Salary vs Dividends vs Management Fees: Comparing Ways to Get Paid from Your Corporation — CPA Firm Near You, Montreal

Introduction

Quebec business owners have three main ways to extract money from their corporation: salary, dividends, and management fees. Each method has different tax consequences for both the corporation and the owner. Choosing the wrong method — or mixing them improperly — can trigger payroll penalties, GST/QST issues, shareholder loan problems, or costly reassessments. This guide explains the differences between salary, dividends, and management fees, and how a CPA near you in Montreal can design a compensation strategy that minimizes tax and avoids compliance risks.

Legal and Regulatory Framework

Under the Income Tax Act and Quebec Taxation Act, salary is employment income, dividends are returns on share ownership, and management fees are payments for services typically paid to related corporations. Salary requires payroll deductions and T4/RL-1 slips. Dividends require board resolutions and T5 slips. Management fees must be invoiced by a corporation providing services and must reflect fair market value; GST/QST applies unless exempt. CRA scrutinizes management fees between related corporations, requiring documentation, commercial substance, and reasonableness. Shareholder loan rules apply to withdrawals not structured as salary or dividends.

Key Court Decisions

Courts have ruled that improperly documented management fees are denied as deductions and reclassified as shareholder benefits. Judges confirmed that dividends must be declared properly and that personal withdrawals without documentation constitute income. Several decisions highlight that management fees between related corporations must reflect actual services and not be used solely for income splitting or tax avoidance. Courts emphasize documentation, resolutions, and commercial purpose.

Why CRA and Revenu Québec Scrutinize Compensation Methods

CRA and RQ examine whether management fees are legitimate, whether dividends were declared properly, whether payroll was remitted correctly, whether shareholder loan balances comply with Section 15(2), and whether GST/QST was applied to intercompany services. Red flags include large management fee deductions, missing contracts, no payroll for an active owner, or inconsistent dividend patterns. Compensation structures directly affect corporate and personal taxes, making them a major audit area.

Salary

Pros

Deductible for the corporation; creates RRSP room; qualifies for childcare credits; contributes to RRQ and EI.

Cons

Requires payroll remittances; increases cash outflow; higher personal tax rates at certain brackets.

Dividends

Pros

Flexible; no payroll remittances; often lower personal tax; simple to issue when documented.

Cons

Not deductible; no RRSP room; no RRQ benefits; must be declared with resolutions and T5s; may affect loan qualification.

Management Fees

Pros

Useful when multiple corporations exist; deductible when justified; allows corporate-to-corporate payments without personal tax.

Cons

GST/QST applies; must reflect real services; heavily audited; cannot be used to circumvent payroll or TOSI rules.

When to Use Each Method

Salary

When you need RRSP room, childcare credits, RRQ contributions, or mortgage qualification.

Dividends

When flexibility and lower personal tax are priorities.

Management Fees

When one corporation legitimately provides services to another (for example, a Holdco providing management functions to Opco).

Common Pitfalls

Undocumented management fees

Denied by CRA; treated as shareholder benefits.

Paying personal expenses through corporation

Creates taxable income or shareholder loans.

No payroll when the owner works full-time

Raises red flags for CRA.

Dividends paid without resolutions

Invalid at audit.

Using management fees solely for income splitting

Violates TOSI rules.

Mackisen Strategy

At Mackisen CPA Montreal, we design custom compensation structures to minimize combined corporate and personal taxes. We prepare payroll setups, dividend resolutions, T5 slips, intercompany management fee agreements, GST/QST compliance, and shareholder loan management. Our team ensures all payments are legally documented and tax-efficient.

Real Client Experience

A Montreal tech business paid large management fees to a related corporation without documentation. CRA denied deductions and reassessed tens of thousands. We created proper agreements, corrected past filings, and implemented compliant structures. Another client used only dividends and lacked RRSP room; we restructured compensation to optimize long-term tax and retirement planning.

Common Questions

Can I pay myself only management fees?

No. Management fees require a service relationship between corporations and cannot replace salary or dividends.

Are management fees subject to GST/QST?

Yes, unless an exemption applies.

Which option saves the most tax?

Depends on income level, family situation, RRSP needs, and corporate structure.

Do management fees help with income splitting?

Only if supported by real services and proper documentation.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal builds compensation plans that balance salary, dividends, and management fees to minimize tax and ensure compliance with CRA and Revenu Québec. We create audit-proof structures tailored to your corporation.