The answer is not clear cut.

For the sake of simplicity we will ignore GST in this example, we will also assume that the corporation is located in Ontario and that the the owner resides in Ontario. We will also assume that the corporation qualifies for the small business deduction (see IT-73R6).

In this scenario the corporation has a net income of $100,000 dollars available for distribution to the owner. The owner has no other sources of income.

Dividends:

If the corporation pays a dividend equal to it's net after tax profit it would incur a tax liability of $18,620 and would, therefore, have $81,380 available for distribution to its shareholder.

The shareholder would report income of $101,725 ($81,380 x 1.25) and would incur, based on 2003 tax rates, a tax liability of $10,490.05.

Total taxes paid between the corporation and shareholder $29,110.05

Salary:

The corporation pays out its entire net income of $100,000 as salary expense to its shareholder - amount of tax paid by the corporation $0.00

The shareholder would report income of $98,198.20 ($100,000 less the company's contribution to CPP of $1,801.80) and incur a tax liability of $29,630.60 - approximately $500 more than just dividends.

But...

Dividends are not insurable earnings for purposes of future CPP benefits.

Dividends are not considered "earned income" for purposes of calculating RRSP contribution limits.

Many private insurers do not consider dividends to be insurable for the purposes of obtaining disability insurance.

Personal service businesses (see IT-73R6) do not qualify for the small business deduction which would effectively double the amount of corporate income tax payable.

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