Who this is for
- Canadian residents contracting through their own Canadian corporation in its first year
- Owners who also earned T4 employment income earlier in the year
Not covered here
- Detailed salary-versus-dividend optimization
- Dividend declarations and T5 preparation
- Payroll setup and remittance instructions
- Personal services business classification
How do you pay yourself after incorporating to contract?
Decide whether owner pay is salary or a dividend before moving money. Record loan repayments and documented expense reimbursements separately.
| Payment | What happens as you are paid | What remains to plan |
|---|---|---|
| Salary | The corporation runs payroll and deducts income tax and applicable CPP or QPP. | Employer pension contributions and any tax from your other income. |
| Dividend | The corporation pays you from profits; there are no payroll deductions on an ordinary dividend to a Canadian resident. | Corporate tax on profits and personal tax on the dividend. |
Why can the first year of dividends produce a large April 30 bill?
Dividends have no income-tax withholding, but remain taxable on your personal return. The balance is due April 30 after the tax year, even without a reminder. Corporate tax has a separate deadline: generally 2 months after year-end, or 3 months for a qualifying CCPC. Corporate instalments can start before the first T2 is filed. See Filing your corporate return.
A dividend from small-business-rate income is generally non-eligible. Its taxable amount is the cash dividend multiplied by 115%; dividend tax credits reduce personal tax.
Does pay from your old job raise the tax on your dividends?
Yes. T4 pay fills lower federal and provincial brackets before your dividend. Old-job withholding was calculated without the later dividend.
Include every T4, expected dividends, and your year-end province in one estimate. Give the new payroll your TD1 and request extra tax withholding if needed. If its payroll is subject to CPP, your corporation must deduct it even if your old employer did. Excess employee CPP is refunded or applied to your balance when you file; the corporation cannot recover its employer share.
Salary or dividends: which leaves less to pay in April?
Salary usually leaves less to pay in April because tax is withheld. Compare full-year cash after corporate and personal tax.
| Choice | April personal balance if payments were handled correctly | Other cash cost |
|---|---|---|
| Salary | Often small when payroll withholding matches your full-year income. | Employee and employer CPP or QPP where applicable; salary uses corporate cash before income tax. |
| Dividends | Often larger unless you paid personal tax voluntarily or by instalments. | Corporate tax on profit before distribution; no CPP on the dividend. |
| Salary plus dividends | Withholding covers salary, while the dividend can still create a balance. | Pension contributions on salary and corporate tax on remaining profit. |
A Canadian-controlled private corporation eligible for the small business deduction has a 9% federal rate, plus a provincial rate (CRA corporation rates). B.C.'s lower corporate rate is 2%. The actual mix depends on the corporation's tax status, your province, other income and CPP. See Salary or dividends for the longer-term choice.
How much should you set aside from each payment?
Estimate full-year personal tax twice: with and without expected dividends. If you plan dividends, divide the tax difference by their expected cash total and reserve that share of each payment. Separately reserve any shortfall from salary or other income and corporate tax on profit. Recheck as income changes; a guessed reserve rate can miss when earlier T4 pay filled lower brackets. See Tax on dividends from your corporation for provincial rates.
Why might instalment reminders start in the second year?
CRA looks at net tax owing in the current year and either of the two preceding years. The threshold is more than $3,000 outside Quebec or $1,800 in Quebec (CRA instalment test). A first dividend year may lead to an August reminder the following year. If earlier rental, self-employment or other income left net tax owing above the threshold, instalments may apply in your first dividend year too.
The August reminder covers September 15 and December 15. If withholding keeps this year's net tax below the threshold, instalments may not be required. See Tax instalment reminders for payment choices.
What should you set up before the first payment?
Gather your old-job T4 or final pay statement, expected revenue and costs, province, share ownership and personal cash need.
- Check the contract. If the client would have employed you without the corporation, the corporation may be a personal services business. That can remove the small business deduction; assess it before using the example below.
- For salary, set up payroll. Register for a payroll account before the first remittance, ordinarily due the 15th day of the month after the first pay with deductions. Deduct tax and applicable CPP or QPP from each pay, and budget for the employer share. Employment is generally not insurable for EI if you control more than 40% of the voting shares (CRA payroll guide). Quebec payroll may also include QPIP. A director can personally owe missed federal payroll remittances, interest and penalties; Income Tax Act recovery must start within two years after they leave office. See Running payroll for the steps.
- For a dividend, check that the corporation can pay it. Keep enough cash for tax and other liabilities, check the dividend rules under its governing corporate law (federal example), and document the declaration. Under federal law, directors who approve a prohibited dividend may have to restore it; a claim must start within two years of the resolution. Plan a T5, due the last day of February after the dividend year (CRA due date). For a Quebec resident shareholder, also file an RL-3 by the same date. See Declaring and paying a dividend.
Example
These B.C. amounts are illustrative Canadian dollars. They assume one resident owner whose salary is subject to CPP throughout the year, no other income or deductions beyond those stated, non-eligible dividends, no EI, and small-business-rate eligibility. An owner aged 65 to 69 who receives a CPP or QPP retirement pension can instead sign Form CPT30 to stop CPP: give the employer a copy when signing and send the original to CRA. It takes effect the next month and changes the salary comparison.
