How Money You Earn Flows Through Your Corporation To Your Pocket

In this post, I describe how you can use a Canadian Controlled Private Corporation (CCPC), such as a Medical Professional Corporation (MPC) to smooth your income and reduce taxes. That is part of the basic knowledge base needed to tax plan using a corporation. It affects how you pay yourself using salary vs dividends. The better you regulate the cash flow using a corporation, the more money you have to spend now or invest for the future.

Cash Flow Is Like A River

When you earn income as a professional, you need to channel that money to grow your business and fund your lifestyle. Unlike a regular paycheck, business income usually fluctuates from month to month and year to year. Like the water level of a river. This results in surplus cash flow sometimes, and not enough at others.

This hazard is accentuated by our progressive personal tax system. As you earn more money, the percentage of personal income that you lose to tax jumps quickly. It can escalate to over 50% of income earned. If you simply took all of your actively earned professional income directly as personal income, then it is taxed in the year earned.

Excess tax from a good year is not balanced by lower income years.

small business tax

In bumper years, your cash flow river would over-run its banks and much would be lost to taxes. In lean years, you would pay less tax. However, the income previously lost to tax would have already soaked into the ground and been absorbed by our government – not to be recovered. Gee, that made our government sound kind of like money-parched dirt. Totally unintentional.

You need to be able to regulate cash flow.

This ebb and flow can hit businesses that have cyclically good and bad times. Some high-income professionals (like doctors and dentists) appear to have a fairly steady business income stream year to year. With a broader view, however, it does fluctuate wildly over our career spans.

We earn very little income and/or have to manage debt for the first 10-15 years while we train. We must pay that debt back while establishing a practice. Then, we experience a huge income increase in our peak earning years. This is followed by little, or no income, as we age and need to scale back or retire.

Canadian professional retirement

Everyone faces these types of changes in earning income throughout their lives. Smoothing that income and consumption is important. For most Canadians, RRSPs, TFSAs, and other pension arrangements smooth out that life-cycle cash flow. However, with high-income professionals, the level of fluctuation is much larger, overflowing those accounts. We need a bigger dam.

Corporation: A Dam Between Business & Personal Money

professional corporation account

You can allow money to pool in your corporation during high-income years. During lower-income years, you can release it in controlled amounts from that reservoir. Even in stable professions, income fluctuates from causes such as parental leave, work hour reduction, personal/family health, and retirement. If it is a predictable cause, you can regulate your cash flow to average it out over a few years. If it is and unpredictable or prolonged change, you have a larger financial reservoir to draw from.

For Canadian professionals, the structure of a CCPC (like an MPC), has much more capacity than an RRSP or TFSA. However, it also comes with some more complexity. We will need to understand how to properly operate the controls of this dam.

The Professional Corporation Blueprint

Below is a detailed diagram that we will spend the rest of this post and the next couple of posts explaining. For this post, we will focus on the flow of active business income. In the schematic below, this will be the money flow through our corporation’s operational account, the payment of business taxes, and the release of money from the corporate reservoir into our personal accounts via salary and dividends. You can click on the picture to open it in a new browser tab to easily reference it.

corporate dividends salary
Click the image to open it in a second browser tab for ease of reference.

Corporate Accounts

These are owned by the corporation, which is considered a separate legal entity to you. This is important because it means that you cannot just put your money into the corporation or take money out of it whenever you feel like it. That would have tax consequences.

Your corporation will have an operational account. This is a business account at whatever bank you use. The money from your professional practice (like clinical billings and stipends for admin/education) gets paid to your operational account. You also pay your business expenses and taxes from this account.

The corporation’s investments will be held in one or more investment accounts. These are accounts at a brokerage through which you invest. That could be at a discount brokerage as a DIY investor, or via an advisor-affiliated brokerage house. How to open a corporate investment account and taxation will be covered in the next post.

