the dividend tax credit can make dividends quite efficient. Canadian dividends benefit from the gross-up and credit system, and at lower personal marginal rates the net personal tax after the credit can be minimal. For a shareholder in a low personal income tax bracket, non-eligible dividends from a CCPC can sometimes be received at very low effective personal rates.

However, if you need to build RRSP room or have unused RRSP carry-forward room you want to fill, paying some salary is still valuable even in a slow year. A small salary sufficient to allow an RRSP contribution may produce a net tax saving that outweighs the CPP cost. Low-income years are also good times to clear retained earnings as dividends before corporate passive income rules reduce the small business deduction in future years.