T5 vs T4: What Canadian Business Owners Need to Know

As tax season approaches, many business owners ask us the same question: What’s the difference between a T5 and a T4 — and which one do I need to issue? Understanding this distinction is important, especially if you pay yourself or other shareholders from your corporation.

T5 vs T4: What’s the Difference?

A T4 slip reports employment income. If someone is an employee earning salary, wages, bonuses, or taxable benefits, a T4 must be issued. Payroll deductions such as CPP, EI, and income tax are withheld and remitted throughout the year.

A T5 slip, on the other hand, reports investment income, most commonly dividends paid to shareholders. If your corporation pays dividends to you or another shareholder, those payments are not considered salary — meaning no payroll deductions apply — and they must be reported on a T5 instead.

What Are the Tax Implications?

The biggest difference comes down to how income is taxed. Salary reported on a T4 is fully taxable as employment income and generates RRSP contribution room. Dividends reported on a T5 receive dividend tax credits, which can reduce personal tax owing, but they do not create RRSP room or pensionable earnings.

Choosing between salary and dividends often forms part of a broader tax planning strategy.

Will I Pay Less Taxes with a T5 or a T4?

The short answer: Not really, the total tax burden is about the same.

The long answer: A key concept when choosing between salary (T4) and dividends (T5) is integration.

Canada’s tax system is designed so that income earned through a corporation and then paid to a shareholder results in roughly the same total tax as income earned personally. This prevents business owners from gaining a large tax advantage simply by operating through a corporation.

When you pay salary, the corporation deducts the expense, reducing corporate tax, and the individual pays personal tax on employment income.

When you pay dividends, the corporation first pays corporate tax. The shareholder then pays personal tax, but receives a dividend tax credit to account for tax already paid by the company and reduce double taxation.

In theory, both methods should produce similar overall taxes — that’s integration. In practice, differences in income level, provincial rates, CPP contributions, and retirement planning mean one option may work better depending on your goals.

For most owner-managers, the optimal strategy is usually a balanced mix of salary and dividends, not strictly one or the other. You really should talk with your accountant to determine what is best for your situation.

When Does a T5 Need to Be Filed?

T5 slips must be filed with the Canada Revenue Agency and provided to shareholders by the last day of February following the calendar year in which dividends were paid.

If your corporation has shareholders receiving dividends — even if it’s just you — issuing a T5 is required to stay compliant and avoid penalties.