The ways to pay yourself from a professional corporation
Every dollar that moves from your corporation to you is taxed somewhere along the way. These are the main routes Canadian dentists and physicians use, and what each one costs.
- Salary or bonus: deductible to the corporation, taxed as regular income to you. It adds CPP contributions on both sides and creates RRSP room.
- Non-eligible dividends: the usual kind for a professional corporation. The corporation pays small business tax first, then you pay dividend tax. No CPP, no RRSP room.
- Capital dividends: paid from the capital dividend account, which builds up from items like the tax-free half of capital gains and life insurance proceeds. They're tax-free to you.
- Shareholder loan repayments: if you lent money to your corporation, taking it back is tax-free. It's your own money.
- RRSP and IPP: salary creates RRSP room, and an individual pension plan funded by the corporation can allow larger tax-deductible contributions for older, higher-income owners.
- Corporate-owned life insurance: premiums are paid with lower-taxed corporate dollars, and the death benefit can flow out largely tax-free through the capital dividend account.
- Leaving it in: profit you don't need now can stay in the corporation or a holding company and be invested, taxed at the low rate until you take it out. Passive investment income inside a corporation has its own rules, so plan the amount with your accountant.
Salary or dividends: which costs less?
On paper, Canada's tax system is designed so salary and dividends cost about the same in total. In practice they don't: provincial rates, CPP, the size of your draw and your other income all shift the answer. Salary costs CPP but builds a pension and RRSP room. Dividends skip CPP but create no RRSP room. Many owners land on a mix, often a salary near the CPP maximum with dividends on top. The calculator above runs the numbers for your province and income.
Toll-free money most owners overlook
Two routes can move money out with no personal tax at all: repaying a shareholder loan and paying capital dividends. Both depend on records your accountant keeps, so ask for your shareholder loan balance and your capital dividend account balance before you pay yourself a taxable dividend.
Common questions
Should a dentist take salary or dividends?
It depends on your province, how much you take out, your other income, and whether you value CPP and RRSP room. Many incorporated dentists use a mix. The calculator compares all three for your numbers.
What is a non-eligible dividend?
A dividend paid from corporate income taxed at the small business rate, which is the usual case for a professional corporation. It's taxed at lower personal rates than salary because the corporation has already paid some tax.
What is a capital dividend account?
A notional account that tracks amounts your corporation can pay out tax-free, such as the non-taxable half of capital gains and life insurance proceeds. Your accountant tracks the balance.
Is taking back a shareholder loan taxed?
Repaying money you lent to your corporation is not taxed, because it's your own money coming back. Make sure the balance is documented by your accountant.
Is this tax advice?
No. It's general information and an estimate based on simplified assumptions. A free 15-minute review can look at your actual numbers, coordinated with your accountant.