Salary or Dividends: How to Pay Yourself in Ontario

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Published: October 9, 2026. Last updated: October 9, 2026.

Your corporation had a decent year. There is money sitting in the business account, you own the company, and you still cannot spend a dollar of it until you move it into your own name. The two normal ways to do that are a salary or a dividend.

Most owners ask which one is cheaper. On $150,000 of corporate profit in Ontario for 2025, the worked example below puts the two routes about $4,100 apart on total tax. That is real money, but it is not the whole story, because the salary route also puts $8,860 into your CPP and creates $26,203 of RRSP room.

So the real question is which side effects you want, and that decision sits right next to how you file your corporate tax return.

Bottom Line Up Front

  • Salary is deductible to your corporation and employment income to you, with source deductions, monthly remittances and a T4.
  • A dividend comes out of profit the corporation has already paid tax on. No deduction, no withholding, one T5 at year end.
  • The tax system is built so the two routes land close. In the 2025 example below, the dividend route pays $4,109 more total tax but saves $8,860 of CPP.
  • Only salary creates RRSP room, earned income for the child care deduction, and income a lender will recognize.
  • Leaving cash out as an unpaid shareholder loan is the expensive mistake. Repay it within one year after your corporation’s year end or the whole amount goes into your income.

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What actually happens on each route

A salary is a cost of running the business, so your corporation deducts it and its taxable income drops by that amount. You report it as employment income. To pay it, the corporation needs a payroll program account and has to withhold income tax and CPP from your pay and send those amounts to CRA. A regular monthly remitter’s due date is “the 15th day of the next month” (CRA, 2025). After year end, the T4 slip and return are due by the last day of February (CRA, 2025).

You probably do not pay EI on that salary, because employment is not insurable where “the employee is a shareholder who controls more than 40% of the voting shares of the corporate employer” (CRA, 2025). No premiums, and no EI benefits either.

A dividend is different in kind. It is a distribution of profit the corporation has already been taxed on, so there is no corporate deduction for it. You need a directors’ resolution, and the corporation issues a T5, due “by the last day of February following the calendar year to which the information return applies” (CRA, 2025). Nothing is withheld, so the tax bill arrives with your personal return instead of coming off each paycheque. Take dividends all year, set nothing aside, and you find out in April. Clean records make that bill predictable instead of alarming, which is most of what good bookkeeping support is for.

Integration: why the rates land in nearly the same place

Integration is the design principle behind the whole comparison: income earned through a corporation and then paid out to you should attract roughly the same total tax as if you had earned it personally. It works through the gross-up and the dividend tax credit. Your corporation pays tax first, at 9% federally on active business income eligible for the small business deduction (CRA, 2025) plus 3.2% in Ontario (CRA, 2025), for a combined 12.2%. One date to put in your calendar: effective July 1, 2026, the Ontario lower rate drops from 3.2% to 2.2% (CRA, what’s new for corporations, 2026), so year ends after that date carry a combined rate below 12.2%. When the after-tax profit reaches you as a dividend, your return grosses it back up toward the pre-tax amount and then credits you for the corporate tax already paid. The match is not exact, but it is close enough that the rate gap is usually the smallest factor on your list.

CPP is the single biggest difference

Salary means CPP contributions. Dividends do not, because CPP is charged on pensionable employment earnings, not on investment income.

For 2025 the rate is 5.95% on earnings above the $3,500 basic exemption up to the year’s maximum pensionable earnings of $71,300, capping the employee and the employer at $4,034.10 each (CRA, 2025). Above that sits the second additional contribution, CPP2: 4% on earnings between $71,300 and the additional maximum of $81,200, capping each side at $396 (CRA, 2025).

As the owner-manager you are on both sides of that transaction. The corporation pays the employer half and withholds the employee half, and both come out of money that would otherwise be yours. At or above $81,200 of salary, that is $8,860.20 for 2025. These figures are indexed annually, so check the current year before you set your pay.

Two honest things about that number. It is a genuine cost, and for an owner in their sixties with no intention of relying on CPP it is hard to justify. It is also not a tax. You are buying an indexed pension for life, and ten years of dividends-only pay is ten years of a smaller CPP cheque later. The tax treatment softens it: the base portion of your contributions is a non-refundable credit, and the enhanced portion, up to $1,074.00 for 2025, is deducted from income (CRA, 2025).

