Should I pay myself salary or dividends in Canada?
There is no universal answer — it depends on your income, province and goals. Salary is deductible to the corporation, creates RRSP room and builds CPP, but triggers payroll deductions. Dividends avoid CPP and payroll, but are paid from after-tax corporate profit and create no RRSP room. Canada's tax system is designed so the two are roughly integrated, so run the numbers both ways.
What is the dividend tax credit?
The dividend tax credit reduces the personal tax on dividends to account for tax the corporation already paid on its profits. Dividends are 'grossed up' to approximate pre-tax corporate income, then a credit offsets much of the resulting tax. This mechanism is what makes the salary-versus-dividend decision roughly neutral under the theory of integration.
Do dividends affect RRSP contribution room?
Yes — dividends do not create RRSP room, but salary does. RRSP room is based on 'earned income,' which includes employment salary but not dividend income. If maximizing RRSP contributions or building CPP entitlement matters to you, paying at least some salary is usually necessary.
Integration is the principle that income earned through a corporation and paid out as dividends should bear roughly the same total tax as income earned personally as salary. In practice integration is imperfect and varies by province and income type, which is why the optimal salary-versus-dividend mix should be modelled with a Canadian tax accountant.