Taxation of Corporate Active Business Income

The income earned from operations minus the practice overhead and salary expenses is considered the net active business income.

The biggest advantage of incorporation is that you pay the business rate of tax on the net active income. This allows your corporation to have more capital to invest than you would if you took the income directly.

There are two different corporate tax rates. Historically, the low small business deduction (SBD) rate applied to the first $500K/yr earned (shown in yellow in the chart below). If a CCPC earns income over the SBD threshold, then that portion of the net active business income is taxed at the higher General Corporate Tax Rate (the red zone of the chart).

Starting in 2019, the SBD threshold will be determined by a combination of the corporation’s active income and its passive investment income. This newly introduced sliding business tax threshold is illustrated below. Basically, every dollar of adjusted aggregate investment income (AAII) above $50K/yr lowers the active income SBD threshold by $5.

corporation investment income tax

Example: An Ontario-based CCPC that earned $100K of passive income this year and next year makes $300K of active income. Its SBD threshold is $250K. That means the first $250K of income is taxed at 12.5% and the remaining $50K of active income is taxed at 26.5%.

Getting Money From Your Corporation Into Your Personal Hands

You primarily take money out of your corporation using salary, dividends, or both. There are some situations where you may be able to use a shareholder loan or a capital dividend. Those are special situations that we will discuss in other posts.

incorporation salary

Whichever method you use to remunerate yourself via your corporation, the amount of tax paid should be similar. The total tax paid should also be similar whether the income was paid directly to you, as an individual, or indirectly via a corporation. That concept is called tax integration.

However, tax integration in practice is not perfect. How well it works varies by province. Generally, the mismatch of tax integration favours paying salary rather than dividends when channeling earned income. The exception to that is Saskatchewan, where there is a slight advantage for dividends. We will explore this in detail in a separate post.

Paying Salary

As indicated above, your corporation can pass money onto you personally by paying salary. If possible, you should also employ your spouse. One of the only ways left to reduce your tax bill via income splitting is to pay a lower income spouse a salary. They need to work for it and be paid at market rates.

Paying out a salary means setting up payroll. For some reason, this is often cited by commentators as difficult. However, it is actually easy. You need to track your corporate ins and outs anyway. Payroll simply means paying the salary regularly to the employees plus making monthly remittance of income tax collected to CRA.

Your accountant can tell you how much to remit monthly, or you can use the CRA payroll deduction calculator. My accountant did this for me and I simply set up automated monthly bank payments. Once per year, your corporation will need to issue T4 slips for salary along with T5 slips for dividends paid out. Your accountant will likely do this as part of your corporate taxes and fees also.

When paying salary, you need to pay both the employee and employer portions of employment insurance (EI) and Canadian Pension Plan (CPP) contributions. This attenuates some of the tax integration advantage that otherwise favours salaries over dividends. However, the self-employed can often opt out of EI if they have not made a previous claim. A previous EI-funded parental leave counts as a claim. Further, CPP is not a really a tax. You get paid the money later as a pension – whether it is a good value for your dollar invested is a debate beyond the scope of this post.

Paying Dividends

Many people do release money from their corporate reservoirs partially or wholly as dividends. Dividends offer the convenience of being easily dispensed when you need a personal cash top-up. They also can improve the tax efficiency of your corporate investment income.

Eligible Versus Ineligible Dividends

Your corp may pay out some of the money left after expenses and business taxes as ineligible dividends. If your corporation earns active income that is taxed at the higher general corporate tax rate, or gets eligible dividends from investments, then that generates space in its General Rate Income Pool (GRIP) account. GRIP is a notional account (meaning it only exists on paper for doing taxes). You may be able to pay out eligible dividends from the balance in your GRIP. This will require the help of your accountant to make sure that it is done properly.