What only a salary buys you

Three things follow employment income and never follow dividends.

RRSP room. Your deduction limit is 18% of the previous year’s earned income, up to the annual dollar limit (CRA, 2025), which is $32,490 for 2025 and $33,810 for 2026 (CRA, 2025). Earned income means employment and business income. Dividends do not count, so a dividends-only year creates no new room. If you are already close to your limit, read the RRSP over-contribution rules before you top up.

The child care expense deduction. Earned income here covers employment remuneration and self-employment business income, and the claim “cannot exceed two-thirds of the taxpayer’s earned income for that year” (CRA, 2025). Dividends are not in that definition, so a dividends-only year can quietly cost you the child care expense claim.

Income a lender recognizes. This is practical rather than legal, since mortgage underwriting is not a tax rule. A T4 with two years of history is the easiest document a lender can price, dividends need more explanation, and some lenders discount them. If a purchase or refinance is coming inside two years, that alone can settle the question.

Then there is the paperwork. Salary means a payroll account, a remittance every month and a T4 in February. Dividends mean a resolution and one T5. Payroll is not hard, but it is a recurring deadline, and CRA charges penalties on late remittances.

Eligible and non-eligible dividends

Your corporation can pay two kinds of dividend, and they are taxed differently in your hands.

Non-eligible dividends are the ones most owner-managers receive, because they come out of income that was taxed at the low small business rate. For 2025 you gross the cash amount up by 15% and report the result (CRA, 2025). The federal dividend tax credit is “9/13 of the taxable gross-up amount, or 9.0301% of the amount you entered in box 11” (CRA, 2025). Ontario adds its own credit at 2.9863% of the same grossed-up amount.

That Ontario rate is changing. The 2026 Ontario Budget proposes to reduce “Ontario’s small business (non-eligible) dividend tax credit rate from 2.9863 per cent to 1.9863 per cent, effective January 1, 2027” (Government of Ontario, 2026), making these dividends slightly more expensive from 2027.

Eligible dividends come out of income taxed at the general corporate rate instead. The gross-up is 38% and the federal credit is 15.0198% of the grossed-up amount (same CRA T5 source, 2025). Bigger gross-up, bigger credit, because that income already bore more corporate tax.

The gross-up is not a penalty. It estimates what the corporation earned before tax, and the credit hands that tax back to you. The catch is that your net income on the return is the grossed-up figure, which is what income-tested benefits look at.

Salary and the $500,000 business limit

The small business deduction applies to a business limit of $500,000 of active business income (CRA, 2025, the corporation tax rates page linked above). Below it, your Ontario combined rate is 12.2%. Above it, the federal rate is 15% after the abatement and Ontario’s general rate is 11.5%.

This is where salary earns its keep in a good year. Because salary is deductible, paying yourself reduces the corporation’s taxable income, which can bring it back under $500,000. A corporation with $560,000 of active income that pays the owner a $100,000 salary has $460,000 left and keeps the low rate on all of it.

If you are still choosing a structure, raise this before you file the articles, not after. It comes up constantly when incorporating a business.

Worked example: $150,000 of profit in 2025

This is an illustration for the 2025 tax year, not a projection for a real person. Assume an Ontario corporation with a December year end, $150,000 of active business income before paying the owner anything, one owner-shareholder, no other personal income, and no credits beyond the basics.

All salary All dividends
Corporate profit before your pay $150,000 $150,000
Salary $145,570 $0
Employer CPP (corporation’s half) $4,430 $0
Corporate taxable income $0 $150,000
Corporate tax at 12.2% $0 $18,300
Cash paid to you $145,570 $131,700
Amount reported on your T1 $145,570 employment income $151,455 taxable dividend
Your personal income tax $38,192 $24,001
Your CPP (employee half) $4,430 $0
In your pocket $102,947 $107,699
Total tax paid (corporate plus personal) $38,192 $42,301
Paid into your CPP pension $8,860 $0
RRSP room created for next year $26,203 $0

The personal tax lines use the 2025 federal and Ontario brackets (CRA, 2025), the federal basic personal amount of $16,129 (CRA, 2025), the Canada employment amount of $1,471 (CRA, 2025), and the Ontario basic personal amount of $12,747 and Ontario surtax from the 2025 Ontario payroll tables (CRA, 2025), plus the dividend tax credits cited above. The Ontario health premium is left out because it is identical on both routes at this income.

