Salary vs Dividends: Paying Yourself in the Most Tax-Efficient Way — CPA Firm Near You, Montreal

Introduction

One of the most important decisions for Quebec business owners is how to pay themselves from their corporation: salary, dividends, or a combination of both. The choice affects your personal taxes, corporate taxes, RRSP room, CPP/RRQ contributions, childcare credits, financing ability, and even audit risk. There is no one-size-fits-all solution—only a strategy tailored to your business. This guide breaks down the tax differences between salary and dividends and explains how a CPA near you in Montreal can help determine the best mix.

Legal and Regulatory Framework

Under the Income Tax Act and Quebec Taxation Act, corporations may distribute profits to owner-managers through salary (employment income) or dividends (investment income). Salary is deductible to the corporation; dividends are not. Salary requires payroll remittances (tax, RRQ, RQAP, EI). Dividends require proper resolutions, T5 slips, and minute book entries. CRA requires that compensation be reasonable and documented. Using corporate funds without declaring salary or dividends creates shareholder loan issues under Section 15(2).

Key Court Decisions

Courts have ruled that undocumented payments to shareholders are considered shareholder benefits or disguised dividends. Judges confirmed that dividends must be legally declared through resolutions. Several decisions emphasize that owner-managers must justify compensation, and that personal expenses paid through the corporation create taxable income. Courts also highlight that failing to remit payroll deductions for salary leads to director liability.

Why CRA and Revenu Québec Scrutinize Salary and Dividends

CRA and RQ examine whether compensation is documented, whether payroll was remitted correctly, whether dividends were properly declared, and whether shareholder loans have been cleared. Red flags include inconsistent compensation strategies, no payroll despite active work in the company, or excessive dividends without justification. Improper compensation increases audit risk.

Salary vs Dividends: Tax Comparison

Salary

• Deductible for the corporation
• Creates RRSP contribution room
• Contributes to RRQ and EI (if opted in)
• Helps qualify for loans and mortgages
• Subject to payroll remittances
• Creates childcare credit eligibility in Quebec

Dividends

• Not deductible to the corporation
• Lower personal tax rates in many cases
• No RRSP room created
• No CPP/RRQ contributions
• No payroll remittances required
• Must be declared with resolutions and T5 slips
• May reduce access to certain personal tax credits

When to Choose Salary

You need RRSP contribution room

Salary creates RRSP space; dividends do not.

You want stronger mortgage qualification

Banks prefer reported employment income.

You want RRQ pension benefits

Dividends do not increase future RRQ benefits.

You need childcare tax credits

Quebec’s childcare credit requires earned income (salary).

When to Choose Dividends

You want to minimize payroll compliance

No need for source deduction remittances.

The corporation has taxable income to distribute

Dividends may be tax-efficient depending on corporate and personal rates.

You want flexibility

Dividends can be declared on demand, depending on cash flow.

You have a holding company

Intercorporate dividends can move funds tax-free.

The Combined Strategy (Most Common)

A blend of salary and dividends often produces the best outcome. A CPA determines: the minimum salary required to maximize RRSP room; the optimal dividend amount; the mix that reduces overall corporate and personal taxes; cash flow timing; RRQ vs tax trade-offs.

Common Pitfalls

Taking money out with no declaration

Creates shareholder loans and taxable benefits.

No payroll deductions

CRA penalizes unremitted payroll.

Dividends paid with no resolution

Invalidates the dividend for audit purposes.

Dividends to family members

May trigger TOSI rules.

Using dividends alone

May hurt RRSP room, RRQ, and loan eligibility.

Mackisen Strategy

At Mackisen CPA Montreal, we calculate salary/dividend mixes that minimize total tax while meeting personal and corporate goals. We handle payroll setup, dividend documentation, T5 slips, compensation planning, and shareholder loan management. Our strategies coordinate RRSP planning, cash flow, GST/QST compliance, and long-term financial goals.

Real Client Experience

A Montreal consultant took dividends for years without resolutions or T5 slips. CRA reassessed and treated withdrawals as shareholder benefits. We prepared retroactive resolutions, corrected filings, and designed a proper salary/dividend mix. Another client needed a mortgage and lacked salary income; we restructured compensation to qualify for financing.

Common Questions

Is salary or dividends better?

It depends on personal income, corporate profits, and long-term plans.

Can I pay myself only dividends?

Yes, but you lose RRSP room and RRQ contributions.

Can I switch strategies each year?

Yes, but must be documented properly.

Do dividends require a minute book update?

Yes, resolutions and T5 slips are mandatory.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal structures compensation strategies that reduce taxes, protect owners, and support long-term financial goals. We ensure proper documentation and compliance with CRA and Revenu Québec.