The short answer
For small-business income in Ontario, salary and dividends end up taxed within about a point of each other at the top bracket once every dollar leaves the corporation. The real differences are what each buys: salary creates RRSP room, CPP and pension eligibility, while dividends skip payroll costs and leave more invested inside the corporation for now.
GuideEvery incorporated physician and dentist has to answer the same question at least once a year: how should the corporation pay me? The advice in circulation ranges from "always take salary" to "dividends are always cheaper", and much of it is still quoting a small business rate that Ontario cut on July 1, 2026.
This guide works through the question on current Ontario numbers. It covers how the two forms of pay are taxed, what each one buys beyond the tax bill, a worked example run through the same engine as the salary vs. dividends optimizer, and the rules that apply specifically to medicine and dentistry professional corporations.
Canada's tax system is built so that income earned through a corporation and paid out as a dividend bears roughly the same total tax as income earned personally. That design principle is called integration, and it is why the salary versus dividend decision is usually a matter of a few points rather than a few dozen.
Salary is deductible to the corporation, so it pays no corporate tax and is taxed once, personally. A dividend is paid from income the corporation has already taxed, so the personal tax on it is lower. The dividend gross-up and tax credit in section 82 of the Income Tax Act do the balancing.
Here is $100 of practice income, paid out in full, at 2026 Ontario top personal rates:
| Route | Corporate tax | Personal tax rate | Net to you | Total tax |
|---|---|---|---|---|
| Salary | None (deductible) | 53.53% | $46.47 | 53.5% |
| Small business income, non-eligible dividend | 11.2% | 47.74% | $46.41 | 53.6% |
| Same route, dividend paid in 2027 or later | 11.2% | about 48.89% | $45.39 | 54.6% |
| Income displaced by the federal passive income grind, eligible dividend | 17.2% | 39.34% | $50.23 | 49.8% |
| Income above $500,000, eligible dividend | 26.5% | 39.34% | $44.59 | 55.4% |
Three things stand out. For the income most practices earn, inside the $500,000 small business limit, salary and dividends land within about a point of each other. Ontario's 2026 Budget widens that gap slightly from 2027 by lowering the provincial credit on non-eligible dividends. And the routes that produce eligible dividends differ more, which is covered in eligible vs. non-eligible dividends.
The table leaves out two things that decide most real cases: CPP contributions, which only salary triggers, and timing, because a corporation does not have to pay everything out this year. Both come up again in the worked example.
Salary costs more payroll administration and, in most years, a little more tax up front. In exchange it creates entitlements that dividends cannot.
RRSP room. RRSP room is 18 percent of the previous year's earned income, up to a dollar limit. The 2027 limit is $35,390, so a 2026 salary of about $196,611 creates the maximum room for 2027. The 2026 limit of $33,810 was set by 2025 income, which is why so many published "ideal salary" figures are a year out of date. Dividends are not earned income under section 146 and create no room at all.
CPP. Salary triggers Canada Pension Plan contributions, and because you are both employer and employee, the corporation pays both halves. In 2026 contributions run at 5.95 percent on each side on salary between the $3,500 basic exemption and $74,600, up to $4,230.45 each, plus 4 percent on each side for the second tier between $74,600 and $85,000, up to $416 each, or about $9,293 in total. The rules change with age: between 65 and 70, an owner who is already receiving a CPP retirement pension can elect to stop contributing, which stops the employer half as well, and contributions end at 70 regardless. For an owner in that age range the CPP side of the comparison below can shrink to nothing. In return you build a lifetime, inflation-indexed pension: the maximum at 65 was $1,507.65 a month in January 2026, reached only after many years of maximum contributions. Whether that is good value is a real question, and the answer depends on your age, health and other savings. What matters for this guide is that CPP contributions are not simply a tax.
An individual pension plan. An IPP is a defined benefit plan for owner-managers, and its contribution limits are based on employment income from the corporation. No salary, no IPP. The trade-offs are covered in IPP vs RRSP for medical professionals, and the IPP vs RRSP tool runs the numbers.
Other things that key off earned income. The child care expense deduction is capped at two-thirds of earned income, and dividends do not count. A dividend-only household can find the deduction limited or unavailable. Lenders and insurers also look at income differently depending on its form, which has its own section below.
Certainty and a corporate deduction. Salary is deducted by the corporation and withheld at source, so there is no personal instalment surprise in April. A bonus can be declared at year-end and still deducted in that year, provided it is paid within 180 days after the year-end, under subsection 78(4). The deduction has to be reasonable under section 67, and CRA has long said it generally does not challenge the reasonableness of salaries and bonuses paid to active owner-managers of a Canadian-controlled private corporation.
What salary does not trigger. If you control more than 40 percent of the corporation's voting shares, your employment is not insurable under the Employment Insurance Act, so there are no EI premiums on your salary and no EI entitlement from it. Ontario's Employer Health Tax only applies once total payroll passes a $1 million exemption, which is shared among associated employers, so a single-owner practice rarely pays it on the owner's salary.