Read the bottom three rows together. The dividend route leaves $4,752 more in your hand this year and costs you $8,860 of CPP and $26,203 of RRSP room. Use that RRSP room and the salary route closes most of the gap in the same year, and you keep the pension credit. Leave it unused and dividends win on cash.

Not sure which side of that trade-off you are on? Ruby Tax has been filing corporate and personal returns from North York for over ten years, and you talk to the person doing the work. Get a free quote or call 647-990-7258.

Do not just call it a shareholder loan

There is a third thing owners do, and it is the one that causes real damage: take the money out during the year, book it to the shareholder loan account, and leave it there.

Where a shareholder receives a loan from the corporation, “the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership” (Income Tax Act, subsection 15(2), 2025). The whole balance, as income, with no dividend tax credit and no corporate deduction to offset it.

The escape hatch is a repayment deadline. The inclusion does not apply to a loan “repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made”, provided the repayment “was not part of a series of loans or other transactions and repayments” (same source, subsection 15(2.6)).

In practice: money you draw during your 2025 fiscal year has to be cleared by the end of your 2026 fiscal year. Repaying it on the last day and borrowing it back the next week does not work. That is exactly the series of loans and repayments the rule is written to catch.

Clearing it usually means declaring a dividend or a bonus and applying it against the balance, which is a decision to make deliberately during the year.

Common Questions

Can I switch between salary and dividends from year to year?

Yes, nothing locks you in. A year where profit runs over the $500,000 business limit may call for salary, and a tight year may call for a smaller dividend. What you cannot do is decide retroactively. Salary needs source deductions remitted through the year, so it has to be set up before you pay it.

Do dividends affect my Canada Child Benefit?

They can, and by more than you expect. Benefits are tested on net income, and the figure that lands on your return is the grossed-up amount, not the cash. A $50,000 non-eligible dividend counts as $57,500 for that test, so $7,500 of your benefit reduction is based on money you never received.

Will I have to pay tax instalments if I take dividends?

Probably, once you have done it for a year. CRA requires instalments where your net tax owing is more than $3,000 in the current year and was also more than $3,000 in either of the two previous years (CRA, 2026). Nothing is withheld from a dividend, so an owner paid that way usually crosses the threshold in year one and starts quarterly instalments in year two.

Can I pay my spouse dividends to split income?

Only sometimes, and the rules are unforgiving. Dividends paid to a spouse or adult child can be caught by the tax on split income rules, which apply to certain amounts received by adult individuals from a related business (CRA, 2025). Where they apply, the income is taxed under those rules rather than at the recipient’s own graduated rates, and the benefit disappears. Check this before you declare anything.

Most owners end up with a mix

Very few owner-managers sit at one extreme. The common pattern is salary up to the point where the side benefits are paid for, then dividends for the rest. What sets the split is the RRSP room you will actually use, whether you want a full CPP year, whether profit is near the $500,000 business limit, and whether a lender will be reading your return. Incorporated professionals who already track deductions closely, like many incorporated IT consultants, tend to land there on their own.

Decide before your fiscal year ends, not in April. Salary has to run through payroll during the year, and a shareholder loan has a hard repayment deadline. Work backward from what you need to live on, then check it against your personal tax return position for the year.

About the author. Raj is the principal of Ruby Tax, a CRA e-file certified tax and accounting practice at 250 Consumers Road in North York. He has spent over ten years preparing personal and corporate returns for clients across Canada, from first-time filers to incorporated businesses and franchise operators, including owner-managers deciding how to pay themselves each year.

This article is general information, not tax advice for your situation. Tax rules change and the right answer depends on your facts. Confirm anything here against current CRA guidance or talk to us before you act on it.

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