Salary vs dividend is the question every incorporated Ontario business owner faces before December 31, and in 2026 the timing matters more than usual. Ontario cut its small business corporate tax rate on July 1, 2026, and the matching change for owners arrives on January 1, 2027, when the Ontario dividend tax credit on non-eligible dividends drops.
In plain terms, the salary vs dividend balance shifts slightly. Dividends paid out of small business income will cost a little more personal tax in 2027 than in 2026. That makes this year-end a good time to review how you pay yourself.
This guide explains how salary and dividends are taxed, what changes in 2027, and how to decide what mix fits your situation.
Quick facts: Ontario small business rate cut from 3.2% to 2.2% on July 1, 2026 | combined federal and Ontario small business rate 11.2% for 2027 | Ontario non-eligible dividend tax credit falls from 2.99% to 1.99% on January 1, 2027 | top combined rate on non-eligible dividends rises from 47.74% to 48.89% | Ask Corporate Empire to prepare your year-end numbers
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How salary vs dividend taxation works
On the salary side of the salary vs dividend choice, when your corporation pays you a salary, it deducts the salary from its income, so the corporation pays no tax on that money. You pay personal income tax on it, and both you and the corporation pay Canada Pension Plan contributions. The corporation must withhold tax, remit it to the CRA and issue a T4 slip.
On the dividend side, when your corporation pays a dividend, the corporation first pays corporate tax on its profit, then pays the dividend out of what is left. You pay personal tax on the dividend, reduced by the dividend tax credit, which accounts for the corporate tax already paid. There are no CPP contributions and no payroll remittances. The corporation issues a T5 slip.
The tax system is designed so the total tax on salary vs dividend is roughly similar either way. In Ontario, it is not perfectly balanced, and the 2027 change widens the gap.
1. What changes on January 1, 2027
Ontario’s 2026 budget lowered the provincial small business rate from 3.2% to 2.2%, effective July 1, 2026. To keep the system in balance, it also lowered the Ontario dividend tax credit for non-eligible dividends from 2.9863% to 1.9863%, effective January 1, 2027. Non-eligible dividends are the kind usually paid from income taxed at the small business rate.
According to PwC’s summary of the Ontario budget, the top combined rate on non-eligible dividends rises from 47.74% in 2026 to 48.89% in 2027. Because the credit is calculated on the grossed-up dividend, the change adds about 1.15% of the cash dividend in tax at every bracket where you owe tax on dividends.
2. What the change costs in dollars
For the salary vs dividend decision, here is the extra personal tax on non-eligible dividends paid in 2027 instead of 2026, based on the 1.15% difference.
| Dividend paid | Extra tax if paid in 2027 |
|---|---|
| $25,000 | about $288 |
| $50,000 | about $575 |
| $100,000 | about $1,150 |
| $200,000 | about $2,300 |
Estimates based on the change in the Ontario dividend tax credit. Actual results depend on your other income and credits.
The corporation does save on its side, because its small business rate is lower. Investment Executive reported one adviser’s estimate that combined corporate and personal tax on this income rises from about 57.93% to 58.86% at the top bracket, and that the gap compared with earning the income personally widens. The full discussion is in Investment Executive’s article on the change.
3. Salary builds RRSP room and CPP
RRSP room is one of the biggest salary vs dividend differences. Salary counts as earned income for RRSP purposes. Your RRSP limit is 18% of the previous year’s earned income, up to the annual maximum, which is $33,810 for 2026. To reach the full limit, you need about $187,800 of earned income in the prior year. Dividends create no RRSP room.
Salary also means CPP contributions. In 2026, the maximum is $4,230.45 from you and the same from the corporation, plus up to $416 each in second-tier CPP2 contributions. That is a real cost today, but it buys a larger CPP pension later, plus disability and survivor benefits. Our CPP and EI rates 2026 guide has the full figures.
4. Dividends keep things simple
In a salary vs dividend comparison, dividends win on simplicity. They need no payroll account, no monthly remittances and no CPP. For owners with irregular income, that flexibility helps. You can declare a dividend when cash is available, as long as the corporation passes a solvency test and the directors approve it in a resolution.
