🤔 The Million Dollar Question
You incorporated your business to optimize your taxes. Excellent. Now comes the execution challenge: How do you extract the funds? Do you pay yourself a **Salary (T4)** and contribute to CPP? Or do you withdraw **Dividends (T5)** to bypass payroll taxes? The wrong choice in 2026 could cost you valuable RRSP contribution room or leave you with zero government pension.
 |
| Pay Yourself Salary or Dividends? |
There is no "one size fits all" solution. The concept of Integration in the Canadian tax system aims to ensure the total tax paid (Corporate + Personal) is theoretically neutral.
However, the ancillary benefits attached to each method differ drastically. Let's analyze the pros and cons for the 2026 tax year.
Salary (The "Safe" Route)
Paying yourself a salary classifies you as an employee of your own corporation. You must issue a T4 slip and remit monthly source deductions to the CRA.
✅ Pros of Salary:
- RRSP Room: Salary generates RRSP contribution room (18% of earned income). Dividends do not.
- CPP Contributions: You contribute to the Canada Pension Plan. This forces forced savings for a government-guaranteed indexed pension.
- Lending Power: Major banks prefer T4 income. Securing a mortgage is significantly easier with a consistent salary history than with variable dividends.
Dividends (The "Cash Flow" Route)
Dividends represent a distribution of after-tax corporate profits. You issue a T5 slip. It is administratively simpler and requires no monthly remittances.
The Catch: By choosing dividends, you increase immediate cash flow (no CPP), but you are solely responsible for funding your retirement. If you lack the discipline to invest the savings, you risk retiring with insufficient funds.
Chief Editor’s Verdict
If you anticipate needing a mortgage renewal or have a spouse with lower income (making Spousal RRSPs valuable), Salary is the prudent choice.
If you are a disciplined investor confident in outperforming the CPP return and prioritize maximizing current liquidity, Dividends are the superior strategy.
The information provided in this article is for educational purposes only and does not constitute professional tax or accounting advice. Canadian tax laws (CRA) regarding TOSI (Tax on Split Income), passive income limits, and CPP contribution rates are subject to change. The optimal compensation strategy depends on your specific corporate structure and personal financial situation. Always consult with a Chartered Professional Accountant (CPA) before finalizing your compensation plan.
0 Comments