TL;DR (executive summary) – This article discusses the implications of choosing between Salary and Dividends for Québec business owners.

• • Salary creates RRSP room and QPP/QPIP coverage but triggers payroll costs (QPP, EI*, QPIP, HSF, CNESST, etc.).
  • Dividends avoid payroll costs and are simple to administer, but don’t create RRSP room and may limit EI benefits (and QPP earnings credits).
  • Québec’s small business corporate rate is ~12.2% (9% federal + 3.2% Québec) when you qualify for the SBD; the general combined corporate rate is ~26.5% (15% federal + 11.5% Québec).
  • Personal tax at the top bracket (2025): employment income ~53.31%, eligible dividends ~40.11%, non‑eligible dividends ~48.70%. Integration narrows the gap, so planning is about cash‑flow, benefits, and long‑term goals, not just a single “lowest tax” answer.

Understanding the differences and tax implications of Salary and Dividends is crucial for effective financial planning.

Understanding Salary and Dividends

Table of contents

1. Québec 2025: the key numbers at a glance
2. Salary: how it’s taxed (and why owners still use it)
3. Dividends: how they’re taxed (eligible vs. non‑eligible)
4. Payroll costs that only apply to salary (QPP, EI, QPIP, HSF)
5. Corporate tax interplay (SBD, GRIP, RDTOH, passive‑income grind)
6. When salary tends to win
7. When dividends tend to win
8. The popular hybrid approach (with simple guardrails)
9. Common pitfalls for Québec owner‑managers
10. Quick decision checklist
11. FAQs

1) Québec 2025: the key numbers at a glance

• Personal marginal rates (combined fed+QC) at top bracket: salary/interest 53.31%, eligible dividends 40.11%, non‑eligible dividends 48.70%. Table also shows bracket breakpoints.
• Corporate rates (CCPC):
  • Small Business (SBD) income: 9% federal + 3.2% Québec = 12.2% combined.
  • General/over SBD: 15% federal + 11.5% Québec = 26.5% combined.
• Québec SBD eligibility: generally requires 5,500 paid employee hours (phased out between 5,500 and 5,000).
• QPP (2025): maximum pensionable earnings $71,300 (+ an additional ceiling of $81,200 for the new second tier); employee and employer base rate 6.4% up to the main ceiling and second‑tier 4% between ceilings; max employee contribution ~$4,339 (+ $396 second tier), with the same amounts paid by the employer. (Revenu Québec)
• EI in Québec (2025): employee premium $1.31 per $100 of insurable earnings; employer $1.83 per $100; MIE $65,700. Note: many owner‑managers’ employment is not insurable if they control >40% of voting shares. (Government of Canada)
• Québec Parental Insurance Plan (QPIP): premiums apply to salary (up to $98,000 maximum insurable earnings in 2025). (RQUAP)
• Health Services Fund (HSF) – employer payroll tax: for most sectors, 1.65% if total payroll ≤ $1M; scales up between $1M and $7.8M; 4.26% above that threshold (special lower tier for primary/manufacturing).

2) Salary: how it’s taxed (and why owners still use it)

What happens when you pay yourself a salary (T4):

• Your corporation deducts the salary; that reduces corporate taxable income (at 12.2% or 26.5% brackets, depending), but it doesn’t avoid employer payroll costs.
• You pay personal tax at your marginal rate on employment income (see table above).
• You and the company contribute to QPP; those contributions build your future QPP pension because benefits are based on employment earnings.
• You may contribute to EI (if employment is insurable) and always to QPIP in Québec; the company also pays the employer portions.
• The company pays HSF on salary (but not on dividends).
• RRSP room is created by salary (earned income); dividends don’t generate RRSP room.

Pros (salary):

• Generates RRSP contribution room (18% of earned income up to the annual limit; $32,490 in 2025 means you’d need at least ~$180,500 of earned income).
• Builds QPP entitlement; can help with QPIP eligibility/benefit level. (rrq.gouv.qc.ca)
• May help with mortgage underwriting (steady T4 income).
• Can reduce corporate income taxed at the 26.5% general rate.