Dividends are simpler to run and often cheaper this year. The reasons are worth separating, because only some of them are permanent.
No CPP and no payroll. A dividend-only owner makes no CPP contributions, runs no payroll, files T5 slips rather than T4 slips, and remits nothing monthly. The savings on CPP are real, and so is the pension you are not building.
More left to invest, for now. Deferral is not unique to dividends: a corporation that pays salary can also keep whatever you do not need. The difference is how much stays. Salary is paid out of pre-tax income, so to deliver the same after-tax cash it takes more out of the corporation, including CPP. Dividends are paid from income already taxed at 11.2 percent, so more is left behind. That extra retained money is the main reason dividends win single-year comparisons, and it is also the part most often misread, because it still carries personal tax that has only been postponed. Nor does it grow at 11.2 percent: once invested, its returns are taxed under the separate rules for corporate investment income, with interest taxed at about 50 percent, part of it refundable, and too much investment income shrinking the small business deduction. Those rules are covered in the corporate investing guide.
Refunds of the corporation's investment tax. A corporation that earns investment income pays refundable tax on it, and the only way to get that refund is to pay taxable dividends, under section 129. Salary does not trigger it. A corporation with a portfolio that pays only salary can accumulate refundable tax it never recovers. The mechanics are in RDTOH explained.
Access to the corporation's other pools. Eligible dividends draw on the general rate income pool, and capital dividends, paid tax-free from the capital dividend account, are available only as dividends.
What dividends cost besides tax. Personal tax on dividends is not withheld, so you pay by instalments or in one lump in April. Dividends create no RRSP room, no CPP, and no IPP eligibility. And the dividend gross-up makes your net income look larger than the cash you received, which matters for income-tested benefits. In retirement, the OAS recovery tax starts at $95,323 of net income for the 2026 income year, and a non-eligible dividend counts at 115 percent of its cash amount, an eligible one at 138 percent.
Take an Ontario physician whose corporation earns $300,000 of practice income after expenses and who needs $150,000 a year after personal tax. Assume the corporation qualifies for the full small business deduction, has no investment income, and the physician owns all the voting shares and is under 65, so CPP applies in full. These figures come from the same engine as the optimizer, using the fully phased-in 11.2 percent corporate rate.
| Dividends only | Salary to the RRSP maximum, dividends for the rest | Salary only | |
|---|---|---|---|
| Salary | $0 | $196,611 | $235,201 |
| Non-eligible dividends | $203,304 | $34,257 | $0 |
| Corporate tax | $33,600 | $11,059 | $6,737 |
| Personal income tax and Ontario Health Premium | $53,304 | $76,221 | $80,555 |
| CPP, both halves | $0 | $9,293 | $9,293 |
| Total paid this year | $86,904 | $96,573 | $96,585 |
| Left in the corporation | $63,096 | $53,427 | $53,415 |
| RRSP room created for 2027 | $0 | $35,390 | $35,390 |
On this year's numbers, dividends look about $9,670 cheaper than the salary mix. That figure is accurate for what it measures, and it is also where most comparisons stop. Two things sit inside it.
The first is CPP. $9,293 of the difference is CPP contributions, which buy a pension rather than disappearing into general revenue. Take CPP out and this year's gap is only about $380.
The second is timing. The dividend route leaves $63,096 in the corporation against $53,427, and that gap is exactly the $9,669 difference in this year's tax. Money in the corporation has only paid corporate tax. When it comes out as a non-eligible dividend, it pays personal tax too.
So look at the same example with everything eventually paid out. Assume the retained money comes out in 2027 or later at the top non-eligible rate of about 48.89 percent:
Counted that way, dividends still come out about $4,900 ahead, and the entire advantage is CPP. Leave the CPP contributions out and the salary mix costs about $4,350 less. If the retained money comes out later at a lower personal rate, say 30 percent in retirement, the salary mix costs about $2,500 less with CPP left out, and about $6,800 more with it in.
One detail from the optimizer is worth knowing. Its lowest this-year figure for this example is not dividends only but a token $2,000 salary with dividends for the rest, at $86,533. A salary below CPP's $3,500 basic exemption triggers no CPP but still earns the federal Canada employment credit. It also means running a payroll account for a very small amount, which not every practice will think is worth it.
That changes the question. The choice is less about which form of pay is taxed less and more about three judgments: what the CPP pension is worth to you, how much the RRSP room is worth, and how long the retained money will stay invested before it comes out. None of those has a universal answer, and the comparison above deliberately leaves out the value of the RRSP deduction itself and the growth on retained money.
Two limits on the example. A corporation with a December 31, 2026 year-end pays a blended rate of about 11.7 percent for 2026, because Ontario's cut is prorated. And this corporation has no investment income; with a portfolio, the passive income grind and refundable tax change the result.
Run your own numbers here:
Most published salary versus dividend advice is written for general business owners. Three rules change it for Ontario physicians and dentists.
