Once your practice runs through a corporation, money can reach you two ways. The corporation can employ you and pay a salary, or it can pay a dividend on your shares. Most physicians end up doing both, and the useful question is not which one wins but what mix suits the year you are actually having.
What follows is the reasoning, not a recommendation. The right answer for you depends on numbers we would need to see.
What salary does
A salary is an expense to the corporation, so it reduces corporate profit and therefore corporate tax. It is employment income to you, taxed at your personal rates, with tax withheld and remitted as you go.
The important part is what salary creates:
- RRSP contribution room. Only earned income generates RRSP room, and dividends are not earned income. A physician who takes only dividends stops building RRSP room entirely.
- CPP contributions. Both halves are paid, one by you and one by the corporation, which is a real cost. It also builds a CPP entitlement, which is an inflation indexed benefit for life. Whether that is a cost or a benefit depends on how you view it.
- A clean income record. Lenders understand T4 income. Mortgage applications, personal lines of credit and rental applications all go more smoothly with a salary history.
- Access to some personal deductions and credits that require earned income, including childcare expenses.
Salary also requires payroll to be run properly, with source deductions remitted on schedule. Late remittances attract penalties fast and it is entirely avoidable administration.
What dividends do
A dividend is paid out of profit the corporation has already been taxed on. There is no withholding, no payroll, and no CPP. You report it on your personal return and pay personal tax at dividend rates, which are lower than salary rates precisely because the corporation already paid tax on that money.
Dividends are simpler and cheaper to administer. What they do not do is build RRSP room, contribute to CPP, or produce the T4 that lenders like to see. They also arrive without withholding, which means you personally have to set aside the tax and often pay quarterly instalments.
The integration in the tax system means the pure tax difference between salary and dividends is usually small. The decision is driven far more by RRSP room, CPP, borrowing and cash flow than by a rate comparison.
The questions that actually decide it
Do you want RRSP room?
If yes, you need salary, and enough of it to generate the room you want. This is the single most common reason physicians take a salary at all. If you are deliberately using the corporation as your retirement vehicle instead, the calculus changes.
Are you buying property soon?
Lenders assess incorporated professionals inconsistently. Two or three years of steady T4 income makes the conversation considerably easier than a pattern of variable dividends. If a mortgage is on the horizon, plan the salary history well in advance.
How much do you actually need personally?
Whatever you do not need should generally stay in the corporation, where it is taxed at the lower corporate rate and can be invested. Drawing money you do not need, in either form, throws away the main reason you incorporated.
Is there a low income year coming?
Parental leave, a sabbatical, a reduced clinical year or a move all create years where your personal income falls. Those are the years to take money out of the corporation, because it is taxed in your hands at lower rates. This is planning you can only do if you look ahead.
What is happening with corporate investments?
Investment income earned inside the corporation reduces access to the small business deduction once it passes a threshold. If your corporate portfolio has been growing for years, the salary and dividend question stops being standalone and becomes part of a larger conversation about where savings should sit.
On paying a spouse. A salary to a spouse must be reasonable for work actually performed, and you should be able to describe that work. Dividends to a spouse are a different question entirely and are frequently caught by the tax on split income rules, which can tax them at the top marginal rate regardless of your spouse's own income. Some exceptions apply for physician families. Check before you rely on it.
Why this is an annual decision
The most common failure is not choosing wrong. It is choosing once, at incorporation, and then repeating it for six years while your income doubles, your family grows and your corporate account fills up. The right mix in your first year as an attending is rarely the right mix in your eighth.
Review it before your fiscal year end, when you can still act, rather than in the spring when you are only reporting on what already happened.
The Incorporated Physician's First Year Checklist
Includes the compensation questions to settle before your first year end, and the filing calendar that goes with them.
If you would like your own mix reviewed with real numbers rather than general principles, we do this with every client before their year end closes.