Tax Efficiency of Eligible Dividends From Your Corporation

Eligible dividends are taxed at a lower net personal rate than ineligible dividends. This is to account for the fact that they come from a corporation that has already paid tax at the higher general corporate rate. With the imperfections of tax integration, the benefit of the lower eligible dividend personal tax rate is more than negated by the higher corporate tax paid. So, it is still best to keep your net corporate active income below the small business threshold, if possible, rather than pay more corporate tax so that you can dispense eligible dividends.

The other reason to pay out dividends is to release RDTOH

RDTOH sounds like a Klingon word, but stands for Refundable Dividend Tax On Hand. This is a refundable tax, collected on the investment income of your corporation. The preceding link discusses it in great detail. We will also come back to this when we discuss taxation of corporate investments in my next post.

Documenting Your Corporation’s Dividend Dispositions

When your corporation pays you a dividend, you will need to enter that into your corporate minute book. This is a binder that you, or your lawyer, may have. It is supposed to be updated annually to document:

  • the corporate structure
  • annual meeting minutes (usually a meeting with your accountant and any other voting shareholders to go over your corporate taxes)
  • dividend distributions to shareholders.

The main benefit of incorporation is to regulate cash flow and to defer tax until the cash flows into your personal accounts.

What is left in the corporation after it pays expenses (including salary/payroll), corporate taxes, and dispenses dividends is called its retained earnings. Retained earnings provide a buffer to handle expenses needed for expansion, or keep the business above water in the event of a business downturn. The other benefit of retained earnings is that they have been taxed at a much lower rate (~12% SBD or ~28% General Corp) than your personal tax rate (20-54%).

This tax deferral gives your corporation more money to invest and grow a larger pool of financial capital. You can then access that larger pool of financial capital later when it is needed. You would pay the remainder of the tax at that time if you flow it out of the corporation into your personal accounts. That future personal tax could possibly be at a lower marginal rate if you are drawing it slowly. It is a similar concept to an RRSP, except that an RRSP has 100% tax deferral and a more limited size. The tax deferral advantage is illustrated below:

corporation tax deferral

What does this all mean for planning our corporation and personal cash flow?

  • Incorporation is most beneficial when there are enough retained earnings to invest. That is a balance between the tax deferral advantage against the extra costs and hassle. The exact number that makes it worthwhile will depend upon your costs, hassle, and investment return.
  • How much money you need personally should be the primary determinant of the amount of money to draw from your corporation. The more slowly that you release money from your corporation, the more you preserve for tax-deferred growth. You may also lower your current personal tax burden by keeping your personal income lower.
  • Salary can be useful to lower your corporate active income if it is above the SBD threshold.
  • Tax integration is imperfect and favours keeping corporate active income below the SBD threshold.
  • Tax integration generally makes it more tax efficient to pay yourself salary than dividends. The exceptions are Saskatchewan and Newfoundland.
  • Paying dividends out of your corporation triggers the release of RDTOH and decreases the tax drag on investments in your corporate investment account.
  • To support your lifestyle: pay enough dividends to release RDTOH, the rest as salary, and then keep the money that you don’t currently need inside the corporation.
  • These are rules of thumb. I would recommend discussing your corporate cash flow plan with your accountant. In my opinion, a well-fitting supportive accountant is mandatory for incorporated professionals. Like underwear.


  1. Hey LD!

    This was awesome!!! Thanks for the recap. Thankfully my accountant has been doing all the above. I call what he does “voodoo” since he masterminds the whole process. I simply do what he tells me to do.

    I want doctors to make sure they use an accountant who already serves physicians and other professionals. The first guy I used did not do my taxes for over a year and I got hit by over 70K in back taxes with extra penalties to CRA. That was in the 1990’s.

    I quickly went with a firm who works mainly with Canadian professionals. And they are very professional. I laugh when people balk at their accountant fees. I have certainly learned first hand what bad advice can cost. I pay up nowadays happily.