Dividends also make it easier to pay family members who own shares, but the tax on split income rules limit this in many cases. Have your accountant confirm that any dividend to a spouse or adult child qualifies for an exception before you pay it.
5. Your personal situation decides the mix
A salary vs dividend decision is not only about tax rates this year. The right mix depends on things that are specific to you:
- Whether you want RRSP room and a larger CPP pension
- Whether you need proof of employment income for a mortgage application
- Whether you claim child care expenses, which need earned income
- How much of the corporation’s profit you need to live on
- Whether profits are above the $500,000 small business limit
A mortgage lender, for example, often finds a steady T4 salary easier to work with than dividends, especially for newer corporations. If you plan to buy or refinance a home in 2027, factor that into your pay plan for 2026.
6. Consider timing before December 31
Timing is the newest part of the salary vs dividend question this year. Because the dividend credit drops on January 1, some advisers suggest paying non-eligible dividends you were already planning to take in 2026 rather than early 2027. One adviser quoted by Investment Executive said there “may be planning opportunities to consider accelerating the payment of non-eligible dividends in 2026.”
That does not mean you should pull out more money than you need. Taking extra dividends now moves income into a year where it may push you into a higher personal bracket. Paying personal tax early also means losing the deferral you get by leaving money in the corporation. Run the numbers both ways before deciding.
7. Paperwork and deadlines
Whichever salary vs dividend route you choose, the paperwork has to match.
- Salary must be paid by December 31 to count for 2026, with source deductions remitted on time and T4 slips filed by the end of February 2027.
- Dividends need a directors’ resolution dated when the dividend is declared, an entry in the corporate minute book and a T5 slip filed by the end of February 2027.
- The payment should be recorded correctly in your books, separated from shareholder loan transactions.
Mixing personal withdrawals with salary or dividends without clear records is one of the most common issues in a CRA review. Our CRA audit small business guide covers the records the CRA looks for.
Salary vs dividend: the two sides
Reasons to favour salary
- Builds RRSP room and CPP pension entitlements.
- Gives you a steady T4 income that lenders understand.
- Lets you claim child care expenses and some other credits that need earned income.
- Deductible to the corporation, which reduces corporate tax.
Reasons to favour dividends
- No CPP contributions or payroll remittances, which lowers cost and admin.
- Flexible timing, paid when cash allows.
- Can be the better fit if you already have RRSP room or a pension elsewhere.
- Simpler for owners with irregular income.
Many owners settle the salary vs dividend question with a mix: enough salary to meet RRSP, CPP or mortgage goals, and dividends for the rest.
Year-end salary vs dividend checklist
- Estimate the corporation’s 2026 profit and how much you need personally.
- Decide whether you want RRSP room or CPP for 2027.
- If you planned dividends for early 2027, compare paying them before December 31.
- Prepare a directors’ resolution for any dividend.
- Pay any 2026 salary by December 31 and remit deductions.
- Clear up the shareholder loan account before the year end.
Our year end checklist for Ontario corporations covers the rest of the year-end tasks.
Frequently asked questions
Is salary vs dividend better for an Ontario business owner?
It depends on your income needs, RRSP and CPP goals, and plans such as a mortgage application. Neither is better for everyone, and many owners take a mix.
What changes for dividends in Ontario in 2027?
The Ontario dividend tax credit on non-eligible dividends falls from 2.9863% to 1.9863% on January 1, 2027, which raises personal tax on these dividends by about 1.15% of the cash amount.
Should I pay myself dividends before the end of 2026?
If you were already planning to take non-eligible dividends in early 2027, paying them in 2026 may save some tax. Taking more than you need can cost more than it saves, so review it with your accountant.
Do dividends count for RRSP room?
No. Only earned income, such as salary, creates RRSP contribution room.
Get your year-end numbers ready
Corporate Empire keeps the books for Ontario corporations and prepares the year-end figures your accountant needs for a salary vs dividend plan. Contact Corporate Empire, read our payroll services Ontario guide, or see our full list of services.
This article is general information as of October 23, 2026, and is not tax advice. Speak with a CPA about your situation before paying salary or dividends.