Who can own shares. Under Ontario Regulation 665/05, only a member of the College can hold voting shares of a medicine or dentistry professional corporation. Non-voting shares can be held by the member's spouse, child or parent, or by individual trustees holding shares for the member's minor children. A discretionary family trust cannot hold them.
Tax on split income. Owning shares does not make dividends to family members tax-efficient. The tax on split income rules in section 120.4 generally tax dividends to family members at the top personal rate unless an exception applies. The most useful exception for general businesses, excluded shares, is expressly unavailable to professional corporations. Exceptions that can still apply include a spouse receiving dividends from the year the owner turns 65, and an adult family member, 18 or older by the end of the year, who is actively engaged in the business on a regular, continuous and substantial basis in the year or in any five earlier years, which the rules treat as met at an average of at least 20 hours a week. That work-based exception is not available for minor children, so dividends to a child under 18 remain subject to the tax on split income. A family member who genuinely works in the practice can be paid a reasonable salary for that work, which is a separate question from dividends.
The small business limit and its neighbours. Salary reduces the corporation's active business income, which matters once income approaches the $500,000 small business limit or when that limit is shared with an associated corporation. Salary does not reduce the passive income grind, which is driven by investment income, not active income. How the grind works, and the practical responses to it, are in five ways to manage the SBD grind.
The right mix usually changes over a career, and a few situations push it in a clear direction.
Early career with unused tuition credits. Section 118.92 applies tuition credits before the dividend tax credit, and the dividend tax credit cannot create a refund. A new graduate drawing only dividends can use up tuition credits against dividend income and leave part of the dividend tax credit unused. Salary avoids that ordering problem, which is one reason salary is sometimes favoured in the first years of practice.
Borrowing for a home or a practice. Lenders generally want to see stable, documented income. Salary appears on a T4; dividend income is usually assessed from two years of personal returns and often the corporation's financial statements. If a mortgage or practice purchase is coming, ask the lender how it treats dividends before changing your pay mix.
Buying disability insurance. Disability insurers set the benefit you can buy from your income, and insurers differ in how they count dividends and retained corporate earnings. A switch to dividends shortly before applying can reduce the coverage available. Disclosure: I am a licensed insurance and investment advisor, and disability insurance is among the products I place, so treat this as a question to ask any insurer rather than a reason to buy.
Peak earning years. With income well above what you spend, the salary that maxes RRSP room is a common anchor, with dividends for the rest and surplus retained and invested. Whether an IPP adds enough to justify its costs is a separate calculation.
Retirement and wind-down. Once practice income stops, there is no active income to pay salary from, and the corporation is usually drawn down through dividends. The gross-up's effect on OAS, the 2027 change to non-eligible dividend rates, and the order in which the corporation's refundable and capital dividend balances are used all start to matter more than the salary question itself.
Very large dividends and the minimum tax. The alternative minimum tax was redesigned in 2024, and it calculates dividends without the gross-up and without the dividend tax credit. Large dividends on their own rarely trigger it, because the regular federal tax on a large dividend is generally higher than the 20.5 percent minimum tax, which applies above a $181,440 exemption for 2026. Large capital gains and big deductions are the usual triggers, so check with your accountant in a year that combines them.
The decision is annual, and it is best made before year-end, when a bonus can still be declared.
If you want the salary question looked at alongside your corporate investments, insurance and retirement plans rather than on its own, that is the planning conversation described on the pages for physicians and dentists.
Neither is better in general. For income taxed at the small business rate, the combined corporate and personal tax on salary and on dividends is close once everything is paid out. Dividends usually lower this year's bill because they avoid CPP contributions and leave more inside the corporation for now; salary buys RRSP room, CPP, and access to an individual pension plan.
RRSP room is 18 percent of the previous year's earned income, up to a dollar limit. The limit for 2027 is $35,390, so a 2026 salary of about $196,611 generates the maximum room for 2027. A pension adjustment from an individual pension plan reduces that room. Dividends are not earned income and create no RRSP room.
Ontario allows a spouse, child or parent, or trustees for minor children, to hold non-voting shares of a medicine or dentistry professional corporation. But the tax on split income rules generally tax those dividends at the top rate, because the excluded shares exception is not available to professional corporations. One common exception applies to a spouse from the year the owner turns 65.
Generally no. Employment by a corporation is not insurable if you control more than 40 percent of its voting shares, so neither you nor the corporation pays EI premiums on your salary. You also do not build EI benefit entitlement through that salary. CPP is different: it applies to salary above the $3,500 basic exemption, up to the annual maximums, until age 65. From 65 to 70, someone already receiving a CPP retirement pension can elect to stop contributing, and contributions end automatically at 70.
It can. Ontario's 2026 Budget lowers the provincial credit on non-eligible dividends from January 1, 2027, lifting the top combined rate on them from 47.74 to about 48.89 percent. Money left in the corporation and paid out as non-eligible dividends later will cost more personal tax than the 2026 tables suggest, which narrows the advantage of deferral.