Cons (salary):

• Employer payroll costs: QPP, EI/QPIP, HSF, CNESST, training levy, etc. (none of which apply to dividends).
• More administration (payroll remittances, T4/RL‑1).

3) Dividends: how they’re taxed (eligible vs. non‑eligible)

What happens when you pay a dividend (T5):

• Dividends are not deductible to the corporation. You first pay corporate tax; then distribute the after‑tax profits.
• At the personal level, dividends are grossed up and you claim dividend tax credits (Québec also provides a provincial DTC). Eligible dividends (generally from income taxed at the general corporate rate) are grossed‑up by 38%; non‑eligible dividends (generally from SBD‑rate income) are grossed‑up by 15%.
• A CCPC can designate eligible dividends up to its GRIP balance. Over‑designation triggers a penalty tax.

Pros (dividends):

• No payroll levies (no QPP, EI, QPIP, HSF).
• Simple to administer (no payroll).
• In higher brackets, eligible dividends often produce a lower personal rate than salary; even non‑eligible dividends can be competitive after integration.

Cons (dividends):

• No RRSP room; no QPP earnings credits.
• EI may not be available anyway for controlling shareholders—but if you want EI/QPIP benefits, salary is the path.
• Must watch GRIP for eligible dividends to avoid penalties.

4) Payroll costs that only apply to salary (quick primer)

• QPP (2025): base 6.4% to $71,300 + a second tier 4% to $81,200; employee and employer each pay, with max contributions noted above.
• EI (Québec rates 2025): employee $1.31/$100, employer $1.83/$100, to $65,700 MIE; controlling shareholders >40% voting shares generally not insurable.
• QPIP: premiums on salary only; $98,000 maximum insurable earnings in 2025.
• HSF: 1.65% (most sectors) up to $1M payroll, scales to 4.26% above $7.8M (2025 thresholds).

5) Corporate tax interplay you can’t ignore

• Small Business Deduction (SBD): reduces Québec corporate rate to 3.2% provincially (12.2% combined) for SBD‑eligible income. Québec’s SBD requires 5,500 paid hours (phase‑out 5,500→5,000).
• Passive‑income grind (fed): if your CCPC’s adjusted aggregate investment income exceeds $50,000, your $500k SBD limit is reduced and is eliminated at $150,000. This can push more income into the 26.5% corporate bracket—changing the salary/dividend math.
• GRIP and eligible dividends: income taxed at the general rate adds to GRIP, enabling eligible dividends (lower personal rate).
• RDTOH & dividend refunds: CCPCs earn refundable tax on investment income; paying non‑eligible dividends can trigger a dividend refund at 38⅓% (part of integration mechanics).

6) When salary tends to win

• You want to maximize RRSP room (e.g., target the $32,490 RRSP limit for 2025—requires ~$180,500 earned income).
• You value QPP pension accrual or need QPIP benefits (e.g., upcoming parental leave).
• Your corporation is already paying 26.5% on a chunk of income (no SBD) and a salary deduction saves tax at that high corporate rate.
• You need T4 income for lending, immigration, or other documentation purposes.

7) When dividends tend to win

• You want to minimize payroll costs and admin (no QPP/EI/QPIP/HSF on dividends).
• You qualify for the SBD (12.2% corporate) and prefer distributing after‑tax profits as non‑eligible dividends.
• You have passive income & RDTOH balances where non‑eligible dividends help trigger refunds.
• You are over age 65 and income‑splitting via dividends with a spouse fits within TOSI exceptions (specialist advice required).

8) The popular hybrid approach (with simple guardrails)

A balanced mix often gives the best of both worlds:

1. Pay yourself enough salary to hit your priorities, then use dividends for the rest.
   • Examples of salary “anchors”:
     • To maximize QPP base earnings, salary up to $71,300 (second tier up to $81,200 if you want extra credits).
     • To reach a specific RRSP target (e.g., $20k), divide by 18% to find the necessary earned income (~$111k in this example).
2. Top up with dividends to clear cash from the company with no added payroll levies and simpler compliance.
3. Watch GRIP/RDTOH so you pick eligible vs non‑eligible dividends intentionally and don’t leave refunds on the table (or over‑designate).