Left the old job in June
You leave employment on June 30 with C$50,000 of T4 pay and take a C$50,000 dividend in December. The dividend's gross-up brings income to C$107,500 before deductions: C$50,000 of wages plus C$57,500 of taxable dividend income. The wages filled lower brackets first. The April balance is tax after credits less T4 withholding and any instalments; the gross-up is income, not tax due. Check tax deducted on the T4 before spending the dividend.
A full year with C$100,000 before owner pay
Suppose a B.C. corporation has C$100,000 available before owner pay, employer CPP and corporate tax. You have no other income. The table rounds to C$100; salary withholding is assumed to match tax on salary alone. "Cash kept" is what reaches you after personal tax and employee CPP, excluding the value of future CPP benefits.
| Route | Payment to you | Approximate personal balance April 30 | Approximate cash kept |
|---|---|---|---|
| All salary | C$95,400 salary; the remaining C$4,600 pays employer CPP | C$0 | C$72,900 |
| All dividends | C$89,000 dividend after C$11,000 corporate tax | C$9,800 | C$79,200 |
| Salary to the first CPP earnings ceiling, then dividends | C$74,600 salary plus about C$18,800 dividend | C$3,700 | C$73,400 |
The dividend route avoids CPP but makes the largest April bill.
Year two brings a reminder
Suppose last April's C$12,000 balance is followed by an August reminder. If its no-calculation amount is C$6,000 for September 15 and C$6,000 for December 15, those are the suggested payments. If salary withholding now keeps projected net tax owing below the threshold, check whether instalments are required. See Tax instalment reminders for the calculation choices.
Different for you?
- Your main client was your former employer or controls your work: check Personal services business before using small-business-rate estimates.
- You need a recurring salary-dividend mix: compare Salary or dividends.
- You already took cash without recording a payment type: check Shareholder loans.
- Your province, ownership, other income or credits differ from the example: use Tax on dividends and get corporate tax help when the corporation's classification or payment history is unclear.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| General corporate tax balance due date After the corporate tax year-end, for most income tax balances | 2 months | CRA: Due dates for corporate income tax payments Checked |
| Eligible CCPC tax balance due date After the corporate tax year-end, if the CRA's CCPC conditions are met | 3 months | CRA: Due dates for corporate income tax payments Checked |
| Taxable amount of a non-eligible dividend Actual amount received multiplied by 115% | 115% Tax year 2026 | CRA: Taxable amount of dividends Checked |
| Canadian federal net corporate tax rate with the small business deduction For CCPCs claiming the small business deduction on active business income up to the business limit; not indexed | 9% | CRA: Corporation tax rates Checked |
| British Columbia lower corporate tax rate Provincial or territorial rate on qualifying small-business income; conditions and business limit may differ from the federal rules | 2% Tax year 2026 | CRA: Corporation tax rates Checked |
| Canadian instalment threshold, net tax owing In the current year and in either of the two previous years | $3,000 | CRA: Required tax instalments for individuals Checked |
| Canadian instalment threshold, net tax owing, Quebec residents Federal net tax owing, in the current year and in either of the two previous years | $1,800 | CRA: Required tax instalments for individuals Checked |
| Ordinary first payroll remittance deadline Unless CRA assigns a different remittance frequency | the 15th day of the month after the first pay with deductions | CRA: Determine if you need to register for a payroll account Checked |
| Voting-share control above which shareholder employment is not insurable for EI Employment is not insurable where the employee controls more than this share of the corporation's voting shares | 40% | CRA: Determine if employment is pensionable and insurable Checked |
| Federal director liability limit after leaving office Income Tax Act subsection 227.1(4) limits when recovery proceedings may begin; Excise Tax Act subsection 323(5) limits when a GST/HST director assessment may be made. Both run from when the person last ceased to be a director. | two years | Income Tax Act, subsection 227.1(4) Checked |
| Federal director dividend liability action limit From the resolution authorizing a dividend payment contrary to section 42 of the Canada Business Corporations Act | two years | Canada Business Corporations Act, subsection 118(7) Checked |
| T5 filing deadline T5 slips are filed and sent to recipients by this date; weekend and holiday rules may shift the CRA due date | the last day of February after the dividend year | CRA: T5 information return due date Checked |
Primary sources
- CRA: Current year tax rates and income brackets
- CRA: Taxable amount of dividends
- CRA: T5 Guide
- CRA: Who has to pay instalments
- CRA: Payment due dates for instalments
- CRA: After sending your tax return
- CRA: CPP contribution rates and maximums
- CRA: Employers' Guide – Payroll Deductions and Remittances
- CRA: Corporation tax rates
- CRA: Corporation balance-due day
- CRA: Corporation Instalment Guide
- CRA: Determine if you need a payroll account
- CRA: CPP when an employee has different jobs
- CRA: Determine the province of employment
- CRA: Income tax deductions from pay
- Canada Business Corporations Act: Dividends
- CRA: Personal services business fact sheet
- CRA: Deemed interest benefit on shareholder loans
- CRA: Travel expense reimbursements
- B.C.: Basic personal and dividend tax credits
- CRA: B.C. payroll deductions tables
- Income Tax Act: Directors' payroll liability
- Canada Business Corporations Act: Directors' liability
- CRA: CPT30 election form
- CRA: T5 filing due date
- Revenu Québec: RL-3 slip
About this guide
Edited and reviewed by Di Lu, CPA on . It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.