    1. Hey Dr. MB. Having a good accountant is key. I have been very fortunate in that regard from day one. I found my accountant through a colleague who I knew was financially savvy accompanied by a low tolerance for incompetence/BS threshold. I have seen advice from accountants all over the map (even amongst good ones). So, I figured it would be important to have a relook at this. We need to be educated clients for sure.

  2. Hi Loonie Doc,
    I’ve bent my accountant’s ear over this a few times, and we ended up concluding that if you don’t draw much out of the corp, you might as well pay yourself dividends.

    With dividends instead of salary, you avoid the EI payments (please note that if you’re late by even one day, paying yourself a salary, I’ve heard that you will be hit with punitive fines), and you’re probably better off investing the money instead of waiting for the government to give it back to you as a pension, decades later.

    Also, the RDTOH can be substantial. In my case, more than enough to cover my accountant’s fees for the past two years. 😉

    I agree that if you need to take more money out of your corp, your course of action probably makes the most sense: maximize RDTOH with dividends, and then move to salary. I haven’t done the math behind it, although I know that Jamie Golombek’s article dealt with it:

    I spent hours puzzling over whether I should crystallize the gains in my Capital Dividend Account while the market was high before I decided that again, I’m too small a potato to bother with these. But I hope you’ll address the CDA with your ICU/sci fi wit soon!

    1. Love the handle! Defibrillating for dollars. Everyone’s situation will be a little different. It gets really important to have a good accountant to advise when you are drawing little and have substantial RDTOH. How much you need to live on should always determine how much to draw out. Opting out of EI is possible for most people unless they took an EI supplemented parental leave. I am a big spender, so it is easy for me to max out my RRSP with salary and still suck money out as dividends to release my RDTOH. I also like having my legislative tax risk spread out with an RRSP and since I direct my income-oriented investments there, it decreases my RDTOH. I saved mentioning CDA for the next article. This stuff is pretty dense and I need to break it up both for people to digest and for my editor’s mental health. CDA’s offer many tax planning opportunities. I haven’t thought too seriously about it yet other than to come up with ways to use it to “stick it to the man” around OAS clawbacks or getting “free tuition” for my kids. That would be priceless.

  3. Hey LD what a beautiful post. I sure wish this had been around a few years back. Would have saved me days of reading snippets online from the rare professionals who would share.

    In our situation we only pay dividends to my wife who is a salaried faculty member. Contributing to a pension eliminates rrsp contribution room, also she pays the max into ccp and if there were to be a secondary salary paid by the corp we would have to pay again, then file to have her personal portion returned and loose the corporate contributions (currently would be 5% on YMPEand soon to be more). And for me her personal financial lackey, I take a modest salary far below the YMPE and the rest in dividends. I would rather receive dividends only as I prefer to create my own pension with my savings of cpp but it seems fitting that a regular and continuous employee should be paid as one.

    1. Thanks Phil! I am reassured that you think this is useful. I am writing this stuff in hopes that those starting out will get off on the right foot or those further along will course correct if needed. I largely got a corporation because all the cool kids were doing it. I probably didn’t fully take advantage of the structure for the first 3-5 years and it was totally my fault. My accountant gave me good general guidance, but much also depends on how we spend and invest.

      Great point about a spouse with an external salary, pension, CPP contributions! Thanks for sharing that.

  4. another high quality post, LD!

    If you really want to “stick it”, max TFSA, use CDA for spend, then apply for GIS at 65.
    Transfer ownership of home, and get rental assistance.


    1. Thanks DN! Honestly, I learn new things every post I write. It generally makes me appreciate my accountant. I am lucky to have a good one. However, from talking with people I also know that there is some variability out there and it pays to know enough to ask the right questions or recognize when things aren’t adding up. -LD

  5. LD ( which might also stand for lethal dose were I a toxicologist),

    What a wonderful schema. I’m charmed by the term financial physiology, as if the Krebs cycle were now suddenly far more pertinent. And the optimization similarities are apparent even if the acronyms have been changed to protect the innocent.

