- Paying Yourself a Salary When your corporation pays you a salary, the payment is a deductible expense for the corporation — it reduces corporate taxable income dollar for dollar.
- Salary triggers CPP contributions — both your employee share and the employer share paid by the corporation.
- Salary requires regular payroll remittances to the CRA throughout the year — typically monthly or twice monthly for small employers.
One of the first questions every Ontario entrepreneur asks after incorporating is: how should I pay myself? You can draw a salary from your corporation, declare dividends, or mix the two. The right answer depends on your personal tax rate, your retirement savings goals, whether you have other income, and what your corporation can afford. There is no universal formula — but understanding the key trade-offs makes the decision much clearer.
This article explains the salary-versus-dividends question for owner-managers of Ontario-based Canadian-controlled private corporations (CCPCs). For the exact numbers that apply to your situation, work with a licensed accountant. The rates and thresholds discussed here are as of writing — verify current figures with the CRA.
How Each Option Works
Paying Yourself a Salary
When your corporation pays you a salary, the payment is a deductible expense for the corporation — it reduces corporate taxable income dollar for dollar. You report the salary as employment income on your personal T1 return and pay tax at your marginal rate. The corporation must also deduct and remit Canada Pension Plan (CPP) contributions on your salary, and it must match those contributions as the employer. You receive a T4 slip.
Salary generates RRSP contribution room — a major advantage if you want to build retirement savings outside the corporation.
Paying Yourself Dividends
Dividends come from after-tax corporate profits. The corporation pays corporate tax first; then it distributes the remaining money to you as a shareholder. To prevent this from being double taxation, Canada's tax system provides a dividend tax credit on your personal return. This credit is meant to roughly equate the combined corporate-plus-personal tax on dividends to the personal tax you would have paid had you earned the income directly.
Eligible dividends (generally paid from income taxed at the general corporate rate) carry a larger gross-up and dividend tax credit than ineligible dividends (paid from income taxed at the low small-business rate). Most CCPC dividends to shareholder-employees are ineligible dividends. The distinction matters because the effective personal tax rate on eligible versus ineligible dividends differs noticeably.
Dividends do not generate RRSP contribution room and do not attract CPP premiums.
The Core Trade-Offs
CPP Contributions: Cost or Investment?
Salary triggers CPP contributions — both your employee share and the employer share paid by the corporation. This is a real cash cost today. However, CPP contributions build toward your future CPP retirement benefit. Whether this is a cost or a benefit depends on your age, health, other retirement assets, and how much you value a government-backed indexed pension. For younger owner-managers, CPP can be attractive; for someone approaching retirement with ample savings, the mandatory premium may feel like a tax.
RRSP Room
This is often the deciding factor for owner-managers who want to hold diversified investments personally or who want the tax deduction from RRSP contributions. RRSP room is calculated as a percentage of your earned income — and salary counts as earned income. Dividends do not. If you pay yourself only dividends, you accumulate no new RRSP room.
Corporate Tax Deduction vs. Personal Tax Rates
A salary reduces corporate income, so the corporation pays less corporate tax. Dividends come from already-taxed corporate earnings. The integrated tax system is designed so that the total tax (corporate + personal) is roughly the same whether you salary or dividend — but "roughly" is doing a lot of work. At the margins, the better option depends on:
- Your personal marginal rate vs. the corporate rate on the income
- Whether the income was taxed at the small-business rate or the general rate
- Your province of residence for the personal portion (Ontario rates apply here)
- Other income you have in the year
The Notional T4 Approach
Many accountants recommend paying at least enough salary to maximize RRSP room and to bring personal income down to the top bracket of the lowest or middle tax bracket — then taking the rest as dividends. Others prefer an all-salary or all-dividend approach depending on cash flow needs. The "optimal" split shifts every year as rates change, so this is an annual conversation with your accountant, not a set-and-forget decision.
Timing and Cash Flow
Salary requires regular payroll remittances to the CRA throughout the year — typically monthly or twice monthly for small employers. Missing remittance deadlines triggers penalties. Dividends are declared by a resolution of the board of directors and can be paid at any time the corporation has sufficient retained earnings and can pass the solvency tests required under the Canada Business Corporations Act or the Ontario Business Corporations Act, depending on your incorporation jurisdiction.
If cash flow is uneven — common in project-based businesses — some owners pay themselves through shareholder loans during lean months and then declare a year-end salary or dividend to clear the loan. This has its own tax rules (covered in a separate article), so it must be done carefully.
TOSI: Income Splitting Restrictions
If you are thinking about paying dividends to a family member who is a shareholder, be aware of the Tax on Split Income (TOSI) rules. These rules, discussed in detail in our article on paying family members from your corporation, can apply the top marginal personal rate to certain dividends paid to related individuals. TOSI is one reason to structure your shareholder register and dividend strategy carefully from the start.
Frequently asked questions
Is there a "right" salary-to-dividend ratio every year?
There is no universally correct ratio. Your accountant models it annually based on current rates, your projected personal income, and your corporation's taxable income. The optimal split changes as tax rates, CPP premiums, and RRSP limits are adjusted.
Do I need to run a formal payroll if I pay myself a salary?
Yes. A salary to a shareholder-employee requires payroll registration, source deductions (income tax withheld, CPP), T4 preparation, and T4 Summary remittances to the CRA. Your accountant or a payroll service handles this.
Can I pay a mix of salary and dividends throughout the year?
Yes, and many owner-managers do. The mix can be adjusted at year-end once you know the corporation's actual income for the year, giving you flexibility to optimize before the tax return deadline.
What if my corporation had a bad year and has no profits?
You can still pay yourself a salary (it creates a deductible loss in the corporation), but you cannot declare a dividend if the corporation does not have sufficient retained earnings or would fail a solvency test. In a loss year, salary may be the only option.
This is a tax question
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