Two calendars run this decision
An incorporated owner answers to two different year-ends. The corporation has its own fiscal year — December 31 for many small companies, but not all. The owner, as an individual, always has a December 31 tax year. Salary, bonuses, and dividends interact with both calendars at once, and most year-end mistakes come from watching only one of them.
The corporation deducts salary and bonuses on its calendar, in its fiscal year. The owner includes salary and dividends in income on the personal calendar, in the year amounts are received. A corporation with a June 30 year-end and an owner planning around December 31 are working from different maps — which is why the first step of any year-end compensation decision is confirming which fiscal year-end the corporation actually has, and only then asking which side of December 31 a payment should fall on.
How each payment works, side by side
| Salary / bonus | Dividend | |
|---|---|---|
| Corporate deduction | Yes — salary is a deductible expense, reducing the corporation's taxable income | No — dividends are paid from after-tax corporate dollars |
| Tax paid first by | The owner, at personal graduated rates, on the amount received | The corporation, on its income; the owner then pays tax with a dividend tax credit meant to compensate for the corporate tax |
| Payroll machinery | Payroll account, source deductions (income tax and CPP), and a T4 | No payroll withholding; amounts are reported on a T5 |
| RRSP and CPP effects | Salary creates CPP participation and RRSP contribution room | Dividends create neither |
| Timing trap | An accrued bonus loses its year-end deduction if it is not actually paid within 180 days after the corporate year-end | The corporation can distribute after-tax income in the year earned or in a future year — the owner's tax follows the year of receipt |
On the T5 side, the paperwork itself encodes the two dividend types: dividends other than eligible dividends are reported in boxes 10, 11, and 12 of the T5 slip, with the dividend tax credit in box 12, while eligible dividends are reported in boxes 24, 25, and 26, with the credit in box 26. Whether a dividend can be treated as eligible depends on how the corporation's income was taxed — accountant-published guidance ties it to the company's general rate income pool (GRIP) and the kind of income earned. Guessing at that designation in December is how a tidy plan becomes an amended slip in February.
The 180-day bonus clock: a worked calculation
The single most actionable number in this article is 180. Under subsection 78(4) of the Income Tax Act, remuneration that is incurred in a taxation year but not paid within 180 days after the end of that year is treated as not having been an expense of that year at all — the deduction is denied for the year-end you were planning around. If the amount is paid later, it becomes deductible in the year it is actually paid instead. A payment made on the 180th day itself still counts as within the limit, and the rule applies whether or not the parties deal at arm's length.
Now the arithmetic for a December 31, 2026 corporate year-end. Count forward 180 days from December 31, 2026 and the deadline lands on June 29, 2027. An owner bonus accrued in the 2026 corporate year must therefore actually be paid — through payroll, with source deductions handled — on or before June 29, 2027 to keep its 2026 deduction. Pay it on June 30 and nothing is lost forever, but the deduction slides into the 2027 corporate year, which is a different tax outcome than the one the year-end plan assumed. Accountant guidance adds the supporting conditions that make an accrued bonus defensible in the first place: the amount should be reasonable, and the employee should be legally entitled to it — a board decision and a recorded amount, not a vague intention to "do a bonus later."
Total-cost framing: compare the two routes on every cost they carry, not just the tax line. A salary route carries the corporate deduction's value, plus payroll administration, plus the employer side of CPP — and buys RRSP room and CPP participation. A dividend route carries corporate tax paid first, no payroll administration, no RRSP room, and a T5 reporting duty. The cheaper route on the tax line alone can be the more expensive route once room, benefits participation, and administration are priced in — which is why this comparison belongs to a decision framework, not a rule of thumb.
The decision framework: five questions in order
- Do you need RRSP room or CPP participation? Only salary creates them. An owner who wants next year's RRSP room sized by this year's pay needs salary in the mix, whatever the rate comparison says.
- Which personal year should absorb the income? Salary and dividends are both taxed to you in the calendar year received. A payment the corporation wants to deduct in its 2026 year can still be timed so you receive it in the personal year where it does the least damage — the accrued-bonus window exists precisely to allow that separation, inside its 180-day limit.
- Can the corporation's cash survive the payment? Corporate tax still has to be paid after compensation is decided: the T2 return is due six months after the corporate year-end, and the corporate tax balance is usually due two months after year-end — three months for some CCPCs. A bonus or dividend that empties the account before those dates converts a tax plan into a borrowing problem.
- If a dividend, which kind? Eligible or other-than-eligible follows the corporation's tax pools, not preference. Confirm the designation with whoever prepares the T2 before declaring, not after.
- Is the paperwork scheduled? Salary means a T4 and T4 Summary due on the last day of February following the calendar year — the next business day when that date falls on a weekend or holiday. Dividends mean a T5 reporting the right boxes for the right dividend type. Neither slip forgives a December decision that was never written down.
The year-end procedure
- Confirm the corporation's fiscal year-end and estimate its taxable income before compensation.
- Decide the salary/bonus total first if RRSP room or CPP participation is a goal; size any dividend after the eligible/non-eligible question is answered.
- If a bonus is accrued at year-end, minute the decision, record the exact amount, and diarize its payment date inside the 180-day window — June 29, 2027 for a December 31, 2026 year-end.
- Pay the bonus through payroll, with source deductions, before that date — an e-transfer labelled "bonus" without payroll treatment is not the same thing.
- Leave cash in the corporation for its tax balance due date; then calendar the February T4 deadline and the T5 for any dividends paid in the calendar year.
What success looks like
By mid-January you can point to four things: a written compensation decision with amounts, a bonus payment date that sits inside the 180-day window, a corporate bank balance that still covers the tax payment coming due, and slip deadlines on the calendar. If all four exist, the bonus-vs-dividend question was answered by timing and paperwork — not left to whichever payment happened to go out first.
FAQ
Can the corporation deduct a bonus it has not paid yet? Generally yes, if the bonus is reasonable, the employee is entitled to it, and it is actually paid within 180 days after the corporate year-end. Miss the window and the deduction moves to the year of payment.
Does it matter that my corporation's year-end is not December 31? Yes. The 180-day clock and the corporate deduction run from the corporation's fiscal year-end; your personal tax on amounts received runs on the calendar year. Both dates belong in the plan.
Are dividends always taxed more lightly than salary? Owners pay a lower personal rate on dividends than on salary because the dividend tax credit recognizes tax the corporation already paid — but dividends build no RRSP room and no CPP participation, so the rate alone does not settle the choice.