Salary vs Dividends in Ontario: How to Pay Yourself in 2026

When it comes to salary vs dividends, neither is better for every Ontario business owner. Salary is a deductible expense for your corporation and builds CPP and RRSP room; dividends are paid from after-tax profits, skip payroll and CPP, and build neither. That is why many owner-managers pay themselves a mix and adjust it each year.

This guide explains how each option is taxed in 2026, including Ontario’s July 1 small business rate cut, the dividend gross-up and tax credits, CPP and CPP2, the EI exemption for owners, RRSP room and the dividend credit change coming in 2027. A worked example compares all salary, all dividends and a mix on $100,000 of profit.

Table of Contents

1. How salary is taxed
2. How dividends are taxed
3. CPP benefits and RRSP room
4. Salary vs dividends: a 2026 worked example
5. The 2027 Ontario dividend tax credit change
6. Why many owners use a mix
7. How BBA Tax helps owner-managers plan their pay
8. Frequently Asked Questions

How salary is taxed

Salary is a deductible expense for your corporation, so profit paid out as salary is taxed once, on your personal return. The trade-off is payroll, including CPP on both sides.

In 2026, CPP contributions are 5.95% each for you and your corporation on earnings between $3,500 and $74,600, up to $4,230.45 each. The second additional contribution (CPP2) adds 4% each on earnings from $74,600 to $85,000, up to $416 each. At a salary of $85,000 or more, you and your corporation pay $9,292.90 in total.

Your corporation deducts its share of CPP as a business expense. On your personal return, the enhanced part of your own contributions is a deduction and the base part earns a non-refundable credit.

No EI if you control more than 40% of the voting shares

If you control more than 40% of your corporation’s voting shares, your employment is not insurable, so no EI premiums are deducted from your salary and the corporation pays none either. That job won’t qualify you for regular EI benefits, but you can register for EI special benefits, such as maternity, parental and sickness benefits, the way self-employed people can.

Payroll paperwork

Paying salary means a CRA payroll account, source deductions remitted on time (by the 15th of the following month for regular remitters) and a T4 slip, due Monday, March 1, 2027 for 2026. Our guide to setting up small business payroll walks through it. Ontario’s Employer Health Tax won’t apply while your total Ontario payroll stays under the $1 million exemption for eligible employers (associated employers share one exemption).

How dividends are taxed

Dividends aren’t deductible: your corporation pays tax on its profit first, then pays dividends from what’s left. The dividend tax credits on your return are meant to account for the tax the corporation already paid.

A Canadian-controlled private corporation pays the small business rate on up to $500,000 of active business income a year (less if it shares the limit with associated corporations or has large taxable capital or passive income). Federally that rate is 9%. Ontario’s rate fell from 3.2% to 2.2% on July 1, 2026, so the combined rate is 11.2% from that date. For a tax year running from January 1 to December 31, 2026, the blended rate works out to about 11.7%.

Dividends paid from income taxed at the small business rate are generally non-eligible dividends. You report 115% of the amount received (a 15% gross-up), then claim a federal dividend tax credit of 9.0301% and an Ontario dividend tax credit of 2.9863% of the grossed-up amount for 2026.

Simpler to pay, but watch your instalments

Dividends need no payroll account. Your corporation reports them on T5 slips, due Monday, March 1, 2027 for dividends paid in 2026. Because dividends have no payroll deductions, owners paid mostly in dividends may need to make quarterly tax instalments once their net tax owing tops $3,000 in the current year and in either of the two previous years.

Dividends to family members

Paying dividends to a spouse or adult children can bring in the tax on split income (TOSI), a special tax on certain income from a related business. There are exceptions, for example for family members who work in the business an average of at least 20 hours a week. Our guide to income splitting in Canada explains the rules.

CPP benefits and RRSP room

Dividends don’t count toward CPP or RRSP room, so an owner paid only in dividends builds no CPP pension and no new RRSP room.

CPP

CPP contributions are based on employment and self-employment earnings. Your CPP retirement pension depends on how much and for how long you contributed and on your average earnings. For reference, the maximum pension at age 65 was $1,507.65 a month in January 2026, and the average at 65 was $858.34 a month in July 2026.

CPP also provides disability, survivor and children’s benefits. Whether that is worth up to $9,292.90 a year is a personal call: some owners prefer to invest the money themselves, while others value a pension paid for life.

RRSP room

Your RRSP deduction limit grows each year by 18% of the previous year’s earned income, up to the annual maximum ($33,810 for 2026 and $35,390 for 2027), less any pension adjustment if you belong to a workplace pension plan. Salary counts as earned income; dividends don’t. Reaching the full 2027 limit takes about $196,600 of salary in 2026.

If you are paid in dividends, a TFSA still gives you $7,000 of new room for 2026, whatever your income. Our RRSP vs TFSA guide compares the two.

Salary vs dividends: a 2026 worked example

On $100,000 of corporate profit in 2026, paying it all as dividends left about $6,600 more cash in the owner’s hands than paying it all as salary, but built no CPP and no RRSP room. A mix landed in between.

