Income vs. Dividends from Your Medical Corporation: Maximizing Tax Efficiency in 2025
Vanessa's Question: Should I Pay Myself a Salary or Dividends from My Corporation?
After a decade in practice, Vanessa incorporated her medical practice three years ago, following the advice of her accountant. With her debts under control and RRSP and TFSA fully funded, she was ready to take advantage of the tax benefits of incorporation.
However, like many physicians, Vanessa is still unsure about the best way to pay herself—should she take a salary (income) or dividends? She’s also concerned about the proposed new capital gains inclusion rate and how it might impact her corporation’s long-term financial strategy.
Salary vs. Dividends: What’s the Best Strategy?
The right approach depends on financial goals, tax efficiency, and long-term planning. Here’s a simplified framework to help physicians decide:
1️⃣ Pay Yourself a Salary First (Up to RRSP Contribution Limit)
A salary allows RRSP contributions, which reduce taxable income and provide tax-deferred growth.
Physicians should pay themselves enough salary to maximize RRSP contributions but not much more.
Salaries also contribute to CPP (Canada Pension Plan), which provides future benefits but adds payroll tax costs.
2️⃣ Use Dividends for Additional Income, Based on Needs
Dividends are taxed at a lower personal rate than salary, reducing overall tax liability.
Unlike salaries, dividends do not generate RRSP room or CPP contributions.
If a physician’s spouse has lower RRSP savings, dividends could be structured to equalize income in retirement (as Vanessa planned for her partner).
3️⃣ Retain Earnings for Long-Term Wealth Building
Physicians can leave funds in the corporation as a tax-efficient way to save beyond RRSPs and TFSAs.
Many treat their corporations like a second RRSP, investing within the corporate structure for long-term growth.
4️⃣ Watch for Tax Rule Changes (Capital Gains Inclusion Rate Concerns)
The proposed capital gains inclusion rate increase (67%) will impact corporate-held assets.
Since it applies to the first dollar of corporate gains, tax planning becomes even more crucial.
Some strategies to mitigate this include:
Holding investments long-term to defer gains.
Considering tax-efficient corporate investments.
Monitoring political and tax changes that could reverse or alter this policy.
Key Takeaways for Physicians Managing Corporate Income
✔ Optimize RRSP and TFSA First – Pay yourself a salary high enough to maximize RRSP contributions before relying on dividends.
✔ Use Dividends Strategically – Adjust dividend payouts based on financial needs, but don’t use them as a sole income source unless tax-efficient.
✔ Think Beyond Immediate Taxes – Retaining earnings in a corporation can serve as a long-term investment vehicle.
✔ Plan for Tax Changes – The proposed capital gains inclusion rate increase reinforces the importance of tax-efficient corporate planning.
The Bottom Line
Vanessa’s case highlights the importance of balancing salary, dividends, and retained earnings to optimize tax efficiency while maximizing long-term wealth. Every physician's situation is different, but by understanding the financial impact of income vs. dividends, doctors can make informed decisions that benefit both their current lifestyle and future retirement.
If you're a physician looking to refine your corporate tax strategy, consult with a qualified financial advisor to tailor an approach that fits your needs.
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