Who this is for
Owners of a small corporation who are the main person working in it. Consultants, contractors, real estate agents with a PREC, trucking owner operators, shop owners. If the company has other employees, the same questions apply to your own pay.
The five questions
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Do you want RRSP room? RRSP room is built from earned income, and salary is earned income. Dividends are not. If saving in an RRSP matters to you, some salary is the only way to create the room.
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Do you want to build CPP? Salary means CPP contributions, both the employee share and the employer share, paid by the company. That costs money now and builds a CPP pension later. Dividends skip CPP entirely, in both directions. Decide which you prefer, knowing that it is a long-term choice.
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Can the company handle payroll? Salary needs a payroll account, deductions sent to the CRA on a schedule, and a T4 by the end of February. Late remittances carry penalties. Dividends need a T5 slip after year end and a directors’ resolution, and that is all. Simpler is not always better, but it is simpler.
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How steady is your personal cash need? A regular salary gives you a predictable amount each month with tax already taken off. Dividends often come as lump sums, with the tax paid when you file, which can mean instalments the following year. If a surprise balance in April would hurt, that points toward salary or toward setting money aside.
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What can the company afford, and what does its own tax look like? Salary is an expense of the company and reduces its taxable income. Dividends are paid out of profit the company has already paid tax on, and the personal tax on them is adjusted to reflect that. The combined result is often closer than people expect. The right mix depends on the company’s income, your other income, and what each of you needs the money for.
One thing most people do not realize
Only salary counts as earned income for RRSP purposes. An owner who takes dividends alone builds no new RRSP room, year after year. And the choice has to be made at the time. Money already paid out as salary cannot be re-labelled as a dividend after the fact, or the other way round, as a year-end correction.
What to bring if you want help
- Last year’s T2 return and the company’s Notice of Assessment
- Your personal Notice of Assessment, which shows your RRSP room
- A note of what you have taken from the company so far this year, with dates
- Whether the company already has a payroll account
- What you need personally each month
What this guide does not cover
Income splitting with family members, holding companies, and the rules that limit dividends to relatives are separate topics with their own tests. We tell you when one of them is in play. Nothing here is a recommendation for salary over dividends or the reverse. The answer comes from the five questions.
From the Rex Tax desk
The pattern we see most often is an owner who took money out during the year without deciding what it was. In April they want to call it whichever is cheaper. That is the one thing we cannot do. What we can do is agree a plan in month one, so every transfer already has a label.
Official sources
- CRA: Definitions for RRSPs (earned income)
- CRA: Corporation income tax return (T2)
- CRA: Required tax instalments for individuals
This guide is general information, not advice about your situation. It reflects the rules for the 2026 tax year. It has not yet been reviewed by a practitioner. The information was checked against the official sources listed above on the date shown. Rules change. Check the official sources above or ask us. How we prepare these guides.