The example makes these assumptions:

• An Ontario Canadian-controlled private corporation with a tax year from January 1 to December 31, 2026 earns $100,000 of active business income before paying its owner, and pays it all out in 2026.
• Corporate tax uses the blended 2026 small business rate of about 11.7%.
• The owner lives in Ontario, controls more than 40% of the voting shares (so no EI), has no other income, and claims only the basic personal amounts, the CPP deduction and credit, the Canada employment amount and the dividend tax credits.
• The mix pays a $74,600 salary (the 2026 CPP ceiling) plus dividends from the rest.
• WSIB, other credits and deductions, and the timing of tax payments are left out.

Amounts are rounded to the nearest dollar. The all-salary figure is $95,354 because the corporation’s $4,646 share of CPP and CPP2 also comes out of the $100,000.

All salary paid the least income tax ($18,835, against $21,502 of corporate and personal tax for all dividends), but $9,293 went to CPP. All dividends kept the most cash, with no CPP or RRSP room. The mix kept about $600 more than all salary, made the maximum first-tier CPP contribution and still created $13,428 of RRSP room.

The 2027 Ontario dividend tax credit change

From January 1, 2027, Ontario’s dividend tax credit on non-eligible dividends falls from 2.9863% to 1.9863% of the grossed-up amount. With everything else unchanged, that adds about $115 of Ontario tax for every $10,000 of non-eligible dividends.

Ontario’s 2026 budget made the change to align with its lower small business rate. In our example, the same $88,304 dividend would cost about $1,016 more in Ontario tax if it were paid in 2027, holding 2026 brackets constant. The Ontario credit on eligible dividends stays at 10%.

If you planned a large dividend for early 2027, ask whether paying some of it before December 31, 2026 makes sense. The answer depends on your income in each year and your corporation’s cash. Federal legislation passed in June 2026 also sets up a cut to the base CPP rate from 2027, which would make salary slightly cheaper; check the CRA’s official 2027 rates before planning around it.

Why many owners use a mix

A mix lets you choose what each dollar does: salary for CPP, RRSP room and a steady personal income, and dividends for flexibility once you know how the year went.

• Salary up to the CPP ceiling. A $74,600 salary in 2026 makes the maximum first-tier CPP contribution without triggering CPP2 and creates $13,428 of RRSP room for 2027.
• Salary sized to your RRSP plans. Each dollar of salary creates 18 cents of RRSP room, up to the annual limit, which only helps if you will use it.
• Dividends as a top-up. Dividends can be paid when cash allows, without running extra payroll.
• Profit left in the corporation. Money you don’t need can stay invested in the corporation, but passive investment income above $50,000 a year starts to shrink the federal small business limit. Ontario doesn’t apply this rule.

Shareholder loans are not a substitute for either. A loan from your corporation that isn’t repaid within one year after the end of the corporation’s tax year in which it was made is generally added to your income; see our guide to shareholder loan rules.

Personal factors matter as much as tax rates: your other income, your spouse’s income, whether you value CPP, and how much you need to live on. Review the split before your corporation’s year-end and before December 31 each year.

How BBA Tax helps owner-managers plan their pay

BBA Tax works with incorporated business owners in Ottawa and across Canada on tax planning for business owners, including how to split pay between salary and dividends each year. We model the options for your situation, then run payroll for your salary or prepare the T5 slips for your dividends.

Because we also prepare your corporate taxes and your personal return, both sides of the decision are planned together. The team is led by Karim Bitar, Lead Accountant and ELITE Certified QuickBooks ProAdvisor, from our office in Westboro.

Frequently Asked Questions

Is salary or dividends better for an Ontario business owner?

Neither is better for everyone. Salary is deductible to the corporation and builds CPP and RRSP room, but it costs CPP on both sides. Dividends avoid payroll and CPP but build neither. In our 2026 example on $100,000 of profit, all dividends left the most cash, all salary paid the least income tax, and a mix landed in between.

Do I pay EI on my own salary?

Not if you control more than 40% of your corporation’s voting shares. That employment isn’t insurable, so no EI premiums are deducted and it won’t qualify you for regular EI benefits. You can still register for EI special benefits, such as maternity, parental and sickness benefits, the same way self-employed people do.

Do dividends create RRSP room?

No. Your RRSP room grows by 18% of the previous year’s earned income, up to the annual limit, and dividends aren’t earned income. The limit is $33,810 for 2026 and $35,390 for 2027. To create room, you need salary or other earned income in the year before you want to contribute.

What changes for dividends in 2027?

Ontario’s dividend tax credit on non-eligible dividends falls from 2.9863% to 1.9863% of the grossed-up amount on January 1, 2027. With everything else unchanged, that adds about $115 of Ontario tax for every $10,000 of non-eligible dividends. The Ontario credit on eligible dividends stays at 10%.

Do I have to pay tax instalments if I take dividends?

You might. Dividends have no payroll deductions, so if your net tax owing is more than $3,000 in the current year and in either of the two previous years, the CRA expects quarterly instalments. They are due March 15, June 15, September 15 and December 15.

Can I change the mix from year to year?

Yes. You can change how much you take as salary and as dividends each year as profits and plans change. Salary runs through payroll with T4 slips, and dividends are reported on T5 slips. Review the split with your accountant before your corporation’s year-end and before December 31, when your personal tax year closes.