    Additionally, I had conflicting thoughts about the beaver dam metaphor. Eager savers, judicious regulators of cash flow, or simply hoarders of sticks?

    Am I unimaginative to think that Canuck physician finance, like Canadian anything, is an exciting and untapped frontier compared to it’s more saturated and garish neighbor to the south?

    For every Kardashian atrocity, there’s a brilliant if underappreciated Degrassi Junior High episode lurking in quiet protest on the public broadcast channel.

    You are the Joey of physician finance in Canada. Wear your title (and your loud Hawaiian shirt) with pride.



    ( Secret fan of the Zit Remedy)

    1. Thanks for the kind words Crispy Doc! I do think Canada is still a bit of wild frontier with stick hoarding beavers. The beavers are pretty benign, but the moose in rutting season – watch out! One of the strategies in my career has been to go where needed. It applies in business whether developing a product or to a career in medicine. My first ten years of practice I spent building new services (now morphed into a dept) and educational material for ICU trainees here. Going where needed is great because people are grateful and there is freedom to put your own stamp on it since there is very little competitive concern. I don’t know that my blog will ever morph into a business, but I think it has been appreciated and definitely has my signature on it. I have been mulling over a post about the topic. My working title is It is best to be the lead sled dog – especially if team ate bean burritos.

  6. Hi LD
    New to this and up till now had the approach of “dont need to know how the sausage is made” when it came to the corp accounting etc. Thanks for the clear explanation. A question – based on the diagram are you saying that taxable net active corp income is calculated AFTER salaries are paid (along with overheads/expenses) but BEFORE dividends paid?

  7. Hey Loonie Doc, or anyone else who may know for that matter. I have a pretty basic (bordering on embarrassing) question but can’t seem to find a clear answer.
    Does taking dividends change your tax bracket, and therefore the tax rate applied to those dividends? Or, is the tax rate applied to your dividends determined purely by your salary?
    Is that question clear(ish)?

    1. Hi Luke,

      That is definitely not an embarrassing one. Dividend taxation is actually very confusing (to me anyway).

      Taking dividends does up your tax bracket. What happens is the dividend is multiplied by a factor (1.17 for ineligible and 1.38 for eligible). So, a $10000 eligible dividend is “grossed up” to $13800 and that is added to your other income to give your taxable income that determines your tax brackets. If my income were $150K from salary and I got a $10K eligible dividend, then my taxable income would be $163800. This has a couple of implications that I know of. One, if I am trying to get a benefit that is income-tested, like old age security (OAS). The taxable income is what counts for determining the OAS clawback. So, dividends result in a disproportionate clawback. The other is the that taxable income is what your RRSP deduction is deducted against. For example, if I have a salary that puts me at 40% marginal rate and my dividends bump me to 50%, then my RRSP deduction is refunded at 50%.

      After that, a tax credit is applied to reduce the net amount of tax I actually pay on the dividend. The net effect is a tax rate less than regular income. This is meant to account for the tax already paid by the company issuing the dividend (small business rate for ineligible and general corp rate for big companies). It isn’t a perfect match and usually means a bit more tax collected by the government overall. I know, shocking! The net rates for income and dividends etc broken into tax brackets for each province is here. I also include them in many of my calculators.

      Hope that helps. This is definitely a confusing one!

  8. Could you comment on this scenario. Winding down the practice. Corp income for final year approx. 30 000.00. Investment income approx. $120,000.00. From the perspective of both the corporate tax and personal tax, is it best to draw a salary of $100 000.00 or dividend $100 000.00?


    1. Hi J.M.

      I would definitely ask your accountant because there can be nuances. However, with that much passive income and low amount of active income, I suspect that dividends would be better. The personal tax would be low and it would trigger RDTOH refund to the corp.


  9. Great article, thank you.

    Certainly a very unique and refreshing way of explaining everything.

