Salary vs Dividend for Incorporated Contractors in Ontario
Salary vs dividend for incorporated contractors in Ontario starts with one question: is your corporation a personal services business (PSB)? If it is not, income is taxed at 11.2% and dividends are usually non-eligible. If it is, income is taxed at 44.5%, but salary paid to you is still deductible.
Why does PSB status change salary vs dividend for incorporated contractors?
Most pay advice for contractor corporations assumes the corporation runs an active business that gets the small business deduction. But if you bill through a staffing agency on a 35, 37.5 or 40 hour contract with one bank, insurer or government client, there is a second question in the background.
That question is whether CRA could treat your corporation as a PSB. If it did, income left in the corporation would be taxed at 44.5% instead of 11.2%, most expenses are denied, and the way dividends are taxed changes. I explain the test itself on our page about personal services business risk. This page is about what PSB status means for how you pay yourself.
For every contractor corporation, I look at pay in two scenarios. The first is the position you file, where the corporation is not a PSB. The second is the downside, where CRA reassesses it as one. A good pay mix holds up reasonably well in both.
How should you pay yourself if your corporation is not a PSB?
Income is taxed at 11.2% and dividends are usually non-eligible
If your corporation is not a PSB, its active business income up to the $500,000 small business limit is taxed at a combined Ontario rate of 11.2%. That rate applies from July 1, 2026. Income earned before July 1, 2026 was taxed at 12.2%, so a corporation with a December 31, 2026 year-end gets a blended rate of 11.70% for 2026.
Because that income gets the small business deduction, dividends paid from it are generally non-eligible dividends. The top 2026 Ontario marginal rate on non-eligible dividends is 47.74%.
Salary works differently. The corporation deducts it, so it is not taxed in the corporation at all. You pay personal tax on it instead, at up to 53.53%, the top 2026 Ontario marginal rate on salary.
At the top rates, salary and dividends land close together
Here is $100,000 of corporate income, not PSB, at top 2026 marginal rates. It assumes your other income already puts you in the top bracket, and it leaves out CPP.
- Dividend route: corporate tax at 11.2% is $11,200. The $88,800 left is paid as a non-eligible dividend and taxed at 47.74%, which is $42,393.12. Total tax: $53,593.12.
- Salary route: $100,000 of salary taxed at 53.53% is $53,530, with no corporate tax.
The difference is $63.12. At the top bracket, the choice is not really about the rate. It is about RRSP room, CPP, how much cash you need personally, and whether you want to leave money in the corporation, taxed at 11.2% now and personally later.
Non-eligible dividends cost more from January 1, 2027
On January 1, 2027, Ontario’s non-eligible dividend tax credit falls to 1.9863%, down from 2.9863%. The top rate on non-eligible dividends rises to 48.89%, up from 47.74%. On the same $88,800 dividend, top-rate personal tax goes from $42,393.12 to $43,414.32, an increase of $1,021.20. If you were already planning a dividend near year-end, we review whether December 2026 or January 2027 suits you better.
How should you pay yourself if CRA treats your corporation as a PSB?
Salary is still deductible under 18(1)(p)
A PSB loses most of its deductions. Section 18(1)(p) of the Income Tax Act limits them to a short list. The main item is salary, wages or other remuneration paid in the year to the incorporated employee, which is you. The cost of benefits or allowances provided to you, certain costs of selling property or negotiating contracts that an employee could deduct, and legal costs to collect fees owed are also on the list. Rent, software, equipment, travel, phone, insurance and accounting fees are denied.
So salary is the one big lever left. Every dollar of salary paid to you comes off the income taxed at 44.5%. Note the words “paid in the year”. We plan payroll so salary is actually paid, with source deductions remitted, within the year.
Salary does not change whether your corporation is a PSB. That depends on the whole working relationship. Salary only changes how much income is exposed if CRA says it is one.
Example C: what a $120,000 salary does to the PSB exposure
Take a contractor corporation that bills $171,000 in a year ($95 an hour, 37.5 hours a week, 48 weeks) and has $9,000 of expenses. Assume a full year at 11.2%.
| Scenario | Not PSB | PSB | Extra tax if PSB |
|---|---|---|---|
| No salary (Example B) | $162,000 x 11.2% = $18,144 | $171,000 x 44.5% = $76,095 | $57,951 |
| $120,000 salary (Example C) | $42,000 x 11.2% = $4,704 | $51,000 x 44.5% = $22,695 | $17,991 |
In the PSB column, the $9,000 of expenses is denied, so taxable income is $171,000 less the $120,000 salary, which is $51,000. The salary cuts corporate tax under PSB by $53,400 ($120,000 x 44.5%) and cuts the extra PSB exposure by $39,960. Employer CPP is left out, and personal tax on the salary is not shown because it depends on your other income.
Even a salary equal to all the income left after expenses does not take the PSB exposure to zero. If the corporation paid you the full $162,000, the $9,000 of denied expenses would still be taxed at 44.5%, which is $4,005. To test your own billings and salary, please use our PSB tax cost calculator.
Dividends from PSB income can be eligible, but the gap stays
PSB income does not get the small business deduction. It is taxed at the full rate and adds to the general rate income pool (GRIP). That means dividends paid from it can be designated as eligible dividends, with a top 2026 Ontario marginal rate of 39.34%.
