Once your business is incorporated, the corporation's money is not automatically your money. It is a separate legal person, and to get paid you have to move money out of it deliberately. In Canada, there are two main ways to do that: salary and dividends. Most owners use one, the other, or a blend.
Here is how salary versus dividends actually works, so the choice is less mysterious.
Paying yourself a salary
A salary is employment income. The corporation pays you, deducts the salary as a business expense, and runs payroll: it withholds income tax and CPP and remits them to the CRA. On your side, salary counts as earned income, so it builds RRSP contribution room and requires you to pay into the Canada Pension Plan.
Paying yourself dividends
A dividend is a distribution of the corporation's profits to you as a shareholder. It is paid out of money the corporation has already been taxed on, so the corporation does not deduct it. There is no payroll to run and no CPP to pay. On your personal return, dividends are taxed using the gross-up and dividend tax credit system rather than as ordinary income. Simpler administratively, but no RRSP room and no CPP.
Salary vs dividends at a glance
| Factor | Salary | Dividends |
|---|---|---|
| Deductible to the corporation | Yes | No |
| Builds RRSP room | Yes | No |
| Requires CPP contributions | Yes | No |
| Payroll administration | Yes | Minimal |
| Personal tax treatment | Ordinary income | Gross-up and credit |
Which is better?
There is no universal answer, which is why you see business owners do different things. It depends on how much you need to take home, whether you want to build RRSP room and CPP, whether the corporation benefits from the deduction, and your overall income level. Many owners take a mix, enough salary to build RRSP room and hit CPP, then dividends on top.
Where Korporex fits
Paying yourself dividends is only possible because your corporation has a share structure that allows it. Korporex sets up that share structure when it files your incorporation, so the option is there from day one.