Paying yourself: salary or dividends?

When you own a corporation, you can pay yourself a salary (including bonuses), dividends, or a mix of the two. Salary is employment income: it comes with CPP contributions and builds RRSP room. Dividends are a share of the corporation’s profits and get a dividend tax credit on your return, but they don’t count toward CPP or RRSP room.

Salary: paying yourself as an employee

If you work for your corporation, it can pay you a salary through payroll, like any other employee. On your return, that’s employment income.

CPP. When your employment is pensionable, both you and the corporation contribute to the Canada Pension Plan on your salary. If you work in Quebec, you both contribute to the Québec Pension Plan instead. The CPP and EI table has this year’s rates and maximums.

EI. If you control more than 40% of the corporation’s voting shares, your employment generally isn’t insurable, so EI premiums don’t apply to your salary.

RRSP room. Your RRSP deduction limit is based partly on your earned income for the previous year, and salary counts as earned income. Each year’s new room is generally 18% of the previous year’s earned income, up to a dollar limit ($32,490 for 2025), less any pension adjustment. Dividends aren’t on the list of income that counts.

Dividends: paying yourself as a shareholder

A dividend is a share of the corporation’s profits that you receive because you own shares. It’s usually reported on a T5 slip. Since it isn’t pay for employment, there are no CPP contributions or EI premiums on it.

On your return, you don’t report the amount you actually received. You report a “grossed-up” taxable amount, then claim the dividend tax credit:

• Eligible dividends are grossed up by 38%.
• Other than eligible dividends are grossed up by 15%.

The dividend tax credit table shows the federal and provincial credit rates for each type.

Which kind your corporation can pay

A corporation designates a dividend as eligible by notifying each shareholder in writing when it pays the dividend. A Canadian-controlled private corporation can pay eligible dividends without extra tax up to its general rate income pool (GRIP), which generally reflects taxable income that didn’t benefit from the small business deduction or another special rate. If it designates more than it can, it pays a special tax (Part III.1 tax) on the excess.

So dividends paid out of profits that got the small business deduction are generally other than eligible dividends.

The corporation’s side

The two also differ for the corporation. The salary it pays you is deducted when it calculates its income, so that part of the profit is taxed only in your hands. Dividends come out of the corporation’s profits, which are taxed in the corporation first: for a Canadian-controlled private corporation’s active business income that qualifies for the small business deduction, at a net federal rate of 9%, plus the provincial or territorial rate. The corporate tax rates table shows the combined rates.

What to weigh

There’s no single answer: the total tax on a dollar of profit paid out as salary or as dividends depends on your province, your income and your corporation’s tax rate. Beyond the tax, think about:

• Retirement savings. Salary comes with CPP contributions and creates RRSP room; dividends do neither.
• Paperwork. Salary means running payroll for yourself; dividends are reported on T5 slips.
• Reported income. Because dividends are grossed up, the income on your return is higher than the cash you actually received.
• Family members. Dividends paid to family members can be caught by the tax on split income (TOSI), which taxes them at the highest marginal rate unless an exclusion applies, for example for an adult family member who works in the business an average of at least 20 hours a week. TOSI doesn’t apply to salary.

You can combine the two: for example, a salary large enough to create the RRSP room or CPP coverage you want, with dividends for the rest.

What to do

• Use the income tax calculator to see your personal tax on a salary, eligible dividends, other than eligible dividends or a mix, and the dividend tax credit table for the rates behind it.
• Check your corporation’s GRIP before designating any dividend as eligible.
• If you’re also borrowing from the corporation, read Shareholder loans first.