Salary vs Dividends Calculator for Incorporated Business Owners: how it works in 2026, with a worked example

Questions people ask

Is it better to pay myself salary or dividends?

On cash alone the two are usually within a few percent of each other because the tax system is designed to 'integrate' them. Salary costs CPP (both halves) but creates RRSP room, CPP pension, and a deductible expense that proves income for mortgages; dividends skip CPP and are simpler. Most accountants suggest enough salary to max RRSP room, then dividends.

What is the small business tax rate in 2026?

9% federal on the first $500,000 of active business income, plus a provincial rate from 0% (Manitoba, Yukon) to 3.2% (Ontario, dropping to 2.2% from July 2026; Quebec 3.2%, 2.2% for years starting after April 29, 2026). Combined rates are roughly 9% to 12.2%.

How are dividends taxed personally?

Non-eligible dividends (from small-business-rate income) are grossed up 15% and included in income, then a dividend tax credit of 9.0301% federal plus a provincial credit offsets the corporate tax already paid. Eligible dividends (from income taxed at the general rate) are grossed up 38% with larger credits.

Do I pay EI on my salary?

Not if you control more than 40% of the voting shares; you are exempt and cannot collect regular EI. CPP still applies on salary, both the employee and employer halves.

What about leaving money in the corporation?

Profit you do not need to live on can stay in the corporation, taxed only at the small business rate, and be invested; that deferral is the main tax advantage of incorporating. Passive investment income above $50,000 a year reduces the small business limit.

Does this account for income splitting?

No. Dividends to family members are subject to the tax on split income (TOSI) rules unless an exception applies, and a spouse's salary must be reasonable for work performed. Get advice before splitting.

What about the Ontario health premium, OAS clawback and CCB?

The grossed-up dividend raises net income for these purposes, so dividends can cost more in clawbacks than the same cash as salary. The calculator includes the health premium and income tax but not benefit clawbacks.

Why is the answer not simply 'whichever has less tax'?

Because integration makes total tax roughly equal either way, and the real differences are elsewhere: salary costs CPP but earns a pension and RRSP room, dividends are simpler and skip CPP, and money you do not need can stay in the company taxed at about 12%. Enter how much you actually need to draw and the scenarios show all three effects.

How much salary creates the maximum RRSP room?

RRSP room is 18% of earned income up to the dollar limit, so a salary of about $196,611 in 2026 creates the maximum $35,390 of room for 2027. Dividends create none. Many owners pay themselves at least enough salary to fund the RRSP they want.

Do I have to pay CPP if I pay myself a salary?

Yes, both halves: the corporation pays the employer share and you pay the employee share, about $9,293 in total at the 2026 ceiling (CPP and CPP2). In return you build CPP entitlement. Dividends do not require CPP and do not build it. EI is not required for a shareholder who controls more than 40% of the votes.

What about the money I leave in the corporation?

It is taxed at the small-business rate (about 9% to 13% combined depending on province) and can be invested inside the company, deferring the personal tax until you take it out. That deferral is the main tax advantage of incorporating, but passive investment income above $50,000 a year starts to erode the small-business rate.