How a salary and a dividend are each taxed, what each one does for your RRSP room and CPP, where the small business deduction fits, and when the slips are due, with every rule linked to the CRA or the Government of Alberta.
A salary is deducted by your corporation and taxed to you as employment income through payroll. It builds RRSP room, comes with CPP contributions and goes on a T4 slip. A dividend is paid out of profit your corporation has already paid tax on, and the dividend tax credit lowers your personal tax on it. It builds no RRSP room, has no CPP and goes on a T5 slip. Many owners use a mix, and the right one depends on your income, your plans and your corporation.
How Is a Salary Taxed?
When your corporation pays you a salary, you are its employee. For the corporation the salary is a cost of earning its income, so it is deducted before corporate tax is worked out, as long as the amount is reasonable in the circumstances.
For you, the salary is employment income. The corporation runs payroll on it, which means it:
- withholds income tax from each pay and sends it to the CRA,
- deducts your CPP contributions and pays the same amount again as the employer. For 2026 the rate is 5.95% each on earnings between $3,500 and $74,600, plus second additional CPP (CPP2) at 4% each on earnings from $74,600 to $85,000, and
- reports the year on a T4 slip, due by the last day of February.
Because tax is withheld from every pay, most of your personal tax on a salary is paid during the year.
- EI usually does not apply. If you control more than 40% of the corporation’s voting shares, your employment is generally not insurable, so no EI premiums are deducted. You can choose to join the EI program as a self-employed person.
- Bonuses have a time limit. Under subsection 78(4) of the Income Tax Act, a salary or bonus still unpaid 180 days after the corporation’s year-end is deductible only in the year it is paid. Our year-end tax checklist has the dates for a December 31, 2026 year-end.
How Are Dividends Taxed?
A dividend is a return on your investment in the corporation as a shareholder, not pay for your work. It comes out of profit the corporation has already paid tax on, so it does not reduce the corporation’s taxable income.
To stop the same income being taxed twice in full, the tax system uses a gross-up and a dividend tax credit. You report more than you received, then claim a credit against your tax:
- Eligible dividends are grossed up to 138% of the amount received. They are considered to be paid from income taxed at the full corporate rate, so they get the larger credit.
- Other than eligible dividends are grossed up to 115%. They are considered to be paid from income that had preferential corporate tax, such as the small business deduction, so the credit is smaller.
- The credit is claimed on line 40425 of your federal return, and the Alberta credit on Form AB428.
Nothing is withheld from a dividend: no income tax, no CPP and no EI. If your net tax owing is more than $3,000 for 2026 and was also more than $3,000 in 2025 or 2024, the CRA expects tax instalments during the year. Dividends are reported on a T5 slip.
How Do Salary and Dividends Compare?
Side by side, the two options differ in who pays the tax, when it is paid, and what they build up for later:
Salary
- Deducted by the corporation
- Taxed as employment income, with tax withheld each pay
- Builds RRSP room
- CPP from you and from the corporation
- EI generally not deducted if you control more than 40% of the voting shares
- Reported on a T4 slip
Dividends
- Paid from the corporation’s after-tax profit
- Grossed up, then reduced by the dividend tax credit
- Builds no RRSP room
- No CPP contributions
- No tax withheld, so instalments may apply
- Reported on a T5 slip
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Where Does the Small Business Deduction Fit In?
A Canadian-controlled private corporation that claims the small business deduction pays a net federal rate of 9% on its eligible active business income, instead of 15%. Alberta’s small business rate is 2%, against a general rate of 8%, on the first $500,000. Together that is 11% on the first $500,000 of active business income in Alberta, and 23% above it.
The $500,000 is the business limit for a corporation that is not associated with any other. Associated corporations share one limit, and it shrinks when the group’s passive investment income is between $50,000 and $150,000, reaching nil above $150,000.
Here is how it connects to your pay:
- Salary is deducted first, so each dollar of salary is a dollar less of corporate income taxed at 11%, and it is taxed to you instead at your personal rates.