    I was wondering if you make $420,000.00 in a professional corporation where you are the only person, if you have $20,000.00 in business expenses, and if you have $100,000.00 in personal expenses, does the personal tax rate apply on the $100,000.00, and the corporate tax rate apply on the $300,000.00 ?

    Can you deduct the $100,000.00 as a salary, thereby only paying corporate tax on the $300,000.00 ?

    Thank you very much.


    1. Hi Cassie,

      If I understand correctly, the corporation would have an income of $400000 after those expenses. The corp would then pay you via dividends or salary enough that you can pay for your $100K of personal expenses. You would pay personal tax on the salary or dividends. So, that would really be $100K plus your personal taxes on the dividends/salary to have that $100K after-tax.

      If the corp paid you as salary, it would be subtracted from the corporate income. For example, $150K salary would make $250K net corporate income. The corp would pay the low corp tax on that $250K and you would pay the higher personal tax rate on the $150K.


  10. Hi LD. Happy New Year!

    Just to clarify, if you have some eligible dividends in the Corp, are you saying you should take them out for living expenses before you take our funds as salary? How much is the tax drag from eligible dividends and ineligible dividends from investment income if they are left in the Corp? Thanks.

    1. Hi Grant. That is an excellent point to consider. The second question is easier – so I will tackle first. The first question is a toughy. This is how I look at it.

      For eligible dividends:
      1) 38.33% tax is collected up front in the corp and fully refunded on payout. So, that is the drag if you don’t pay out the eligible dividend.
      2) So, if you are in a marginal tax rate where the personal eligible dividend rate is lower, then it makes sense to pay it out and if you don’t need it to live then invest in a non-registered personal taxable account (if TFSA/RRSP maxed).For example, in Alberta the top marginal rate on eligible dividends is 31.71%. So, it always makes sense there and is a 7% absolute decrease in tax drag. Same with SK, BC, MB, NB, and PEI. In a place like Ontario, it depends. The top margin rate is 39.34% on eligible dividends – so more tax drag if you pay out in that bracket. If you are below $150K in Ontario, then the tax rate is below 38% – so it could make sense in that income range.

      For ineligible dividends, the reversible drag is 30.67%. So, I would compare that to my personal ineligible dividend rate. Varies by province, but generally under $100K makes sense to pay out and over $100K the personal rate is higher.

      Prioritizing salary over dividends to release RDTOH is a bit trickier and is partly a judgement. Salary is generally 0.5%-2% more efficient than dividends for flowing out active income and it gives RRSP room which is a long-term advantage. On the other hand, 38.33% tax drag and 30.67% from non-released RDTOH is huge in comparison. So, I favor paying out some dividends to release the RDTOH, then salary. The amount of dividends needed is usually very low if the corp account isn’t spitting off much income. There is a judgement to make though. If I have a huge corporate account, then it may take a lot of dividends to release the RDTOH and I also may be wanting to maximize my RRSP in that situation too! An issue for those with huge corp accounts and low personal spend rates. Not so much of an issue for those who need >160K to meet their personal spending needs. It may be a strategic decision – if I were going to hit the passive income limits while still wanting to work many years without spending more, then I may prioritize salary for the RRSP room. If I were not going to hit the SBD passive income problems or work less/spend more if I did, then I may prioritize dividends to release the RDTOH. Hard to give a canned answer on this one and I need to think about it some more. However, it really reinforces to me that starting your RRSP/TFSA earlier and avoiding the dilemmas of having a huge corp down the road is important. Same with trying to keep investment income in the corp down compared to capital gains. I have avoided the problem by keeping my corp investment income capital gains focused, working less, and spending more now that I have a large portfolio 😉

  11. Thanks for the detailed reply. Just to clarify, the 38.33% and 30.87% tax in the Corp is refundable, but it terms of taking out those dividends you have to pay personal tax so after that, in Ontario for eligible dividends when income is between about $150k and $216k, the tax is 32.11% so you’re ahead, but for ineligible dividends the rate is 41.72%, so best left in the Corp. So, for example, for someone on the $150k- $216k tax bracket, you should pay yourself a salary for what you need for living expenses and no more (up to $162k), then pay out eligible dividends and invest them in a taxable account and leave the ineligible dividends in then Corp?

