What is tax integration and why does it matter for my Ontario salary-dividend decision?

Tax integration is the principle that income earned through a corporation and then distributed to a shareholder should bear roughly the same total tax as income earned directly by an individual. Canada's corporate and personal tax systems are designed with this goal in mind: the dividend gross-up and dividend tax credit mechanism attempts to give shareholders credit for corporate tax already paid.

Perfect integration would mean you pay exactly the same total tax whether you earn income personally or earn it through a corporation and pay it out as dividends. In practice, integration is imperfect. The combined corporate rate plus personal dividend tax sometimes differs slightly from the personal rate on employment income, and the gap varies by province and income level.

In Ontario, at many income brackets, integration is close enough that the salary-dividend choice produces similar total tax. The real differences lie elsewhere: salary creates RRSP room and CPP, dividends avoid CPP contributions and the payroll remittance obligation, and retaining income inside the corporation defers personal tax. Understanding that integration is the theory helps you focus on those practical non-tax factors — cash flow, retirement savings, administrative cost — when making your compensation decision. Your accountant can calculate the precise integration efficiency at your current bracket.