In Ontario, a Canadian-Controlled Private Corporation (CCPC) has specific tax considerations when it comes to dividends and salaries. Here's how dividends work in a CCPC and why a business might choose to declare them over salaries:

How Dividends Work in a CCPC:

1. Definition: Dividends are distributions of a portion of the corporation's after-tax profits to its shareholders.

2. Taxation at Corporate Level: A CCPC in Ontario benefits from lower tax rates on active business income up to a certain threshold (the small business limit), which makes retaining earnings within the corporation for later distribution as dividends more tax-efficient.

3. Personal Taxation: Shareholders receiving dividends from a CCPC are taxed at their personal income tax rates. However, they also get the advantage of the Dividend Tax Credit, which is meant to alleviate the issue of double taxation (since the income was already taxed at the corporate level).

Reasons to Declare Dividends Over Salary:

1. Tax Efficiency: Depending on the individual tax situation of the shareholders, receiving dividends might result in a lower overall tax burden compared to receiving an equivalent amount as salary. This is because of the lower corporate tax rate on active business income and the Dividend Tax Credit.

2. CPP Contributions: Salaries require both the employer (the corporation) and the employee to make Canada Pension Plan (CPP) contributions. In contrast, dividends are not subject to CPP contributions, which can result in savings for both the corporation and the individual.

3. Flexibility: Dividends can be declared and paid at different times and in varying amounts, providing more flexibility in managing personal and corporate cash flows.

4. Income Splitting: If a CCPC has multiple shareholders (such as family members), dividends can be used to split income among them, potentially reducing the overall tax burden if these shareholders are in lower tax brackets.

5. Administrative Simplicity: Paying dividends can be administratively simpler and less costly than setting up and maintaining a payroll system, especially for smaller CCPCs.

Considerations:

• Integration Principle: The Canadian tax system is designed to make the total tax paid on income earned through a corporation and then distributed as dividends roughly equal to the tax that would be paid if that income was earned directly as personal income.

• Personal Circumstances: The decision between salary and dividends often depends on personal circumstances, including income needs, tax situation, retirement planning, and other personal financial goals.

• Professional Advice: It's advisable for business owners to seek professional tax and financial advice to make the most beneficial decision based on their specific situation and the ever-changing tax laws.

Choosing between dividends and salary in a CCPC involves a complex analysis of tax implications and personal financial planning. Each business and individual situation can significantly influence the optimal choice.