If you own a Canadian-controlled private corporation, you choose how profit reaches you: salary through payroll, dividends declared on your shares, or a mix. Canada's tax system is built so the total tax comes out roughly the same either way. In practice it never quite does, and everything outside the tax rate is what decides the answer.
The case for salary
Salary is deductible to the corporation, so it comes out of profit before corporate tax. It counts as earned income, which builds RRSP room at 18% of the prior year's earned income, up to the annual cap. It also earns CPP pension credits, and it gives you a T4, which lenders read far more easily than dividend income when you apply for a mortgage.
The cost is CPP. You pay both the employee and employer shares, and since 2024 a second tier of contributions (CPP2) applies to earnings above the first ceiling. Higher salaries now cost more in CPP than they used to, and that's what changed the math.
The case for dividends
Dividends are paid from after-tax corporate profit and come with a dividend tax credit that accounts for the tax the corporation already paid. There's no payroll, no CPP and no source deductions to remit. That makes dividends simple and flexible, so you can declare them when cash allows. The trade-off is that they create no RRSP room and no CPP pension.
The tax rates come out close. The real differences are retirement savings, CPP, borrowing and cash flow.
Profit you leave in the company
Active business income up to $500,000 is taxed at the low small business rate, and there's an advantage to leaving profit you don't need inside the company. Invest that surplus, though, and watch the passive income: once investment income tops $50,000 a year, the small business limit starts shrinking. Retained earnings strategy and pay strategy have to be planned together.
Why the answer is usually a mix
For many owners, the best result is a salary high enough to build the RRSP room and CPP credits they actually want, with dividends on top for the rest. Where that line falls depends on your personal tax bracket, family members who work in the business, your mortgage plans and how much you want to leave invested in the corporation. We run it each year before year-end, when there's still time to act on it.
General information only, not tax advice. Talk to a CPA about your situation.