Owner's Compensation Glossary
Plain-English definitions for the key terms you'll encounter when managing owner compensation in a Canadian corporation.
Dividend
A payment made by a corporation to its shareholders out of after-tax profits. Dividends are not a business expense — they come from retained earnings. Shareholders pay personal income tax on dividends, offset by the dividend tax credit to account for corporate tax already paid.
Dividend Tax Credit
A personal tax credit that reduces the income tax a shareholder pays on dividends. It exists to avoid double taxation — the corporation already paid tax on the profit before distributing it as dividends. The credit is calculated as a percentage of the grossed-up dividend amount.
Eligible Dividend
A dividend paid from income that was taxed at the general (higher) corporate tax rate. Carries a higher gross-up and a more generous dividend tax credit than non-eligible dividends. Most owner-operated small businesses pay non-eligible dividends.
Gross-Up
An adjustment that increases the stated dividend amount to reflect the pre-tax corporate income it came from. Used to calculate the taxable amount of dividends on a T5. Non-eligible dividends are grossed up by 15%; eligible dividends by 38%.
Income Splitting
A tax strategy that shifts income from a high-income family member to a lower-income one, reducing the overall family tax burden. Often done through dividends to family members who are shareholders. Subject to the TOSI (Tax on Split Income) rules for most private corporations — get advice before implementing.
Non-Eligible Dividend
A dividend paid from income taxed at the small business rate (the lower corporate tax rate on the first $500,000 of active business income). Carries a lower gross-up and smaller dividend tax credit than eligible dividends. Most small business dividends are non-eligible.
Owner's Drawing
For sole proprietors — money withdrawn from the business for personal use. Not a business expense and not taxable at the time of withdrawal (the proprietor pays tax on business profit, not on drawings). Recorded as a reduction in equity.
Retained Earnings
Cumulative corporate profit that has not been distributed as dividends. Sits on the Balance Sheet as equity. Can be retained indefinitely in the corporation, invested, or eventually distributed as dividends. Retained earnings are subject to corporate tax when earned.
Salary (Employment Income)
Compensation paid to an owner-employee through payroll, subject to source deductions (CPP, EI, income tax). Deductible as a business expense for the corporation. Generates RRSP contribution room for the individual. T4 issued at year-end.
Shareholder Loan
An account on the corporate Balance Sheet that tracks money flowing between the corporation and its shareholders — either the corporation lending money to a shareholder or a shareholder lending to the corporation. Must be repaid within one year of the corporation's fiscal year-end (for shareholder borrowings) or the amount is included in personal income.
Small Business Deduction
A federal tax credit that reduces the corporate income tax rate on the first $500,000 of active business income earned by a Canadian-Controlled Private Corporation (CCPC). The combined federal-provincial rate on income eligible for the small business deduction is typically 9-12% (varies by province), compared to 25-28% at the general corporate rate.
T5 Slip (Statement of Investment Income)
The tax slip issued to shareholders who receive dividends from a corporation. Reports the actual dividend amount, the grossed-up taxable amount, and the dividend tax credit. Must be filed with the CRA and distributed to shareholders by the last day of February.
TOSI (Tax on Split Income)
CRA rules that apply a top marginal tax rate to certain income received by family members from private corporations — designed to prevent aggressive income splitting. Whether TOSI applies depends on the recipient's age, their involvement in the business, and the nature of the income. Your Mesa CPA advisor should review any income-splitting strategy before implementation.