When a corporation pays a salary to the shareholder it is an expense and there are corporate tax savings. The individual is then taxed on the personal tax return based on the tax bracket of their total income. Salaries require withholding taxes to be submitted regularly to Canada Revenue Agency (CRA), usually on a monthly basis. The employer is also responsible to pay an equal portion of CPP, and EI may be applicable to both the employer and employee(s).

In contrast, dividends do not attract any withholding taxes, but they generally do require quarterly personal tax instalments if you are paying dividends regularly year to year. Dividends allow you more flexibility with regard to income splitting and tax planning. They can be paid to any shareholder at any particular time of the year as cash flow permits. Dividends can be paid to a family trust if it is a shareholder and then further split to its beneficiaries. However, the new tax on split income (TOSI) rules has made it more difficult to pay dividends to shareholders as you may be taxed at the highest marginal rate.

Overall tax cost is higher by approximately 5% when taking remuneration from a corporation by dividends for 2019 vs salaries (based on income of $100,000 for BC residents). This tax cost has to be taken into account in addition to the factors listed above to help you make your decision.

One other factor that may influence your decision to pay salaries instead of dividends is that salaries generate contribution room for RRSP’s.