Does taking dividends instead of a salary affect my RRSP contribution room?

Yes, this is one of the most important practical differences between salary and dividends for Ontario owner-managers. RRSP contribution room is calculated as 18% of your prior year's earned income, subject to an annual dollar maximum. Earned income for RRSP purposes includes employment income (salary, bonuses, commissions) and net self-employment income, but it does not include dividends.

If you pay yourself only dividends, you generate no new RRSP room, no matter how profitable your corporation is. Over several years of dividend-only compensation, your RRSP room can remain stagnant, reducing your ability to shelter personal investment returns in the registered account.

Many owner-managers pay at least enough salary to maximize their annual RRSP contribution, then take the rest of their cash needs as dividends. The salary is a deductible corporate expense, and the RRSP deduction offsets the personal tax on that salary, making the combination tax-efficient. The right balance depends on your income level, whether you have unused RRSP room from prior years, and how much you need personally. Work through the numbers with your accountant.