Paying Dividends Instead of Salary in Alberta: Corporate and Personal Tax Implications for Small-Business Owners

If you own an Alberta corporation, you have to decide how to get money out of it. The usual choices are salary, dividends, or a mix. The right answer depends on your personal income needs, your corporation’s tax position, your retirement plans, and whether you want to reinvest profits. This article explains how the Canada Revenue Agency (CRA) treats each option and what Alberta adds. It assumes you own a Canadian-controlled private corporation (CCPC) that earns active business income in Alberta.

Disclaimer: This article is general information only. It is not tax, legal, or accounting advice. Rates, thresholds, and deadlines change, so confirm current requirements with the CRA, the Alberta government, or a qualified Canadian tax professional before making decisions.

Understanding How Corporate Earnings Are Distributed

Salary and dividends defined

Salary (including bonuses) is employment income paid to you as an employee or officer. The corporation deducts it as a business expense, and it must withhold and remit income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums where applicable. You report it on a T4 slip.

Dividends are a distribution of after-tax corporate profits to shareholders. The board must declare them, and they are not deductible to the corporation. You report them on a T5 slip. The CRA recognizes two types:

• Non-eligible dividends, usually paid from income taxed at the small business rate.
• Eligible dividends, usually paid from income taxed at the general corporate rate, tracked through the general rate income pool (GRIP).

Federal and Alberta roles

The federal government sets the rules for what counts as employment income, the dividend gross-up, and the federal dividend tax credit. Alberta applies its own corporate and personal tax rates and its own provincial dividend tax credit. Alberta corporations file one T2 return, which the CRA administers for both levels of government. Alberta also has no provincial sales tax (PST), which keeps GST-related issues simpler than in some other provinces.

Tax Treatment of Salary

Corporate and payroll treatment

Salary reduces the corporation’s taxable income, provided it is reasonable for the work performed. The corporation must register a payroll account, withhold deductions, and remit them. It also pays its own share of CPP and EI. For 2024, the CRA set the following (confirm current-year figures, since they change annually):

• CPP: 5.95% each for employee and employer on pensionable earnings above the $3,500 basic exemption, up to $68,500. A second tier (CPP2) applies at 4% each on earnings between $68,500 and $73,200.
• EI: The employee rate is 1.66% on insurable earnings up to $63,200, and the employer pays 1.4 times the employee premium. Many owner-managers who own more than 40% of the voting shares are not insured for EI, so check your eligibility before remitting premiums.

Your Alberta payroll costs may also include Workers’ Compensation Board (WCB-Alberta) premiums, and these are not CRA items.

Personal treatment

Salary is taxed at your progressive federal and Alberta marginal rates. Alberta uses its own brackets and credits. Verify the current brackets, because the province has changed its lowest bracket recently. Salary also creates RRSP contribution room (generally 18% of earned income, up to the annual limit) and builds your CPP retirement benefit.

Tax Treatment of Dividends

Corporate level

The corporation pays tax first and distributes what is left. For a CCPC, the combined federal and Alberta small business rate is currently 11% (9% federal and 2% Alberta) on up to $500,000 of active business income. Above that, the combined general rate is 23% (15% federal and 8% Alberta). The $500,000 business limit can be reduced by associated corporations or by passive investment income above $50,000. Verify these rates and limits with the CRA and Alberta Treasury Board and Finance before relying on them.

Personal level: gross-up and dividend tax credit

Dividends are grossed up to approximate the pre-tax corporate income, and you then claim a dividend tax credit. The federal and Alberta figures below are current at the time of writing; confirm them on the CRA site:

Item	Non-eligible dividend	Eligible dividend
Gross-up	15%	38%
Federal dividend tax credit (of grossed-up amount)	9.0301%	15.0198%
Alberta dividend tax credit (of grossed-up amount)	2.18%	8.12%

For example, on a $10,000 non-eligible dividend, the taxable amount is $11,500. The federal credit is about $1,038 and the Alberta credit is about $251. Those credits offset the tax on the grossed-up amount. Dividends do not generate RRSP room or CPP contributions.

Disclaimer: The content on this website is AI-generated for informational and educational purposes only. It does not constitute certified financial, tax, or legal advice. Because accounting standards and local tax codes vary frequently, readers should consult a qualified accountant or certified professional before making any financial decisions based on this material.