The income tax system is designed in theory to produce little difference in tax rates between salaries and dividends in a small business. Having said that, practically speaking, there are differences. Where the combined federal and provincial corporate income tax rates are less than 20%, dividends may attract less tax than salaries, though the differences are relatively small. There are other considerations in addition to the actual amount of tax paid. Dividends are not part of the calculation of earned income for the purposes of RRSP contribution limits, meaning you do not get to contribute to RRSP’s based on what you take out of your company in dividends. Dividends are not part of the calculation for Canada Pension Plan (CPP) contributions. CPP contributions are based on business income and employment income. Individuals with a history of investment losses impairing their ability to claim the Capital Gains Exemption on the future sale of shares in a small business corporation may wish to receive dividends. As with other matters involving tax planning, each situation must be examined based on the facts presented.