The Salary vs. Dividend Worksheet calculates the decision prior to any impact to the corporate tax return. The best way to explain this is through an example:
If we assume that a corporation has $100,000 of taxable income and is interested in allocating this full $100,000 to the shareholder, here are the mechanics under both a salary and a dividend (we will ignore items such as CPP, EI, EHT, and other amounts for this example).
If the corporation paid a salary of $100,000, the corporation revised taxable income would be $0. Therefore, there would be no tax to the corporation. Only the personal taxes on the salary to the individual of $100,000 would be due (based on the individual’s marginal rate).
If the corporation chose to pay the $100,000 as a dividend, the first step is to tax the $100,000 inside the corporation at the appropriate rates (assume 25% for this example). Once the corporate taxes of $25,000 are paid ($100,000 * 25%), the remaining amount of $75,000 ($100,000 - $25,000) may be paid as dividends to the shareholder (eligible or other than eligible as appropriate). Lastly, the personal taxes must be paid to the individual on the $75,000 of dividends (based on the individual’s marginal rate).