That looks better than 47.74%, but the corporate tax has already done the damage. Here is Example D at top 2026 marginal rates:
- PSB income of $100,000. Corporate tax at 44.5% is $44,500.
- The $55,500 left is paid as an eligible dividend, taxed at 39.34%, which is $21,833.70.
- Total tax is $66,333.70, or 66.33%.
- The same $100,000 paid to you as salary at 53.53% costs $53,530.
The PSB route costs $12,803.70 more on every $100,000. The dividend tax credit is built around the general corporate rate, not the 44.5% PSB rate, so the extra corporate tax never comes back. In a PSB, salary is usually the cheaper way to take money out.
What do RRSP room and CPP add to the salary side?
Salary is earned income for RRSP purposes. Each year, your new RRSP room is 18% of the prior year’s earned income, up to the annual dollar limit, less any pension adjustment. A $120,000 salary creates $21,600 of room for the next year. Dividends are not earned income, so they create none.
Salary is also pensionable. The corporation withholds your share of CPP from each pay, pays the employer share, and remits both to CRA. On higher salaries, the second tier, CPP2, applies too. Some see CPP as a cost, others value the pension. We include it when we compare options.
Dividends need no payroll account and no CPP. They are simpler to pay. But they build no RRSP room, and in a PSB they come out of income that was first taxed at 44.5%.
Salary vs eligible dividend vs non-eligible dividend: how do they compare?
| Feature | Salary | Eligible dividend | Non-eligible dividend |
|---|---|---|---|
| Deductible to the corporation? | Yes. In a PSB, salary paid in the year to the incorporated employee stays deductible under 18(1)(p) | No. Paid from after-tax income | No. Paid from after-tax income |
| PSB relevance | Reduces the income exposed to 44.5% | Can be designated when paid from PSB income, because PSB income adds to GRIP | The usual type when the corporation is not a PSB and income is taxed at 11.2% |
| Creates RRSP room? | Yes, 18% of earned income up to the annual limit | No | No |
| CPP contributions? | Yes, employee and employer shares | No | No |
| Top 2026 Ontario marginal rate | 53.53% | 39.34% | 47.74% (48.89% from January 1, 2027) |
These are top marginal rates. They apply to income in the top bracket, so the rate on your own income may be lower.
How do we set the pay mix for a contractor corporation?
Each year, we work through the same steps:
- We review your contract and working facts as part of tax planning, to see where your PSB risk sits this year. Hours alone never decide it. We are accountants, not lawyers, so any change to contract wording is for your lawyer.
- We look at your personal cash needs and other income, and check the tax on split income (TOSI) rules before any dividend to family.
- We model salary, dividends and retained income in both scenarios: not PSB and PSB.
- If salary is part of the plan, we set up payroll, run it on a schedule, remit source deductions and file the T4 slips.
- We file the T2 corporate return and keep the pay records that support the position you took.
If you write code, run cloud platforms or work in data, QA or security, our page for an accountant for IT contractors explains how we handle the year-round work. FP&A, controller, audit and risk contractors can see our accountant for finance contractors page. For a general model of salary and dividends outside the PSB question, please try our salary vs dividend calculator.
Would you like us to review your pay mix?
If you bill through your own Ontario corporation and you are not sure your pay mix holds up in both scenarios, please book a consultation. We work with incorporated businesses only, on a fixed flat fee. Bring your contract, your last T2 and your payroll or dividend records, and we will go through the numbers with you. Book a consultation.
Frequently asked questions
Is salary deductible if my corporation is a personal services business?
Yes. Section 18(1)(p) still allows salary, wages or other remuneration paid in the year to the incorporated employee, plus the cost of benefits or allowances provided to that person. Most other costs, such as rent, software, equipment, travel and phone, are denied. That is why salary matters so much in a PSB.
Are dividends from my contractor corporation eligible or non-eligible?
If the corporation is not a PSB and its income is taxed at 11.2% with the small business deduction, dividends from that income are generally non-eligible. If the corporation is a PSB, its income is taxed at the full rate and adds to GRIP, so dividends paid from it can be designated eligible.
Does paying myself a salary reduce my PSB risk?
No. Salary does not change whether your corporation is a PSB. That depends on the whole working relationship, tested year by year. What salary does is reduce the income left in the corporation that would be taxed at 44.5% if CRA reassessed it as a PSB.
How much RRSP room does salary from my corporation create?
New RRSP room is 18% of the prior year’s earned income, up to the annual dollar limit, less any pension adjustment. A $120,000 salary creates $21,600 of room for the next year. Dividends are not earned income, so they create no room.
Do I have to pay CPP on salary from my own corporation?
Yes. Salary is pensionable, so the corporation withholds the employee share of CPP, pays the employer share and remits both to CRA. Dividends are not subject to CPP. We include CPP when we compare salary and dividends for you.
What changes for non-eligible dividends on January 1, 2027?
Ontario cuts its non-eligible dividend tax credit from 2.9863% to 1.9863%. The top Ontario marginal rate on non-eligible dividends rises from 47.74% in 2026 to 48.89%. If you were planning a dividend near year-end, we review whether paying it in December 2026 or January 2027 suits you better.
Can you run payroll for my contractor corporation?
Yes. We set up salary, remit source deductions and file T4 slips for incorporated businesses. We work with corporations only, not individuals or sole proprietors, on a fixed flat fee. Please book a consultation and we will look at your pay mix with you.