How IT Consultants Should Structure Their Salary vs. Dividends
If you run your IT consulting work through a corporation, how you pay yourself matters. It affects your after‑tax cash, your retirement savings, and even your audit risk. The choice is not “salary or dividends.” For most owners, the best result comes from a simple blend that fits your income, your cash needs, and your level of CRA risk.
At Dexado, we design compensation plans with the Ex‑CRA Advantage. That means the plan is not only tax‑efficient, it’s also built to pass CRA review.
Quick overview
- Salary gives you RRSP room and CPP credits. It’s lender‑friendly and reduces year‑end tax surprises because of payroll withholdings. At common income levels (e.g., around $100,000 in Ontario), salary often beats pure dividends and builds RRSP room.
- Dividends are flexible. No payroll, no CPP on the payout. They can make sense at very high incomes when you don’t need more RRSP room. But you lose RRSP room and, for families, dividends can be limited by TOSI rules.
- PSB risk (being treated like an “incorporated employee”) hits IT consultants hard. If you look like an employee of one client, your corporate tax rate can jump to ~44.5% in Ontario—so structure your work and your pay with this risk in mind.
When salary should lead
Use salary as your foundation if you want:
- RRSP room (18% of earned income up to the annual limit).
- CPP accrual for future benefits.
- Clean eligibility for common deductions/benefits.
- Lender‑friendly T4 income for mortgages and financing.
In practice, a salary‑first plan often wins at mid‑range incomes. For example, analysis for Ontario (2024) at $100,000 shows salary can produce more after‑tax cash and creates RRSP room, compared to all dividends.
Plain tip: Set salary high enough to meet your personal cash needs and hit your RRSP (or IPP) targets. Then add dividends later in the year if you need to top up or smooth your tax bracket.
When dividends can take the lead
Dividends can play a larger role when:
- Your income is high (roughly $300k+).
- Your company has ample cash.
- You don’t need more RRSP/IPP room.
- You prefer less payroll administration.
Dividends don’t trigger CPP. That can save cost at high incomes. But remember: no salary means no new RRSP room and no CPP accrual. For many owners, that trade‑off only makes sense once you’re already well funded for retirement.
The PSB issue (why IT consultants must care)
CRA can classify some IT corporations as Personal Services Businesses (PSBs), essentially treating you like an employee of a single client. If that happens, the small business rate disappears and your corporate rate can jump (Ontario example: ~44.5% vs 12.2% small business rate).
How to lower PSB risk:
- Have more than one client over time.
- Show business risk (your own tools/software, scope changes, delivery risk).
- Use subcontractors or staff when appropriate.
- Use clear contracts (SOWs, change orders, indemnities) to show commercial substance.
If PSB is unavoidable, lean on salary and pension (RRSP/IPP) so less income sits in the corporation at high PSB rates.
The simple “blend” most owners use
1) Start with salary.
Pick a number that:
- Meets monthly cash needs, and
- Creates RRSP room (or supports an IPP, see below).
2) Top up with dividends.
Use dividends to fine‑tune your personal tax bracket and release extra corporate cash at year‑end.
3) Add smart benefits instead of more salary.
- Health Spending Account (HSA/PHSP): 100% deductible to the company and tax‑free to you, when structured properly. Great for health, dental, and vision costs you’re paying anyway.
Two retirement tools that pair well with your pay
1) Individual Pension Plan (IPP)—a “bigger RRSP” for owners 40+
An IPP is a defined‑benefit pension for owner‑managers. Contributions are paid by your corporation and deductible to the company, and the annual room increases with age (often outpacing RRSP limits once you’re 40+ with stable $100k+ T4 salary). Funds grow tax‑deferred and are generally creditor‑protected. (IPP requires salary.)
Good fit: You’re 40+, earn $100k+ in consistent T4 salary, and want a larger, safer retirement bucket than an RRSP alone.
2) Retirement Compensation Arrangement (RCA)-the overflow pension for very high earners
An RCA is a separate trust your company funds when you want retirement benefits above RRSP/IPP limits. Think of it as a CRA‑recognized overflow pension. Here’s how it works—in plain language:
- Set up a trust with a licensed custodian.
