Quick answer: Both get profit out of the corporation, but they behave differently. A bonus is deductible to the company, creates RRSP room and CPP, and — critically — must actually be paid within 180 days of year-end to be deductible in the year it was accrued. A dividend is simpler paperwork and no payroll cost, but no RRSP room and no corporate deduction. The right answer depends on your bracket, your RRSP plans, and where corporate income sits relative to the small-business limit.
Key takeaways
- An accrued bonus is only deductible in the fiscal year if it is paid within 180 days after year-end — miss the window and the deduction moves.
- Bonuses create RRSP room and CPP; dividends create neither.
- “Bonusing down” to the small-business limit is no longer automatic — integration means leaving income at the general rate is sometimes fine.
- Dividends need a director’s resolution and a T5 — simpler, but not zero paperwork.
- Decide before year-end, not at filing time: the bonus accrual has to be in the year’s books.
The year-end decision
Every profitable owner-managed corporation faces the same fork as the fiscal year closes: profit is sitting in the company — do you accrue a bonus to the owner, declare a dividend, or leave it inside? We covered the leave-it-in question in a separate guide; this one is about the two ways of taking it out.
How a year-end bonus works
A bonus is employment income. The corporation accrues it as an expense in the closing year, which reduces corporate taxable income — and then it has a deadline:
- The 180-day rule. Unpaid remuneration must actually be paid within 180 days after the corporation’s year-end for the deduction to stick in the accrual year. Pay it later and the deduction is pushed to the year it is paid — which defeats the planning.
- Source deductions apply when paid. The bonus runs through payroll, with tax and CPP withheld — see our remittance guide.
- It creates RRSP room (earned income) and continues CPP contributions — both of which dividends do not.
How a dividend works
A dividend is a return on shares, not pay for work. The company gets no deduction; you personally get the dividend tax credit, and the type of dividend matters — see eligible vs non-eligible dividends. Mechanics are light: a director’s resolution when declared, and a T5 slip by the end of February. No payroll, no CPP — which cuts cost today and pension later.
The bonus-vs-dividend call changes with your bracket, RRSP plans and the corporation's rate. We model both routes before your year-end closes — while there is still time to act.
“Bonusing down” — still a thing?
The classic play was to bonus corporate income down to the small-business limit so everything left inside was taxed at the low rate. It still has its place — especially where the owner wants the cash personally anyway — but it is no longer automatic. Corporate and personal taxes are designed to integrate: income earned at the general corporate rate generates eligible dividends that carry a richer credit. Leaving income above the limit inside the company and paying eligible dividends later is sometimes the better after-tax path, particularly if you don’t need the cash now. The passive-income grind can also change the math.
How we actually decide with clients
- Need RRSP room or CPP years? Leans bonus/salary.
- Personal bracket already high this year? A dividend next year, or a split across years, may beat a lump bonus now.
- Corporate income above the small-business limit? Model bonusing down against leaving it at the general rate with eligible dividends later.
- Cash flow: a bonus must be funded (gross, plus remittances) within 180 days; dividends can be timed more freely.
- Already drew money all year? Clean up the shareholder loan first — the year-end decision often is really about clearing that balance.
The traps
- Accruing a bonus and not paying it in time. The deduction moves to the payment year — and CRA sees this one constantly.
- Declaring dividends without paperwork. No resolution, no T5 — messy at review time.
- Deciding at filing time. A bonus has to be accrued in the year’s books; you cannot invent it months later when the return is being prepared.
- Splitting a “bonus” with a spouse who didn’t earn it — that is a wage, and the reasonableness rules apply.
This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.
Founder of EverStone CPA, an Abbotsford CPA firm, and a member of the Chartered Professional Accountants of British Columbia (CPABC). Sunny works with incorporated contractors and small business owners across Canada on tax, bookkeeping and advisory. More about Sunny →
Frequently asked questions
When must a declared bonus actually be paid?+
Does a bonus create RRSP room?+
Is bonusing down to the small-business limit still worth it?+
What paperwork does a dividend need?+
Can I do both a bonus and a dividend?+
Closing your year-end soon?
We model bonus vs dividend against your real numbers before the books close — free consultation, fixed-fee quote.