  12. Found gold here. I did not know anything about the GRIP account until this week.
    It turns out I have built up over 10k balance (from investments) that I can now take as an Eligible Dividend.
    I will make sure I get my accountant help me with that so I do it right .
    I am looking forward to the CDA account – I am not fully understanding that one yet. (1) when can I take it out? there may be forms to submit to CRA … I would love to learn more about CDA account before I can use it wisely. Thanks

    1. Great to hear. You are definitely not alone on missing it. I have seen people with literally a million in their CDA or GRIP accounts. Unused.

      Main points for CDA. An accountant needs to file the election – they get a special form. They usually charge a flat fee and should talk about it when they do your corporate tax filing. If you need the money in the CDA to top up a TFSA, RRSP, big spend, or can invest excess personal cash efficiently, then a capital dividend could make sense. Since there is an accounting fee, best done with a large sum. We usually empty ours when it is in the 30-50K range (we have no problems spending money or investing tax-efficiently). Sometimes even realizing some gains, paying the cap gain tax corporately to move money out of the corp efficiently makes sense (a good point to bring up with your accountant if thinking of it). I call it a capital gain harvest.

  13. If you didn’t need the income from your corporation for personal expenses, and are holding whatever you accumulate there (200k/year) for when you retire, would it still make sense to take out the minimum yearly that wouldn’t trigger personal taxes (or very little of it)? Basically start decumulating without creating personal tax liability yearly instead of waiting to do it all when retiring? If so, what would be that minimum amount say in Ontario for 2022? I punched some numbers in the wealthsimple tac calculator and at $16,000 of ineligible dividends, you’d owe $0 in personal taxes (assuming no other source of income). At $40,000, it’s only about $1,400 of taxes. I guess there’s a sweet spot there, but certainly it seems I should take out at least $16,000/year and wouldn’t pay any taxes.

    1. Hey Marc,

      You have the right idea. The money has to come out sometime. Deferring taxes on money that you need in the distant future and smoothing taxes on money you need in the near future are where a corporation can shine.

      There are a few aspects that I can think of. First, if you can remove the tax liability by getting money out at low or no tax, then that makes sense. So, there is the basic personal amount which you’d want to take advantage of ($15K). There is also very little tax on dividends for the first couple of brackets (varies by province). There could even be non-refundable tax credits for an effectively negative personal tax rate on eligible dividends in some provinces (non-refundable credit – so lost if you don’t take enough out). The second aspect is the tax drag on investment income. If in a low tax bracket, it would be lower than a corp. So, if you had TFSA room you could siphon money to there, and if not, then invest it personally.

      The third aspect is consumption now vs the future. Tax deferral means more personal after-tax money if you defer from a high tax rate and take it out at a low one. The opposite also applies. If you defer at a low tax rate, but must take it out later at a higher one, then you have less in hand. Corporations are set up with mechanisms to increase tax on passive income unless you pay it out (RDTOH and the active-passive income limits). I wrote about that here. You would want to be paying out enough dividends to release your RDTOH each year. That would gradually rise as your passive income rises. The active-passive income limit in Ontario is actually beneficial (complicated but true)

      To model how it changes over time and strategy, I have made a simulator. I haven’t made it fully public yet, but here it is. There is a simple version and a fully modifiable one. It does annual tax calculations and moves money out if it is either more efficient than leaving it or to meet a cash flow requirement.


    2. Just to clarify, you only pay zero tax on $16k of dividends if you have no other income. So you need to calculate how much tax you’ll pay at your marginal tax rate thus accounting for other income, perhaps investment income from a personal taxable account that you are using to live on, if you are not taking out any money from your Corp for living expenses.

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