The salary-dividend decision after the small business rate cut

Bashar Qawas is a partner at Better Books Canada and a former Canada Revenue Agency auditor.

IN THIS two-part series, part one set out what changed: a small business rate cut to 2.2 per cent in both Ontario and Quebec, and a reduction in the provincial dividend tax credit on non-eligible dividends for 2027. This part works the arithmetic and asks what is worth revisiting.

Two notes before the numbers. The 2027 figures assume federal rates and the ordinary provincial brackets are otherwise unchanged from 2026, so they move only by the announced credit reduction. And Quebec's measures were announced in an information bulletin from the Ministere des Finances; I have not separately confirmed their enacting legislation. The top-bracket rates below are derived rather than quoted, and the derivations are set out for the editor at the end.

What it does to the comparison

Take $100 of active business income eligible for the deduction, an Ontario shareholder at the top bracket, and full distribution. Income tax only: CPP and QPP, employer payroll costs and the credits tied to earned income are all left out.

Before: corporate tax $12.20, dividend $87.80, personal tax at 47.74 per cent is $41.92. Total $54.12, leaving $45.88.

After: corporate tax $11.20, dividend $88.80, personal tax at 48.89 per cent is $43.41. Total $54.61, leaving $45.39.

Salary is unaffected. At Ontario's top rate of 53.53 per cent the shareholder keeps $46.47 either way.

So the dividend route, which cost 0.59 points against salary before, now costs 1.08. The disadvantage roughly doubles. In Quebec it widens from 1.65 to 1.88 points, against a top ordinary rate of 53.31 per cent.

These are top-bracket figures on income tax alone. Lower down the comparison behaves differently, and the omitted items can reverse it. On these assumptions the direction of travel is the same in both provinces: distributing non-eligible dividends becomes relatively more expensive, and the corporate rate cut does not fully pay for it.

Where the gain actually lands

The corporate saving is one percentage point of eligible income, once the reduction applies for a full taxation year. On a full $500,000 limit that is $5,000 a year of additional retained capital. In 2026 an Ontario calendar-year corporation gets only the prorated amount, and a Quebec one gets nothing.

A client who retains captures that and defers the offset until a non-eligible dividend is eventually paid. A client who distributes as they go captures it and hands back most of it, or on a full distribution more than all of it, in the same year.

On $500,000 of eligible income in Ontario, comparing the same dividend paid under each regime, the change in combined cash, meaning cash in the shareholder's hands plus cash left in the corporation, is $5,000 less 1.15 per cent of the dividend:

• Retain everything: $5,000 better off
• Draw $100,000: $3,850
• Draw $250,000: $2,125
• Draw $400,000: $400
• Break-even at roughly $434,800

That break-even is a cash comparison, not ultimate after-tax wealth. Cash left in the corporation still carries shareholder-level tax whenever it comes out, so the economic answer also depends on how long it stays there and at what rate it is eventually drawn.

Distribute each regime's full after-tax pool instead, $439,000 before against $444,000 after, and the comparison turns negative by about $2,493.

So the measure can help or hurt the same corporation depending largely on how much comes out.

The 2026 window

Ontario's credit reduction is enacted, in Bill 97, and applies from January 1, 2027. Quebec's was announced for dividends received or deemed received after December 31, 2026. Ontario's corporate cut is already in effect.

For an Ontario shareholder who can use the full non-refundable credit and whose position is otherwise unchanged, a non-eligible dividend received in 2026 rather than 2027 is worth 1.15 per cent of the cash amount, around $1,150 on $100,000. In Quebec the figure is roughly 0.84 per cent, about $840.

That is a real number, not a rounding difference, but it only helps if the dividend was going to be paid anyway. Accelerating income into 2026 can push the shareholder into a higher bracket and affect OAS recovery or child benefit entitlement, and it requires a lawfully declared dividend, sufficient liquidity, and compliance with the applicable corporate solvency test and any financing covenants. A $1,150 saving is easily erased by a bracket effect.

What to revisit before year-end

Compensation policies set years ago. Any policy built on the old comparison was built on numbers that have moved. A mix that was optimal at a 12.2 per cent corporate rate and a 47.74 per cent dividend rate is not automatically optimal now.

The 2026 dividend decision, deliberately. For clients already planning a distribution, model 2026 against 2027 rather than defaulting to the usual timing. For clients who were not planning one, weigh the saving against the cost of creating a distribution that was not otherwise needed.

Quebec year-ends. The corporate cut only reaches a Quebec corporation in its first taxation year starting after April 29, 2026. A December year-end waits until 2027, so the 2026 acceleration argument runs on personal timing alone.

Salary for reasons other than rate. RRSP room, CPP or QPP participation, and eligibility tied to earned income are unaffected by any of this and often decide the question regardless.

Whether the client is a retainer or a drawer. It is worth asking directly rather than inferring from last year's T5, because it determines which side of the break-even they sit on.

None of this makes the rate cut unwelcome. It makes it uneven, and the unevenness runs along a line a compensation policy set on the old numbers was never set up to notice.

This is part two of a two-part series. Read part one of Bashar Qawas' analysis: The small business rate cut that partly reverses in January.

Bashar Qawas is a partner at Better Books Canada and a former Canada Revenue Agency auditor. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances. Author photo courtesy Bashar Qawas. Title image: iStock ID 1360551210.