Optimizing Compensation from Your Corporation: Salary or Dividend? 

As a Canadian corporation owner, deciding between salary and dividends as a form of compensation is a critical financial decision. Both options have unique tax implications and benefits that can impact your personal and business finances. 

Compensation via Salary 

Choosing a salary means you’re an employee of your corporation. This has several implications: 

• The salary is a deductible expense for the corporation, reducing its taxable income. 
• On your personal tax return, the salary is considered employment income and is taxed at your personal income tax rate. 
• The corporation is responsible for withholding income tax and Canada Pension Plan (CPP) contributions from your salary. Additionally, it must match the CPP contributions, all of which are remitted to the Canada Revenue Agency (CRA). 
• A T4 slip must be issued, and an information return filed with the CRA. 
• Salaries count towards your RRSP contribution room and CPP benefits, aiding in retirement planning. 

Compensation via Dividends 

Dividends are paid out from the corporation’s after-tax profits and carry different considerations: 

• Dividends are not a deductible expense for the corporation. 
• The corporation must adhere to legal requirements for dividend distribution. 
• At the end of the fiscal year, the corporation must file a T5 form with the CRA and calculate the appropriate dividend amounts, taxable dividends, and dividend tax credits. 
• Dividends do not count towards RRSP contribution room, and no CPP deductions or contributions are made. 
• Relying solely on dividends may affect your ability to obtain personal credit, as there is no employment income reported. 

Combining Salary and Dividends 

The most tax-efficient strategy often involves a combination of both salary and dividends. The right balance depends on your specific corporate and personal tax situation. For instance, Canadian Controlled Private Corporations (CCPCs) have a small business limit that can influence the decision to take a salary to maximize tax-deductible expenses. 

It’s crucial to consult with a corporate tax accountant to tailor a strategy that fits your unique circumstances.