- Active business profit you leave in the corporation is taxed at 11% now. When it is paid out later as a dividend, it is generally an other than eligible dividend, grossed up to 115%.
- Investment income the corporation earns on profit it keeps can reduce the $500,000 limit in later years, as above.
What About RRSP Room and CPP?
RRSP room. Your new RRSP room each year is generally 18% of your earned income for the previous year, up to the annual limit. Earned income, as the CRA works it out in its RRSP guide, is built from employment and self-employment earnings and certain other income. Dividends are not part of it. So a salary paid in 2026 creates room for 2027, when the limit is $35,390, and dividends create none. To reach that full amount from salary alone, 2026 earned income would need to be about $196,600.
CPP. A salary of $85,000 or more in 2026 means the maximum: $4,230.45 of CPP and $416 of CPP2 from you, and the same again from the corporation. Because the corporation is yours, both halves come out of the same business. In return, your CPP retirement pension depends on how much you contributed and for how long. Dividends carry no CPP contributions, so years paid only in dividends add nothing to it.
| Key number | Figure |
|---|---|
| CPP on salary, you and the corporation each | 5.95% of earnings from $3,500 to $74,600 |
| CPP2 on salary, you and the corporation each | 4% of earnings from $74,600 to $85,000 |
| Most CPP and CPP2 you pay on a salary | $4,646.45, matched by the corporation |
| RRSP dollar limit | $33,810 for 2026, $35,390 for 2027 |
| Dividend gross-up | 138% eligible, 115% other than eligible |
| Corporate tax in Alberta, first $500,000 | 11% (9% federal, 2% Alberta) |
The figures come from the CRA and Alberta pages linked in this article. The 11% is the sum of the two published rates.
When Are T4 and T5 Slips Due?
Both are due by the last day of February after the calendar year they cover: the T4 for salary and the T5 for dividends. When the due date falls on a weekend or public holiday, the CRA treats a return as on time if it receives it, or it is postmarked, by the next business day.
For slips covering 2026, February 28, 2027 is a Sunday, so the practical deadline is Monday, March 1, 2027. Before then, gather your 2026 payroll totals and the dividends the corporation paid in 2026.
Why Does the Right Mix Depend on You?
There is no single right answer. This is general information, not advice for your situation, and the mix that works best usually depends on:
- How much you need and what else you earn. Personal tax rises with income. Alberta’s rates for 2026 start at 8% on the first $61,200 and reach 15% above $370,220, with federal tax on top.
- Whether you want RRSP room and CPP. Salary builds both. Dividends build neither.
- How much your corporation earns and keeps. Profit kept inside is taxed at 11% on the first $500,000, and personal tax comes when it is paid out.
- Who else is paid. Dividends paid to family members from a family business can be caught by the tax on split income unless an exclusion applies. Our guide to paying family members from your corporation explains the exclusions.
- Cash flow and paperwork. Salary means payroll and remittances through the year. Dividends can mean personal tax instalments.
The numbers change every year, so the decision is worth revisiting before each year-end.
How Can We Help You Decide?
We work out salary and dividend options for Alberta owner-managers with their real numbers, from our Calgary office, as part of our T2 corporate tax work. A T2 return is a fixed $1,200 with one of our bookkeeping packages or $1,500 on its own, with owner-manager tax planning included.
If you pay yourself a salary, our owner-manager payroll is $75 a month for a single salaried director, with pay runs, CRA remittances and the year-end T4. T4, T4A and T5 slip filing starts from $150 per slip set. Fees exclude GST.
Want to see your own numbers? See our packages.
Frequently Asked Questions
Is it better to pay yourself a salary or dividends in Alberta?
It depends on your income, your plans and your corporation. A salary is deducted by the corporation and builds RRSP room and CPP. Dividends come from after-tax profit and build neither. Many owners use a mix, worked out with their own numbers each year.
Do dividends create RRSP room?
