How to Pay Yourself Dividends from Your Corporation in Canada

Most Canadian business owners pay too much in taxes.

Not because they're doing anything wrong. They just pick the easiest option: salary. Every month, they run payroll, deduct source deductions, and call it a day. But if you've incorporated your business, like 1 million+ other Canadian businesses, there’s another option that could save you thousands each year.

Dividends.

Times are tough for small businesses. With 69% of Canadian small business owners now having to reduce or eliminate their salaries. Dividends might be an option to help in these challenging times.

Who Can Actually Pay Dividends?

Short answer? Only corporations.

If you're a sole proprietor, you can't pay yourself dividends. All your business income flows straight to your personal tax return. That's the deal you signed up for when you decided to keep things simple.

But if you've incorporated? Different story. Whether you run a construction company, dental practice, consulting firm, or online store, your corporation can pay dividends to its shareholders. That's you, assuming you own shares.

This matters for:

• Professional corporations (dentists, lawyers, accountants)
• Small business owners with CCPCs (Canadian-Controlled Private Corporations)
• Tech startups and consultancies
• Construction companies and contractors who've incorporated
• Any incorporated business, really

The key requirement? Incorporation. The $400 to $600 you spent setting up that corporation just opened up a whole new world of tax planning.

Keep Your Money Separated

Before we talk dividends, let's cover something basic that trips up too many business owners.

Your business needs its own bank account.

Might seem obvious. Yet plenty of incorporated business owners still mix personal and business funds. Bad idea. The CRA doesn't like it. Your accountant will hate you. And you'll mess up any dividend strategy before it starts.

Why? Dividends are distributions from your corporation to you as a shareholder. Two separate entities. Your corporation writes you a cheque (or E-transfer). Clean. Simple. Documented.

Your Payment Options: Salary vs. Dividends

When you own a corporation, you have three ways to pay yourself:

1. All salary
2. All dividends
3. Mix of both

Most successful business owners pick option three. Here's why.

Salary: The Traditional Route

Take a salary, and your corporation treats you like any other employee. You get a T4. You pay CPP. You pay EI (unless you own more than 40% of voting shares). You build RRSP contribution room.

The downsides? CPP contributions cost you and your corporation almost $7,000 per year combined (2025 rates). That's real money leaving your pocket.

The upside? You're building CPP retirement benefits. You get RRSP room (18% of earned income, up to $31,560 for 2025). Banks understand T4 income when you apply for mortgages.

Dividends: The Tax-Efficient Alternative

Canada uses something called tax integration. The government tries to make the total tax (corporate plus personal) roughly the same whether you earn money directly or through a corporation.

How? Through gross-ups and tax credits.

When your corporation pays you a dividend, you "gross up" that amount on your personal return. Then you claim a dividend tax credit. The math works out so you're not getting taxed twice on the same money.

Example time. Your corporation earns $100,000. Pays about $11,000 in small business tax (rates range from 9% to 12% depending on your province). You take the remaining $89,000 as a dividend. After the gross-up and tax credit calculations, you'll pay roughly the same total tax as if you'd earned that $100,000 directly.

The exact numbers depend on your province and whether you're paying eligible or non-eligible dividends. Non-eligible dividends (from income taxed at the small business rate) get a 15% gross-up with a 9% federal tax credit. Eligible dividends (from income taxed at general corporate rates) get 38% gross-up with a 15.0198% federal credit. Different credits apply too.

The Mixed Approach

Smart business owners often take a modest salary (enough to max out CPP or qualify for mortgages) then top up with dividends. Best of both worlds.

How to Actually Pay Yourself Dividends

Here's the process.

Step 1: Pass a Board Resolution

Even if you're the only director, you need paperwork. Write a resolution declaring the dividend. Date it. Sign it. File it in your corporate minute book.

Sample wording: "The board of directors declares a dividend of $X per share to all shareholders of record as of [date]."

Done.

Step 2: Check Your Corporation Can Pay

Your corporation needs retained earnings to pay dividends. Basically, profit from previous years that you haven't already distributed. Your accountant can confirm the amount available.

Also, your corporation must be solvent after paying the dividend. Can it still pay its bills? Good. Proceed.

Step 3: Transfer the Money

Write yourself a cheque. Or transfer the funds electronically. Record it in your books as a dividend payment, not salary.

Step 4: Prepare T5 Slips

By February 28 of the following year, you need to file T5 slips with the CRA. These show:

The actual dividend amount 

The taxable amount after gross-up

The federal dividend tax credit

If you miss the deadline, penalties start at $100 and climb to $7,500 depending on how many slips you're late filing.

Your accounting software probably handles T5s. If not, your accountant definitely does. Don't try to wing this part.

Dividend Payments Province to Province

Where you live affects your dividend tax rate.

Take non-eligible dividends. The top marginal rate in Manitoba is 37%. In Newfoundland -  49%. That's a 12% difference on the same dividend.

Same story for eligible dividends. BC residents pay 26% at the top bracket. Newfoundland residents? 46%.

These differences add up fast on larger dividends. If you're mobile, your province of residence becomes a tax planning tool.

How Much Should you be Earning to Pay Yourself Dividends?

If your corporation earns less than $50,000 annually, dividends probably aren't worth the complexity. Stick with salary or draws.

Between $50,000 and $150,000? Start exploring a mixed approach. Maybe $30,000 in salary to build some CPP and RRSP room, rest in dividends.

Above $150,000? You need a real strategy. The tax savings from optimizing your salary-dividend mix could buy you a nice vacation. Or two.

Above $500,000? Your dividends might become "eligible" (taxed at higher corporate rates but better personal treatment). That's because the small business deduction only applies to the first $500,000 of active business income. Different math entirely.

Common Mistakes to Avoid

Taking dividends when the corporation owes taxes. The CRA can make you personally liable for unpaid corporate taxes on dividends. They can't do this with salary.

Forgetting about retirement. No salary means no CPP or RRSP room. Plan accordingly.

Paying dividends to family members carelessly. TOSI (Tax on Split Income) rules can hit family members with top marginal rates if they're not actively involved in the business.

Assuming dividends are always better. They're not. Your situation matters. A lot.

Next Steps

Dividend planning works best when it fits your bigger financial picture. What are your retirement goals? Cash flow needs? Other income sources?

That's where professional guidance pays for itself. A good financial advisor can model different scenarios. Show you the real numbers for your situation. Help you avoid expensive mistakes.

At Surcon Mahoney Wealth Management, we work with business owners daily on these exact decisions. We'll analyze your complete financial situation, not just your dividend strategy in isolation. Because smart tax planning is just one piece of building real wealth.

Want to explore whether dividends make sense for your corporation? Let's talk. We'll review your situation and show you exactly what the numbers look like.