What is the small business deduction?

A lower federal corporate tax rate of 9% on the first $500,000 of active business income earned by a Canadian-controlled private corporation, instead of the 15% general rate. Each province adds its own small-business rate. The $500,000 limit is shared among associated corporations.

Is it cheaper overall to pay myself dividends instead of salary?

Not usually by much. The dividend gross-up and credit are designed so corporate tax plus personal tax on a dividend roughly equals the personal tax on the same salary. The real advantage is deferring personal tax on profit you leave inside the company.

What is the passive-income grind?

If the corporation and its associated companies earned more than $50,000 of adjusted aggregate investment income in the previous year, the $500,000 business limit shrinks by $5 for every $1 above $50,000, reaching zero at $150,000 of passive income (Guide T4012, chapter 4).

Can I pay dividends to my spouse or adult children to split income?

Only if an exclusion from the tax on split income (ITA section 120.4) applies. Otherwise the dividend is taxed at the top marginal rate in their hands. Exclusions include working in the business an average of 20 hours a week in the year or in any five earlier years, being 25 or older with at least 10% of the votes and value of a corporation that is not a service business, and being the spouse of an owner who is 65 or older.

I contract for one client through my corporation. Is that a problem?

It can be. If you would be the client's employee without the corporation, the CRA can treat the company as a personal services business. That means no small business deduction, and deductions limited to salary and a few other items (Guide T4012, chapter 4).

What is the lifetime capital gains exemption?

For 2026, $1,275,000 of capital gains on qualified small business corporation shares, and on qualified farm or fishing property, can be sheltered from tax. The shares must meet the holding-period and active-asset tests in ITA section 110.6.

Incorporating: Salary or Dividends? (2026)

This guide is part of Tax-saving strategies for Canadians (2026).

Who this is for

Contractors, consultants and business owners who earn well above what they spend and can leave money in the company. If you spend everything you earn, incorporating mostly adds paperwork.

How it works

The small business deduction. A Canadian-controlled private corporation pays federal tax of 9% on its first $500,000 of active business income (ITA section 125), instead of the 15% general rate. Ontario adds 2.7%, for a combined 11.7% in 2026. The gap between 11.7% and a personal marginal rate in the 40s is the deferral.

Salary. The company deducts it and you pay tax on it at ordinary rates. It creates RRSP room (18% of earned income, up to the annual dollar limit) and CPP contributions, both halves. The 2026 maximum is $4,230 per half plus up to $416 of CPP2.

Dividends. Paid from profit the company has already paid tax on. A non-eligible dividend, from income taxed at the small-business rate, is grossed up 15% and earns a federal dividend tax credit of 9.0301% of the grossed-up amount. An eligible dividend, from income taxed at the general rate, is grossed up 38% with a 15.0198% credit. Dividends create no RRSP room and no CPP.

Worked example: $150,000 of profit in Ontario, all paid out (2026)

Figures come from the salary vs dividends calculator, using the 2026 corporate, dividend and CPP data files. The owner is a controlling shareholder, so no EI applies.

	All salary	All non-eligible dividends	Salary to the CPP ceiling, rest dividends
Salary	$145,354	$0	$74,600
Corporate tax (11.7%)	$0	$17,550	$8,327
Dividend paid	$0	$132,450	$62,843
Personal income tax	$38,139	$21,819	$29,085
CPP (both halves)	$9,293	$0	$8,461
Cash in your pocket	$102,568	$110,631	$104,127
Total tax and CPP	$47,432	$39,369	$45,873
RRSP room created for 2027	$26,164	$0	$13,428

Dividends leave $8,063 more cash this year. The salary route pays $9,293 of CPP, which buys a pension rather than disappearing. The dividend route pays $1,230 more in corporate and personal income tax combined ($39,369 against $38,139). The salary route also adds $26,164 of RRSP room. If $60,000 stayed in the company instead, only $7,020 of corporate tax would be due on it this year, and the personal tax would wait.

The rules that trip people up

Passive-income grind. Investing retained profit inside the company can cost you the low rate once passive income passes $50,000 a year (Guide T4012, chapter 4).
Tax on split income (TOSI). Dividends paid to a spouse or adult child are taxed at the top marginal rate under ITA section 120.4 unless an exclusion applies, or the amount is no more than a reasonable return on what they put in. A reasonable salary for real work is not TOSI, but ITA section 67 lets the CRA deny any unreasonable amount.
Integration is not a discount. Over the full cycle, salary and dividends are meant to cost about the same.
Ontario’s rate changed mid-year. Ontario cut its small-business rate from 3.2% to 2.2% on July 1, 2026, prorated for taxation years that straddle the date. A calendar-year corporation pays a blended 2.7% for 2026, which is what the calculator and the example above use. From 2027 the full-year rate is 2.2%.
Lifetime capital gains exemption. Selling qualified small business corporation shares can use the $1,275,000 exemption for 2026, subject to the holding-period and active-asset tests in section 110.6.

What to do next

Run your own profit and province through the salary vs dividends calculator. The self-employed tax calculator shows what you owe as a sole proprietor, and contract vs full-time checks whether the contract rate is worth it. More strategies: Tax-saving strategies for Canadians (2026).

Questions people ask

What is the small business deduction?: A lower federal corporate tax rate of 9% on the first $500,000 of active business income earned by a Canadian-controlled private corporation, instead of the 15% general rate. Each province adds its own small-business rate. The $500,000 limit is shared among associated corporations.
Is it cheaper overall to pay myself dividends instead of salary?: Not usually by much. The dividend gross-up and credit are designed so corporate tax plus personal tax on a dividend roughly equals the personal tax on the same salary. The real advantage is deferring personal tax on profit you leave inside the company.
What is the passive-income grind?: If the corporation and its associated companies earned more than $50,000 of adjusted aggregate investment income in the previous year, the $500,000 business limit shrinks by $5 for every $1 above $50,000, reaching zero at $150,000 of passive income (Guide T4012, chapter 4).
Can I pay dividends to my spouse or adult children to split income?: Only if an exclusion from the tax on split income (ITA section 120.4) applies. Otherwise the dividend is taxed at the top marginal rate in their hands. Exclusions include working in the business an average of 20 hours a week in the year or in any five earlier years, being 25 or older with at least 10% of the votes and value of a corporation that is not a service business, and being the spouse of an owner who is 65 or older.
I contract for one client through my corporation. Is that a problem?: It can be. If you would be the client's employee without the corporation, the CRA can treat the company as a personal services business. That means no small business deduction, and deductions limited to salary and a few other items (Guide T4012, chapter 4).
What is the lifetime capital gains exemption?: For 2026, $1,275,000 of capital gains on qualified small business corporation shares, and on qualified farm or fishing property, can be sheltered from tax. The shares must meet the holding-period and active-asset tests in ITA section 110.6.

Sources

Every figure in this guide comes from one of these primary sources, checked on September 11, 2026.