Salary vs. dividends

A corporation is a separate legal entity. To extract funds, you must either receive a dividend from the corporation or have it pay you a salary. In addition, if you have loaned money to your company, you can arrange to receive interest on the loan.

The payment of a salary is deductible to your corporation whereas dividends are paid from after-tax corporate profits. Careful analysis is needed to calculate the best mix of salary, interest and/or dividends for your specific circumstances. The introduction of the eligible dividend regime has further added to the factors that must be considered in making this decision. There are now two tax rates that can apply to dividends, depending on whether they’re eligible or regular dividends (see topic 143). The eligible dividend regime also means that it’s no longer a rule of thumb to bonus down to the small business limit.

Tax tip: Consider paying yourself a salary large enough to make maximum CPP and RRSP contributions.