Salary or dividends: what you are actually choosing between
The most asked question by incorporated contractors, and it is usually asked in the wrong form.
General information, not tax advice. Rules differ by province and change over time, and none of this is a substitute for advice about your own situation. Quebec runs its own regime and is not covered here.
This page deliberately names no tax rates, thresholds or dollar figures. The arithmetic answer depends on your own income, province and year, so any worked example here would be a number you would be applying to a situation it was not calculated for. What is below is structure, and structure does not move when a rate does.
People ask which one is cheaper. Cheaper is the least decisive part of the answer.
Canada's tax system is built on a principle called integration: the intent is that earning income through a corporation and paying it out to yourself should leave you in roughly the same place as earning it personally. It does not land exactly, and the gap moves with your province and the year, but it is small enough that it is rarely the thing that should decide it.
What actually differs is everything else. Here is what you are really choosing.
What a salary does
It reduces your corporation's taxable income. Salary is a deductible expense, so paying yourself $100 of salary removes $100 from the corporation's profit. That is the single biggest structural difference between the two.
It builds RRSP room. RRSP contribution room is driven by earned income, and salary is earned income. Every year you pay yourself a salary, your room grows.
It builds CPP, and it costs CPP. You pay the employee contribution and, as the employer, the corporation pays its side too. That makes a salary cost the corporation meaningfully more than the salary itself. In return you accumulate CPP entitlement for retirement. Whether that is a cost or a benefit is genuinely a matter of view, and it is one of the few parts of this decision that is about what you want rather than what is optimal.
It creates admin. A payroll account with CRA, source deductions remitted on a schedule, and a T4 at the end of the year.
It produces a T4. Which matters in places that have nothing to do with tax, and we will come back to that.
What dividends do
They are not deductible. Dividends are paid out of income the corporation has already paid tax on. There is no deduction, because the corporate tax has already been applied to that money.
They build no RRSP room, and no CPP. Neither the contribution nor the entitlement. A contractor who has paid themselves entirely in dividends for five years has five years of no new RRSP room and no new CPP.
They are simpler. No payroll account, no source deductions through the year, no T4. A T5 slip after the calendar year ends, and that is the paperwork.
The part that catches people
Nothing is withheld from a dividend.
When you take a salary, tax is deducted before the money reaches you. What lands in your account is roughly yours. When you take a dividend, the full amount lands, and the personal tax on it is still owed. It comes due at your personal filing, months later, all at once.
This is the most common way an incorporated contractor gets into trouble, and it is not a tax problem. It is a cash problem. The money was in the account. It looked available. It was spent. The bill arrives in April.
If you pay yourself dividends, some portion of every one of them is not yours, and nothing in your bank balance will tell you which portion.
The things that are not about tax at all
Borrowing. Lenders assess income differently, and many are more comfortable with a T4 than with dividend income or corporate profit, particularly for a mortgage. Practice varies a great deal between lenders and it changes, so this is worth asking about directly rather than assuming. But if a mortgage is anywhere in the next few years, it belongs in this decision.
RRSP room is use-it-or-regret-it. Room you never generated is not room you can generate later. This is the part people discover long after the years in question have closed.
Childcare and similar deductions. Some personal deductions depend on having earned income, so a dividends-only year can affect what you are able to claim. Worth checking whether any apply to you before assuming they do not matter.
CPP is insurance as well as a cost. Disability and survivor benefits come with it. People who describe CPP purely as a deduction are only counting one side.
Why most people end up with both
The two are not exclusive. A mix is common, and it is usually a mix for a reason: enough salary to generate the RRSP room and CPP you want and to produce a T4, with the rest taken as dividends.
The mistake is not picking the wrong one. It is picking once. The right split depends on how much you are billing, what you want to take out, what you are saving for, and whether you are about to borrow. All of those change, and the decision does not revisit itself.
What to actually do
Decide what you want the year to produce, not just what it costs:
- How much RRSP room do you want to create this year?
- Do you want to keep contributing to CPP?
- Are you likely to apply for a mortgage or a loan in the next two or three years?
- How much do you actually need to take out, as opposed to leave in the corporation?
Then work out the split that produces those things, and check the tax cost second rather than first.
The numbers that answer this depend on your income, your province and the current year's rates, all of which move. A conversation with an accountant costs a fraction of getting this wrong for several years running, and this is the decision where that is most true.
Related: the GST/HST Quick Method, and what a one-person corporation actually owes, and when.
ContractorBooksAI, which I should say up front since I am about to name it, is built for incorporated Canadian contractors: corporate books, GST/HST, T2 figures, and a safe-to-spend number that already accounts for what you will owe, so a dividend that is partly the taxman's does not look like money you can spend. $69 a month.
Your books are stored in Canada. Your login is too. Some processing runs on trusted US services, and we name every one of them.