Why there is no standing answer, only a yearly one
Salary versus dividends has no permanent winner because the tax system is built for a rough tie. Integration, the design principle behind Canadian corporate tax, aims to make profit earned in a corporation and paid out promptly cost about the same in total tax as income earned directly, whichever route it travels. Salary is deducted by the corporation and taxed fully in your hands; dividends are paid from after-tax corporate profit and arrive with a gross-up and credit that recognize the corporate tax already paid. On the headline math, the routes land close together most years.
The real differences live in the side effects, and for dentists they are unusually large. Dental corporations tend to retain serious surpluses, which builds investment portfolios, which creates refundable tax balances that reward dividends. Dentists also sell their practices, which pulls the capital gains exemption and corporate cleanliness into a compensation question. And many dentists want the pension tools only salary supports. Those forces push in different directions, which is why the answer is a recipe, recalculated when the numbers move.
If the corporation does not exist yet, this page is premature; the threshold decision, with the surplus test that governs it, is at should a dentist incorporate in Ontario. What follows assumes a working DPC and walks the four numbers in the order we actually run them for clients.
The first number: the cash your household needs
Start from spending, not from tax, because the cheapest dollar is the one you never draw. Whatever your household genuinely needs sets the total that must leave the corporation; everything above it can stay behind at Ontario's roughly 12.2 percent small-business rate and compound from a far larger base than a personally taxed dollar would. The deferral on that retained layer is the engine of the whole structure, and over-drawing out of habit quietly burns it.
This number needs honesty in both directions. Understate it and you end up topping up with unplanned dividends mid-year, which makes a mess of instalments and planning. Overstate it and you pay personal tax years earlier than necessary on money that just sits in a personal account. We ask dentists to set the draw off twelve months of real household outflows plus committed savings, then hold it steady and review annually, treating raises to the draw as decisions rather than drift.
The second number: what salary builds that dividends do not
Salary is the only route that builds entitlements, and their value depends on your age and plans. T4 income creates RRSP room as a share of earned income up to the yearly cap, supports CPP through contributions the corporation and you both fund, anchors disability insurance coverage, and creates the salary history an individual pension plan is built on. Dividends build none of that: no room, no CPP, no pensionable history, and no tax withheld at source, which moves the discipline of instalments onto you.
Whether those entitlements are worth their cost is a genuine question, not a talking point. CPP contributions on a healthy salary are significant money for a benefit that arrives decades later; RRSP room only matters if you will use it; and the IPP, often the strongest pension answer for a dentist in their forties or fifties, requires committing to T4 salary as a standing feature. For a younger dentist prioritizing debt repayment, a dividend-heavy mix defensibly wins; for a dentist building toward an IPP and insured income, salary earns its payroll admin. This is where two dentists with identical billings correctly choose different recipes.
The third number: where profit sits against the small-business limit
The corporation's own tax position moves the blend, because salary and dividends touch corporate profit differently. Salary and bonuses are deducted before corporate tax, so they can pull active profit back under the $500,000 small-business limit when a strong year pushes past it; dividends leave profit where it is. Profit above the limit is taxed at the general corporate rate, but it also creates a notional account that lets the corporation pay eligible dividends, which are taxed more gently in your hands than ordinary ones. High-profit years therefore become a deliberate choice between bonusing down and paying the general rate to build eligible-dividend capacity.
Association tightens this number for many dental families. Corporations under common or related control share one $500,000 limit, so a spouse's professional corporation, a service corporation or a building corporation beside the practice can all be drawing on the same pool, and the compensation plan has to be set across the group rather than company by company. This is standard multi-entity work, but only if whoever runs your file knows every corporation in the family and plans them together.
The fourth number: RDTOH and the dividend refund
Refundable dividend tax on hand is the number most dentists have never had explained, and it can flip the whole comparison. When your corporation earns investment income on its retained surplus, it pays tax at roughly 50 percent up front, but a large slice of that is a refundable deposit rather than a final cost: it accumulates in notional RDTOH accounts, and the CRA hands it back at a set rate per dollar of taxable dividends the corporation pays you. A DPC with a meaningful portfolio is therefore partially reimbursed every time it declares a dividend.
