Should I Declare a Year-End Bonus or Pay Dividends from Company Profits to Myself?

Allan Madan, CA
 Dec 16, 2015

With the end of the year approaching, business owners must make important decisions quickly to reduce their business taxes for the year, one of which is paying out bonuses. Read further to figure out what decision is best for you.

Bonuses vs. Dividends

Business profit earned by a Canadian controlled private corporation that is $500,000 or less is taxed at a lower rate of 15.5% in the province of Ontario. However, business profits in excess of $500,000 are taxed at a higher rate of 26.5%.

In order to avoid this higher tax rate, consider declaring a bonus to reduce your corporation’s profits to not more than $500,000. So long as the bonus is declared by the end of your corporation’s fiscal year, it will count as a tax deduction, even if it’s not paid. When you receive the bonus, you will pay personal tax on it at your marginal tax rate, which in Ontario is 53.5% as of 2016.

At first, paying a bonus in order to avoid high corporate taxes of 26.5% seems foolish, given that the personal tax on bonuses is 53.5%, even more.


So why not keep profits inside your corporation, and then pay them out as a dividend to you in the future when you personally need the money? In this case, your corporation will pay 26.5% of its profits in taxes, and when you take out a dividend at some point in the future, you will pay personal taxes at a rate of 38% on the dividend you received. This comes to a total of 54.4% in taxes when the corporate and personal tax paid are added together. That’s 1% higher than paying a bonus.

Now you’re probably thinking that you’re better off paying a bonus to yourself instead of a dividend because the total tax bill is lower with a bonus. Well, you’re right, but for the fact that your company could potentially earn even more profits by reinvesting its money rather than paying a bonus to you. For example, if your corporation could earn a 15% rate of return on its investments, it would make more sense for your corporation to keep its profits in excess of $500,000, rather than paying a bonus to you.

So Here’s the Tip:

Choosing between paying a bonus or a dividend from business profits in excess of $500,000 depends on your corporation’s ability to earn a decent rate of return on its investments. If the rate of return is negligible, pay a bonus to yourself. If the rate of return is high, your corporation should reinvest its profits and pay a dividend to you in the distant future.


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 3

  1. After reading a lot of your articles, I am thinking of incorporating my business. I have a lot of questions though:

    1) How can I access $30k of tax-free dividends
    2) Can I give myself allowances that will be tax-free for me and tax-deductible for the corporation? How? Are reimbursements taxable?
    3) What is passive vs. active income?
    4) How do shareholder loans work? Can I give myself a shareholder loan for the year then pay it back and then issue another one to be able to use the money without having to declare any salary for me for my day to day expenses?
    5) Is there any benefit to paying into CPP for self-employed individuals? Old Age security and GIS is available to them at the age of 65.
    6) What combination or bonus, salaries, dividends and allowances are the best way to take money out of a corporation?

  2. Hi , love the blog

    I have a question about how to tax the dividen withdraws. I plan on making around 80-120k for the year. Pay myself a salary of 45k
    And then take 30-50k In dividens at random amounts and times throughout the year depending on cash flow etc.

    How do I calculate the tax for the dividens on the personal side. Do I have to send remittances for it throughout the year?


    1. Hi Steven,

      I recommend that you use a personal tax calculator. The calculator I prefer is Simple Tax Calculator:

      If you have a small business with taxable profits of less than $500,000 in the year, then the dividends paid to you are classified as ‘ineligible dividends’. You must specify the dividend type (eligible or ineligible) in order to calculate the correct amount of taxes payable.


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