How to Pay Yourself as a Small Business Owner in Canada

For many Canadian entrepreneurs, launching and growing a business often comes with an important — and sometimes overlooked — financial question: How do I pay myself correctly? While it may seem as simple as transferring funds from your business account to your personal one, the method of compensating yourself has significant implications on your taxes, compliance, cash flow, and long-term wealth planning.

Whether you operate as a sole proprietor or through an incorporated company, this guide offers a comprehensive overview of your options, with accurate, up-to-date information tailored to Canadian business owners.

Why How You Pay Yourself Matters

Person counting dollar bills, wearing a blue shirt. Hands are in focus. Moody atmosphere with a blurred background.

Choosing the right compensation method can affect:

Your personal income tax liabilities
Your CPP (Canada Pension Plan) contributions
Your RRSP contribution room
Your business’s cash flow
Your eligibility for financing
Your CRA compliance and audit risk

Paying yourself without understanding the legal and tax implications could lead to overpaying taxes, missed deductions, or triggering unnecessary CRA scrutiny.

Identify Your Business Structure

1. Sole Proprietorship or Partnership

If you operate as a sole proprietor or general partner, your business is not legally separate from you.

This means:

You do not pay yourself a salary
You simply withdraw money from your business as needed (commonly referred to as a draw)
All business profits are included in your personal income tax return, regardless of whether you actually withdraw the funds

Important note: These owner withdrawals are not deductible business expenses. You will be taxed on the net income of the business, not on what you draw.

You will also be required to pay both the employer and employee portions of CPP contributions — a combined 11.9% in 2025 on net business income over $3,500, up to the maximum pensionable earnings limit of $68,500.

2. Corporation (Incorporated Business)

If you operate through a corporation, you and the business are considered distinct legal entities, which introduces more flexibility in how you can pay yourself.

The two primary compensation methods are:

Salary (Employment Income via T4)

Dividends (Shareholder Income via T5)

Salary vs. Dividends: Key Differences

Criteria	Salary (T4)	Dividends (T5)
Tax Treatment	Deductible from corporate income	Paid from after-tax profits
CPP Contributions	Yes (mandatory)	No
RRSP Eligibility	Yes	No
Tax Withholding Required	Yes	No
Administrative Burden	Higher (payroll setup)	Moderate (T5 slips, board minutes)
Preferred When	Building RRSP, credit score, or qualifying for loans	Retaining tax efficiency or wealth accumulation

Many owner-managers adopt a hybrid approach, combining salary and dividends to optimize tax outcomes and personal financial planning.

How Much Should You Pay Yourself?

There is no universal rule, but key factors include:

Your personal living expenses
Your anticipated tax obligations
Your business’s cash flow capacity
Plans for growth, reinvestment, or retained earnings
Whether you plan to invest through the corporation or personally

A prudent approach is to establish a reasonable compensation level that supports your lifestyle without compromising business operations. It's also recommended to leave adequate capital in the business for taxes, emergencies, and planned investments.

Payroll and Tax Compliance for Incorporated Businesses

If you pay yourself a salary, ensure you:

Register for a CRA payroll account
Withhold and remit income tax, CPP, and EI (if applicable)
File T4 slips and summaries annually by February 28

If you pay dividends:

Maintain corporate board resolutions authorizing dividend distributions
Ensure retained earnings are sufficient to support the dividends
File T5 slips and summaries annually by February 28

Failing to comply with payroll or dividend reporting requirements may result in penalties, interest, or increased CRA scrutiny.

Advanced Tax Planning Tips

Income Splitting with Family

Consider employing or issuing shares to your spouse or adult children. However, be cautious of Tax on Split Income (TOSI) rules, which may result in punitive tax rates if not structured properly.

Use of Holding Companies

Maximize the Lifetime Capital Gains Exemption (LCGE)

Common Mistakes to Avoid

Final Thoughts

The way you pay yourself is more than just a transactional decision — it’s a key element of your overall tax strategy, retirement planning, and business sustainability.

People sitting at a wooden table, holding pens and notebooks. Bright sunlight creates a focused and collaborative atmosphere.

At Sahil & Meher Accountants, we help Canadian entrepreneurs design personalized compensation strategies that align with their business structure, lifestyle needs, and long-term goals. Whether you're navigating CRA compliance, setting up a hybrid approach, or planning for growth, we’re here to ensure every dollar you earn works smarter for you.