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

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.

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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)

Paying yourself a salary means you’re treating yourself as an employee of your corporation. To do this properly, your corporation must register a payroll account with CRA. Each time you pay yourself, you must withhold and remit income tax, CPP, and possibly EI (if applicable). These payments are due monthly in most cases and must be reported annually through a T4 slip.

Salaries are a deductible expense for the corporation, meaning they reduce corporate taxable income. This makes salary a common option for owner-managers who want to lower the corporation’s taxes.

Receiving a salary also creates RRSP contribution room. RRSP limits are based on 18% of earned income, and only employment income qualifies.

However, salaries are subject to CPP contributions. As both the employee and employer, you must contribute both portions. While this increases your cost today, it does help build future pension entitlement. When salary may be the better choice:

• You want to build RRSP contribution room

• You’re applying for a mortgage or personal loan (T4 income looks better)

• You want to contribute to CPP for future pension benefits

• You want to reduce corporate taxes with a deductible expense

• You need steady, predictable personal income

Dividends (Shareholder Income via T5)

Dividends are payments made to shareholders from the corporation’s after-tax profits. They are not considered employment income, so they do not create RRSP room and are not subject to CPP.

Dividends are taxed differently than salary. They receive favourable personal tax treatment due to the dividend tax credit, which helps prevent double taxation since the corporation already paid tax on the earnings used to issue the dividends.

Compared to salary, dividends are simpler in terms of remittance because they don’t require regular payroll deductions. However, they still need to be properly documented with board resolutions, and a T5 slip must be filed annually.

When dividends may be the better choice:

• You want to reduce overall tax and CPP costs

• You don’t need RRSP room or CPP pension benefits

• You prefer flexible, lump-sum payments instead of monthly payroll

• Your corporation has retained earnings and you’re not drawing a regular salary

• You want simpler administrative work (no payroll remittances)

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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.

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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.

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Payroll and Tax Compliance for Incorporated Businesses

If you pay yourself a salary, ensure you:

1. Register for a CRA payroll account

2. Withhold and remit income tax, CPP, and EI (if applicable)

3. File T4 slips and summaries annually by February 28

   
   

If you pay dividends:

1. Maintain corporate board resolutions authorizing dividend distributions

2. Ensure retained earnings are sufficient to support the dividends

3. 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.

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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

Transferring excess income to a holding company can help defer taxes, preserve LCGE eligibility, and create a more structured approach to investments or inter-generational planning.

Maximize the Lifetime Capital Gains Exemption (LCGE)

Planning your compensation method can help maintain eligibility for the LCGE, which allows you to sell qualifying small business shares and potentially shelter up to $1,016,836 (2025) in capital gains from taxation.

Common Mistakes to Avoid

• Treating personal withdrawals as business expenses

• Failing to remit payroll deductions on time

• Overdrawing the shareholder loan account without recording proper salary or dividends

• Paying dividends from retained earnings without board resolutions or tax planning

• Ignoring long-term implications for CPP, RRSP, and LCGE eligibility

• Mixing personal and business banking or credit cards

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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.

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.