No. New RRSP room is generally 18% of the previous year’s earned income, up to the annual limit, and dividends are not earned income. A salary is.
Do I pay EI on my own salary?
Generally not, if you control more than 40% of the corporation’s voting shares, because that employment is not insurable. CPP still applies to the salary.
When are T4 and T5 slips due?
By the last day of February after the calendar year. For 2026 slips that is March 1, 2027, because February 28, 2027 is a Sunday.
Do I have to pay tax instalments if I only take dividends?
Possibly. Nothing is withheld from dividends, so if your net tax owing is more than $3,000 for 2026 and was also more than $3,000 in 2025 or 2024, the CRA expects instalments.
Reviewed on 20 October 2026. Tax rates, contribution rates, limits and deadlines in this article are from the Canada Revenue Agency, the Government of Canada and the Government of Alberta, linked beside each fact and listed below.
T2 Corporate Tax
Every Canadian corporation must file a T2 within six months of fiscal year-end, active or inactive
Payroll
Owner-manager payroll from $75 a month: pay runs, CRA remittances and the year-end T4
Sources
- Canada Revenue Agency, Corporation tax rates (page dated 2025-05-30, checked 19 October 2026)
- Government of Alberta, Tax, levy, and prescribed interest rates (corporate income tax rates) (no page date, checked 19 October 2026)
- Canada Revenue Agency, T2 Corporation Income Tax Guide (T4012), chapter 4, small business deduction (page dated 2026-05-28, checked 19 October 2026)
- Canada Revenue Agency, CPP contribution rates, maximums and exemptions (page dated 2025-10-31, checked 19 October 2026)
- Canada Revenue Agency, Second additional CPP (CPP2) contribution rates and maximums (page dated 2025-10-31, checked 19 October 2026)
- Canada Revenue Agency, Determine if employment is pensionable and insurable (page dated 2025-12-17, checked 19 October 2026)
- Canada Revenue Agency, About the deduction of EI premiums (page dated 2022-11-15, checked 19 October 2026)
- Canada Revenue Agency, Shareholder benefits (page dated 2025-06-09, checked 19 October 2026)
- Canada Revenue Agency, Income Tax Folio S3-F2-C2, Taxable Dividends from Corporations Resident in Canada (effective 2024-10-07, checked 19 October 2026)
- Canada Revenue Agency, Lines 12000 and 12010, taxable amount of dividends (page dated 2026-06-12, checked 19 October 2026)
- Canada Revenue Agency, Federal dividend tax credit (line 40425) (page dated 2026-08-14, checked 19 October 2026)
- Canada Revenue Agency, Required tax instalments for individuals: who has to pay (page dated 2026-01-20, checked 19 October 2026)
- Canada Revenue Agency, How contributions affect your RRSP deduction limit (page dated 2026-01-29, checked 19 October 2026)
- Canada Revenue Agency, RRSPs and Other Registered Plans for Retirement (T4040) (page dated 2026-01-23, checked 19 October 2026)
- Canada Revenue Agency, MP, DB, RRSP, DPSP, ALDA, TFSA limits, YMPE and the YAMPE (page dated 2025-12-01, checked 19 October 2026)
- Government of Canada, CPP retirement pension: how much you could receive (page dated 2026-10-13, checked 19 October 2026)
- Canada Revenue Agency, When to file your information returns (T4) (page dated 2025-07-03, checked 19 October 2026)
- Canada Revenue Agency, T5 information return: due date (page dated 2025-12-05, checked 19 October 2026)
- Canada Revenue Agency, Federal tax on split income (line 40424) (page dated 2026-01-20, checked 19 October 2026)
- Government of Alberta, Personal income tax (2026 tax brackets) (no page date, checked 19 October 2026)
- Government of Canada, Income Tax Act, section 67 (reasonableness) (Justice Laws website, checked 19 October 2026)
- Government of Canada, Income Tax Act, section 78 (unpaid amounts) (Justice Laws website, checked 19 October 2026)