9) Common pitfalls for Québec owner‑managers

• Assuming EI coverage: if you control >40% of the corporation’s voting shares, your employment is generally not insurable (no EI regular benefits).
• Forgetting Québec payroll taxes: the HSF alone can add 1.65%–4.26% to salary cost, depending on total payroll and sector.
• Ignoring SBD eligibility: slipping below 5,500 hours can bump your provincial corporate rate from 3.2% to 11.5% on the first $500k—big dollars.
• TOSI traps: paying dividends to family members without meeting an exception can push them to top rates.
• No RRSP room on dividends: great today, but can compromise retirement tax‑sheltering later.

10) Quick decision checklist

• Do I need RRSP room this year? → Salary (at least to your target).
• Do I need QPP/QPIP coverage/benefits soon? → Salary.
• Is my corporation SBD‑eligible and do I want to minimize payroll costs? → Dividends for the top‑up.
• Am I planning to pay eligible dividends (enough GRIP)? → Consider dividends for lower personal rate at high income.
• Do I have RDTOH to flush? → Non‑eligible dividends can trigger refunds.
• Will TOSI or lending needs affect family payouts? → Adjust or use salary where appropriate.

11) FAQs

Q1) Is there a single “best” answer for Québec in 2025?
No. After corporate‑personal integration, the lifetime tax difference between “all salary” and “all dividends” can be modest for many owner‑managers. The right mix usually hinges on RRSP/QPP goals, payroll cost tolerance, SBD status, GRIP/RDTOH balances, and near‑term benefit needs.

Q2) What’s the simplest rule of thumb?
Commonly: salary to your target (RRSP/QPP or lending needs), dividends for the rest—then revisit annually as your SBD/GRIP/RDTOH positions evolve.

Q3) Do dividends create RRSP room in Canada?
No. Earned income (e.g., salary, net business, certain other types) creates RRSP room; dividends don’t.

Q4) What should my salary be if I want the maximum RRSP deduction in 2025?
The RRSP limit is $32,490 for 2025, which requires ~$180,500 of earned income (since RRSP room = 18% of earned income up to that maximum).

Q5) What’s the difference between eligible and non‑eligible dividends?
Eligible dividends come from profits taxed at the general corporate rate and are taxed to individuals using a 38% gross‑up and enhanced credits (lower personal rate). Non‑eligible dividends typically come from SBD‑rate income and use a 15% gross‑up with smaller credits. A CCPC needs GRIP to pay eligible dividends.

Practical next steps (for owner‑managers)

1. Map goals: RRSP target? Parental leave? Mortgage?
2. Check your corporate status: SBD eligible (5,500‑hour rule)? Any passive income that grinds SBD? GRIP/RDTOH balances?
3. Design your mix:
   • Salary to RRSP/QPP/QPIP targets (or loan requirements).
   • Dividends to optimize tax and avoid payroll levies.
4. Review yearly: rates move; your hours, profits, and investment income change.

Sources (selected, current to 2025)

• Marginal personal rates (Québec 2025) and notes on dividend tax/refunds.
• Corporate rates (CCPC) and Québec SBD hours rule.
• QPP 2025 contribution ceilings and rates; QPP benefits based on earnings.
• EI in Québec 2025 (premiums) and MIE; EI insurability for controlling shareholders.
• QPIP 2025 maximum insurable earnings.
• HSF (2025) rates and thresholds.
• RRSP earned income (T4040) and “dividends don’t create RRSP room.”
• Eligible dividends/GRIP overview.
• Passive‑income grind of the SBD.
• RDTOH/dividend refund mechanics.

Disclaimer

This article is general information for Québec owner‑managers (2025) and not tax or legal advice. Your facts (e.g., SBD eligibility, GRIP/RDTOH, TOSI exposure, payroll thresholds) will drive the optimal mix. Speak with a CPA before implementing changes.