The consequence is direct: once refundable balances build up, dividends stop costing their sticker price, because each one triggers a corporate refund that offsets part of the personal tax you pay on it. A compensation plan that ignores a standing RDTOH balance strands money with the CRA year after year; one that sizes dividends to recover the refund captures it. The balances come in two pools tied to the type of dividend paid, which is bookkeeping your accountant should be tracking continuously, not reconstructing at year-end.
| Way to pay yourself | On the corporation's side | On your side |
|---|---|---|
| Salary or bonus | Deductible against practice profit; payroll withholdings remitted through the year | Fully taxable; builds RRSP room, CPP and IPP history |
| Ordinary (non-eligible) dividend | Paid from small-business-rate profit; recovers RDTOH where a balance exists | Grossed up and credited; no room or entitlements built |
| Eligible dividend | Needs capacity created by general-rate profit | Gentler personal rate than an ordinary dividend |
| Capital dividend | Paid from the untaxed half of realized gains, by election, from the capital dividend account | Completely tax-free when the balance and election are in place |
The capital dividend row is the quiet gift in the table. A portfolio that has realized gains over the years, or a corporation that has received life insurance proceeds, accumulates a capital dividend account that can pay genuinely tax-free money out, and using it belongs in the same annual conversation as the salary and dividend amounts. Between CDA dividends and RDTOH refunds, a dentist with a mature corporate portfolio often has cheaper access to cash than the headline dividend rates suggest, but only if someone is doing the counting.
Putting the mix together, and what changes it
The blend is assembled once a year, in about this order: set the household draw, decide how much salary the entitlement goals justify, check the corporation's position against the small-business limit across all associated companies, then size dividends to cover the rest of the draw while recovering refundable tax and using any capital dividend capacity. The output is a payroll amount, a dividend schedule with resolutions behind it, and an instalment plan, written down and executed through the year rather than reverse-engineered in April.
Name the facts that should trigger a re-run, because the mix goes stale quietly:
- A change in household need, a home purchase, tuition, a renovation, since the draw anchors everything.
- Profit crossing the $500,000 limit, or a new associated corporation joining the family.
- Portfolio growth, because rising investment income builds RDTOH and can grind the federal small-business limit once it passes $50,000 a year.
- A financing application on the horizon, since lenders read your compensation history when they underwrite you personally.
- Age and pension milestones, especially the years an IPP becomes compelling and the approach to 65, when spousal dividends open up under the tax on split income rules.
- A sale coming into view, because draining surplus and cleaning the corporation for the capital gains exemption changes what dividends are for.
Family dividends deserve their own caution flag. TOSI taxes most dividends to a spouse or adult child at the top personal rate unless an exception applies, family who genuinely work in the practice twenty or more hours a week, or a spouse receiving dividends once you are 65, and the ownership-based exception is closed to professional corporations. Plan family compensation as reasonable pay for real work first, and treat family dividend splitting as the narrow exception it now is.
The lender point is worth one more sentence, because dentists finance practices, buildings and expansions more than almost any profession: a bank underwriting a practice loan reads the corporation's statements, but the banker underwriting you personally reads T4s and dividend history, and a consistent, documented compensation pattern makes both files stronger. The full borrowing picture sits at how do you finance the purchase of a dental practice.
This whole cycle is the standing core of what a CPA for incorporated healthcare professionals in Ontario should deliver: the blend recalculated each year inside the broader practice work described at accounting and tax planning for dental practices, with the notional accounts tracked as they move rather than discovered later. For our dental clients it runs inside the Ongoing Financial Partnership alongside our dentist tax planning work; if your current mix was set years ago and never revisited, a free 15-minute discovery call from our Mississauga office is a cheap way to find out what it is costing.