- When your company contributes, you split each dollar in half:
- 50% goes to the RCA custodian to invest for you.
- 50% goes to the CRA as a refundable tax deposit. (This is not a permanent tax.)
- Investment earnings inside the RCA are also subject to that 50% refundable tax as they’re earned.
- Later, when the RCA pays you benefits, the CRA refunds $0.50 for every $1.00 paid out. In other words, the deposit unwinds as you receive retirement income. You report the payments as taxable income at that time.
Why use an RCA?
- You’ve maxed your RRSP/IPP but still want deductible corporate contributions earmarked for retirement.
- You want the money outside your operating company in a dedicated, custodian‑held trust.
- You’re comfortable with the 50% refundable deposit because you’re thinking long‑term and will draw benefits later (which triggers the refunds).
Simple example:
Your company contributes $100,000: $50,000 goes to the RCA to invest; $50,000 goes to CRA as a refundable deposit. Over time, as the RCA pays you benefits, CRA refunds the deposit back into the plan. A common illustration shows how that $100,000 can build over 10 years and then pay out with refunds kicking back as you draw income.
Who is it for?
- Sustained high earners who’ve outgrown RRSP/IPP room.
- Owners who want corporate deductions today, with controlled, flexible payouts later. (It’s advanced. Get actuarial and tax support.)
Income bands: what usually works best
$75k–$150k (owner income):
- Salary‑led (create RRSP room; simpler for lenders).
- Add HSA/PHSP for health costs.
- Small dividend at year‑end if it helps smooth your bracket.
$150k–$300k:
- Balanced mix. Set salary to meet cash needs and fund RRSP/IPP.
- Use dividends to top up and control your personal bracket.
- Keep PSB risk low with strong commercial evidence.
$300k+ and well funded for retirement:
- Dividend‑heavy can make sense (no CPP on dividends, lighter admin).
- Consider RCA as an “overflow pension” if you want more deductible retirement funding beyond IPP/RRSP.
A few practical guardrails
- Management fees vs salary: Don’t pay yourself from another company as “management fees” unless there’s real substance (contracts, invoices, market rates, GST/HST). CRA scrutinizes this heavily. The tax difference is usually small; the audit risk can be large.
- Company vehicle: Company‑owned cars can create punitive taxable benefits (standby charge and operating benefit). Owning the car personally and billing mileage often wins on tax and simplicity.
- Holdco basics: Moving extra cash to a holding company protects assets and lets profits grow before you take them personally. Inter‑corporate dividends can be tax‑free, but plan around the passive‑income rules.
Myth vs Reality
- Myth: “Dividends are always lower tax.”
Reality: Not once you value RRSP/IPP room, CPP accrual, lender needs, and PSB risk. At common income bands, a salary‑first or balanced plan often wins overall. - Myth: “RCAs are just a tax dodge.”
Reality: An RCA is a CRA‑recognized trust with a 50% refundable deposit. The corporation gets a deduction now; you pay tax when you receive benefits; and CRA refunds the deposit as you’re paid. It’s legitimate, but advanced.
How Dexado builds your owner pay plan
- Model your numbers (province‑specific): salary vs. dividends, plus the value of RRSP/IPP, CPP, and HSAs.
- PSB defence: structure your client contracts and work pattern to show real business substance.
- Right tools for your stage: IPP for 40+ earners with $100k+ T4; RCA for overflow needs at high incomes; HSA for tax‑free health costs.
- Ex‑CRA documentation: minutes, schedules, and evidence that stand up in an audit.
👉 Book a consultation with Dexado to get a clear, plain‑English compensation plan that saves tax and protects you from surprises.
References
- Dexado internal: Comprehensive Tax Planning Analysis for Management and Shareholder Compensation in Canada (2025).
- Dexado internal: Additional Compensation Strategies for Canadian Business Owners (2025).
- Dexado internal: Even More Advanced Compensation Strategies for Canadian Business Owners (2025).
Disclaimer
This article is for education only and isn’t tax or legal advice. Your situation is unique. Please speak with Dexado Accounting & Tax before you act.
