Salary, Bonus or Dividends? Why You Have to Decide Before Your Corporation's Year-End

3 hours ago

2 min read

Every owner-manager asks the same question: what is the best way to pay myself? The honest answer is that there is no single right answer. But there is a right time to answer it, and that is before your corporation's year-end.

Once the fiscal year closes, many of the most useful options are gone. Here is why.

The bonus that has to be declared in time

One of the most effective planning tools is the year-end bonus. Your corporation can deduct a bonus in the current year even if it is paid after year-end, as long as it is properly declared and recorded before the year closes and actually paid within 180 days after year-end. Used well, it lets you bring corporate income down to the small business limit, smooth your personal income between years, and decide on the final number once the profit is known.

Miss the year-end, and that flexibility is gone for this year.

Why salary still matters

Dividends are simple, but salary creates things that dividends do not:

RRSP room. RRSP room is based on earned income, and dividends are not earned income. For 2027, the maximum RRSP contribution is $35,390, which requires roughly $196,600 of earned income in 2026.
CPP retirement benefits. Salary up to the 2026 maximum pensionable earnings ($74,600, plus the second tier up to $85,000) builds your CPP pension. Some owners value this; others prefer to invest the difference. Either way, it should be a decision, not an accident.
Proof of income. Lenders and mortgage brokers often prefer a steady T4 history.
Childcare and other deductions that depend on earned income.

Why dividends still matter

Dividends have their own advantages: no payroll remittances, no CPP cost, and flexibility in timing. For some owners, especially those with large investment portfolios inside the corporation, dividends can also help recover refundable taxes the corporation has already paid.

The mix is where the savings are

The best result is usually a combination, designed around your personal goals: how much you need to live on, whether you want to maximize your RRSP, whether you plan to retire early, and whether family members are part of the picture. That design needs your current-year numbers, which is exactly why it has to happen in the weeks before year-end.

What happens if you wait

If you only think about compensation when your accountant prepares the return, you are limited to whatever already happened. Too much income may have been taxed at higher corporate rates, RRSP room for next year may be lower than it could have been, and an opportunity to split or defer income may simply be gone.

Plan it now

A short year-end planning meeting lets us model salary, bonus and dividend options side by side and show you the after-tax result of each, before the decision is locked in.

Rise CPA LLP helps incorporated professionals and business owners in Ontario and Manitoba pay themselves the smart way. Book your year-end compensation review or call (647) 847-1000.

This article is general information and is not tax advice for your specific situation. Speak with a CPA before acting on it.