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A salary is paid to you as an employee of your corporation. A dividend is paid to you as a shareholder. Because many owner-managed Canadian corporations have one or two owners, you can pay yourself a salary, a dividend, or a combination of both.<\/p>\n
When you hire yourself as an employee(even as the sole owner) you must register for payroll accounts with the CRA<\/a>, and with Revenu Qu\u00e9bec if you operate in Quebec.<\/p>\n Once registered, you calculate payroll deductions (or use a payroll service), remit amounts monthly or quarterly, and prepare T4s at year end (plus RL-1s if you are in Quebec). These amounts are reported as employment income on your personal T1 return.<\/p>\n Dividends require less ongoing administration than salary. During the year you can withdraw money from the corporation as needed. Once a year, you calculate the total withdrawn, prepare a T5 slip<\/a> (and RL-3 in Quebec), and submit it to the CRA and Revenu Qu\u00e9bec. The amount is then reported as dividend income on your personal return.<\/p>\n For a step-by-step guide to declaring and filing dividends, my <\/em>Small Business and Your Dividends guide<\/em><\/a> walks through the full process including the T5 and RL-3.<\/em><\/p>\n Yes. Quebec has its own payroll system through Revenu Qu\u00e9bec, and dividends require an RL-3 slip in addition to the federal T5. Quebec also has QPIP (Quebec Parental Insurance Plan) premiums, which apply to salary but not dividends. If you operate in Quebec, both the CRA and Revenu Qu\u00e9bec need to be kept up to date on your payroll and dividend filings.<\/p>\n Yes to both. T4s require more ongoing administration which includes registering for payroll, calculating and remitting source deductions monthly or quarterly, and filing slips at year end. T5 slips<\/a> are only required once a year and are more straightforward. Many owners handle T5s themselves and use a payroll service for T4 administration.<\/p>\n Minutes are not required for salary payments since this relates to regular operations of the business. Minutes should, however, be prepared whenever dividends are declared, as this is a shareholder-level decision. You can get your lawyer to prepare your minutes (if you have one) or you can do it yourself using templates found online (and save some money_.<\/p>\n Yes. Salaries are a business expense and are deducted from corporate revenues\/sales before calculating taxable income.<\/p>\n No. Dividends are paid from after-tax corporate income. However, contrary to what many people believe, this does not result in double taxation (see below).<\/p>\n No. Even though dividends are not deductible at the corporate level, the CRA compensates for this through the dividend tax credit on your personal return. When you factor in the dividend tax credit alongside the additional corporate tax already paid, the total taxes payable is roughly comparable to salary. It should be noted though that dividends do not generate CPP contributions or RRSP room. Correspondingly, you are not required to pay CPP\/QPP or EI contributions on dividends. In Quebec, QPIP (Quebec Parental Insurance Plan) is also not paid on dividends, but is on salary. <\/p>\n Eligible dividends are paid by corporations that are not entitled to the small business deduction. In practice, recipients of eligible dividends receive a larger dividend tax credit, reflecting the higher corporate tax already paid.<\/p>\n Non-eligible dividends are paid by corporations that qualify for the small business deduction. Most owner-managed Canadian corporations pay non-eligible dividends. <\/strong>The dividend tax credit on non eligible dividends is lower than for eligible dividends.<\/p>\n When your corporation realizes a capital gain, 50% of that gain is non-taxable. This non-taxable portion accumulates in the Capital Dividend Account (CDA) and can be distributed to shareholders tax-free by filing a T2054 election with the CRA. For more detail, see my post on capital dividends and how they benefit your corporation<\/a>.<\/p>\n No. You can leave earnings inside the corporation and pay yourself nothing, a portion, or the full amount. Retained earnings (accumulated profits) inside the corporation can be invested and used for future needs. There may also be tax advantages to spreading income over multiple years rather than taking a large withdrawal in a single year.<\/p>\n If you\u2019d like to learn more, watch my video on <\/em>Investing through your corporation<\/em><\/a><\/p>\n No. You can take any amount, at any frequency whether its weekly, monthly, quarterly, or annually. The amount of salary that you take can change from period to period. <\/p>\n The salary reported on your T4 is based on when it is actually paid, not when it is earned. For example, if you pay yourself a salary in December 2026 but it relates to a January 2027 pay period, this will be reflected on your 2026 T4.<\/p>\n CPP contributions (and QPP in Quebec) apply only to salary, not dividends. EI premiums also apply only to salary, though shareholders who own more than 40% of their corporation are not required to pay EI and cannot claim EI benefits<\/strong>.<\/p>\n The practical implication is that if you take only dividends, you will not receive CPP or QPP when you retire, which would then need to be compensated for by building a larger retirement portfolio. <\/p>\n Salary is consider to be earned income<\/a> under CRA rules. Consequently, RRSP contribution room is calculated at 18% of earned income up to the annual maximum ($33,810 for 2026).<\/p>\n Dividends are passive income and do not generate RRSP contribution room. <\/p>\n This is one of the most significant practical differences between the two. Many incorporated Canadians take a combination so that you have enough salary to generate some RRSP room, with the balance as dividends. For a framework of how to think through this decision, see my guide to choosing between salary and dividends<\/a>.<\/p>\n Shareholders within the same share class must receive dividends in proportion to their ownership. <\/p>\n If you want flexibility to pay different shareholders different amounts, you can structure your corporation with multiple share classes. This is common in income-splitting arrangements and is worth discussing with your accountant or financial advisor before you incorporate, since implementing new share classes after you incorporate<\/a> can be costly.<\/p>\n When you withdraw money from the corporation during the year, it is typically recorded as a debit to a shareholder loan account. If you later decide to treat those withdrawals as dividends, you clear the loan with a journal entry:<\/p>\n Debit:<\/strong> Dividends Paid (reduction of equity) Note that dividends are not an expense but rather they are a reduction of equity. For a walkthrough of how shareholder transactions work in your books, see my shareholder loan post<\/a>.<\/p>\nWhat are the reporting requirements for dividends?<\/h3>\n
Do Quebec corporation owners have additional reporting requirements?<\/h3>\n
Can you prepare your own T4s and T5s?<\/h3>\n
Do you need to prepare minutes when paying salary or dividends?<\/h3>\n
Tax Considerations<\/h2>\n
Are salaries tax deductible in the corporation?<\/h3>\n
Are dividends tax deductible in the corporation?<\/h3>\n
Do dividends result in double taxation?<\/h3>\n
What is the difference between eligible and non-eligible dividends?<\/h3>\n
What is a Capital Dividend?<\/h3>\n
Paying Yourself<\/h2>\n
Do you have to pay yourself the full amount of corporate profits?<\/h3>\n
Do you have to take a fixed salary?<\/h3>\n
How do CPP and EI work with salary and dividends?<\/h3>\n
How do salary and dividends affect RRSP contribution room?<\/h3>\n
Ownership and Accounting<\/h2>\n
Do you have to pay dividends to all shareholders equally?<\/h4>\n
How do you record dividends in your accounting system?<\/h3>\n
Credit:<\/strong> Shareholder Loan (clears the liability)<\/p>\nGo Deeper<\/h3>\n<\/div>\n