Frequently Asked Questions About Salary and Dividends by Owners of Corporations

What is the difference between a salary and dividend?

A salary is paid to the employee of a business while a dividend is paid to the shareholder of a business.  Since small business corporations often only have one or two owners they can take either a salary as a employee or a dividend as a shareholder, or both.

What are the reporting requirements for salary?

• When hiring employees, even if it is just yourself as the owner of the corporation, you must register for payroll numbers with Revenue Canada (CRA), and Revenue Quebec if you are located in Quebec.

• Once you have the payroll numbers, you can either calculate your salary manually or employ a service to take care of the calculations and reporting on your behalf.  Amounts are deducted from your salary that have to be remitted to CRA (and RQ when applicable) usually on a monthly or quarterly basis.

• At the end of the year T4s (RL1s in Quebec) have to be prepared and submitted to CRA (and RQ).  These amounts are reported as employment income on your personal tax return.

What are the reporting requirements for dividends?

You borrow money from the corporation as and when needed.  Once a year, you determine the total amount that you have withdrawn from the corporation , prepare a T5 slip (RL3 slip in Quebec) and submit to CRA (RQ). The amount is then reported as dividend income on your tax return.

Are salaries tax deductible in the corporation?

Yes, salaries are considered to be an expense and deducted from your revenues in the corporation. 

Are dividends tax deductible in the corporation?

No, dividends are not tax deductible. Rather they are paid from after tax income. 

Do dividends result in double taxation?

No, dividends do not result in double taxation.  Even though dividends are not deductible as an expense, CRA compensates for this by allowing for a dividend tax credit.  This dividend tax credit is offset against the dividend income on your personal tax return (T1) and  results in lower income taxes payable, which are approximately the same as what you would pay on a salary.  Note that income taxes does not include CPP and EI – see below.

How does CPP and EI work with salary and dividends?

Deductions relating to the Canada Pension Plan (CPP) (QPP in Quebec) , Employment Insurance (EI) and Quebec Parental Insurance Plan (QPIP in Quebec) are only taken from salaries since this is considered to be active income. 

These payroll taxes do not apply to, nor are they deducted, from passive income such as dividends.  Consequently, your total taxes payable are lower with dividends, however, you will not receive CPP (QPP) benefits when you retire if you only take dividends. 

EI contributions do not apply to shareholders who own more than 40% of their corporations.  They are not required to pay EI on their salaries nor are they entitled to claim benefits.

How do salaries vs dividends impact RRSP contribution room?

Salaries are considered to be “earned income” which essentially means that income is earned by active participation in a job or a business.  RRSP contribution room is calculated on the total income that is “earned” during the year at 18% of the gross earned income (total salary) up to a maximum of $175,333 for 2024. 

Dividends are considered to be passive income since they are earned as a shareholder of corporation.  This, according to CRA, means that they do not qualify for the RRSP calculation base.  In other words, dividends do not add to your RRSP contribution room.

This is a significant consideration when deciding whether to take salary vs dividends.  Since RRSPs contributions are one of the best way to reduce your taxes while saving for retirement, it often makes sense to make take a salary and dividend mix where you can accumulate some room to contribute.

Do you have to pay yourself the full amount of profits from a corporation?

You do not have to pay yourself the full amount of profits from a corporation.  You do not have to pay yourself at all.  The amount of salary or dividend that you take is your decision (although there might be other tax considerations.)

Do you have to take a fixed salary?

No, you can take any amount of salary that you want in any frequency.  The salary that you earn in a year is based on the date on which it is paid.

Do you have to pay dividends to all shareholders?

All shareholders in the same class must receive dividends in proportion to their ownership in that class.  So if you are paying $1,000 of dividends to the shareholders of Class A or Common Shares and you own 80% and your partner owns 20%, you would pay out $800 and $200 respectively.

If you want to pay different shareholders, different amounts that are not in proportion to their shareholdings, you would structure your corporation shares so that there is more than one class.  You then have flexibility in how you pay the dividends.

Do you have to prepare minutes when you pay a salary or dividends?

You do not have to prepare minutes when you pay salaries as this is internal to the corporations.  You should however prepare minutes whenever dividends are paid as shareholders are external to the corporation.  Minutes can be prepared internally for which templates can be found on the internet.  You can also hire a lawyer, but this can be costly. 

What is the difference between eligible and non eligible dividends?

Eligible dividends are those that are paid from corporations that are not entitled to the small business deduction.  They receive a higher tax credit since the corporation paid a higher tax rate.  Non eligible dividends are paid from businesses that are eligible for the small business tax deduction.  There are situations where a corporation considered to be a small business can pay eligible dividends, which are tracked via a tax account called the General Rate Income Pool (GRIP). This is a more complex area of tax and likely requires the assistance of an accountant.

Can I prepare do my own salary reporting and year end slips?

You can calculate, submit your monthly deductions at source (salary deductions) to CRA and prepare your T4s at the end of the year.   Alternatively, if you don’t want to do the extra administration yourself you can use a payroll service.  It is important to ensure that submissions to CRA are done on time, otherwise penalties can be steep.

Can I prepare my own dividends slips?

Dividends declarations i.e. the T5 and RL3 are only required once a year and are relatively easy to do on your own. For more details, you can take a look at my small business dividend guide.

How do you withdraw dividends from the corporation and Do the Accounting?

When you borrow or withdraw money from the corporation for any reason, it should be allocated to a shareholder loan account which is a “current liability” on your balance sheet. This can be done at any time (or multiple times) during the year. If you decide to take dividends (rather than repay the loan), then you would reallocate the amount from the shareholder loan account, via a journal entry, to a “dividends paid” account which is part of your equity. The journal entry to reallocate the dividends declared is:

Debit: Dividends Paid (reduction of equity)

Credit: Shareholder Loan (clearing out the loan receivable amount)

My video below explains the different types of transactions that affect the shareholder loan account: