How to Pay Yourself as a Canadian Business Owner

Sole Proprietors and Partners

There's no legal separation between you and a sole proprietorship or partnership. The business's profit is already your income — you report it on your personal tax return, and you pay personal income tax on it.

Taking money out: You simply move money from the business account to your personal account. In QBO, this is recorded as an Owner's Drawing — a reduction in equity. It's not a business expense and doesn't reduce your taxable income.

You pay taxes on profit, not drawings. If the business earned $100,000 and you only drew $60,000, you still pay tax on $100,000. The drawing is just moving money you've already earned.

Incorporated Business Owners

A corporation is a separate legal entity. You don't automatically own the money in the corporation — you need to pay yourself through one of two formal mechanisms: salary or dividends. Most incorporated owners use a combination of both.

Option 1: Salary

You put yourself on payroll as an employee of your corporation.

What it means	Details
Processed through payroll	CPP contributions required (both employee and employer share)
Source deductions withheld	Income tax deducted and remitted to CRA
Business expense	Salary reduces corporate taxable income
Creates RRSP room	Salary generates RRSP contribution room
T4 issued at year-end	Same as any other employee

Best for: Owners who want to maximize RRSP room, need to show personal income (for mortgage qualification), or want a predictable personal cash flow.

Option 2: Dividends

The corporation pays out a portion of its after-tax profits to you as a shareholder.

What it means	Details
Paid from retained earnings	No CPP contributions — neither employee nor employer
No source deductions	No payroll processing required
Not a business expense	Dividends come from after-tax profit — they don't reduce corporate tax
Lower personal tax rate	Dividend tax credit reduces the personal tax rate on dividends
T5 issued at year-end	See: How to Prepare and File T5 Slips

Best for: Owners who don't need RRSP room, want to avoid CPP contributions, or are in a position to draw down retained earnings tax-efficiently.

The Salary vs. Dividends Trade-Off

	Salary	Dividends
CPP contributions	Required	Not required
RRSP room	Generated	Not generated
Reduces corporate tax	Yes	No
Tax rate (personal)	Marginal rate	Lower (dividend tax credit)
Admin	More (payroll setup)	Less (T5 only)

Most incorporated owners work with their Mesa CPA advisor to determine the optimal mix each year — the right split depends on personal income level, corporate profit, retirement savings goals, and provincial tax rates.

Abnormal Procedures

You took money out of the corporation but haven't decided whether it's salary or dividends.

Record it as a shareholder loan for now. At year-end, your Mesa CPA advisor will determine the best treatment. If left unresolved, the CRA may treat it as income. See: How to Record a Shareholder Loan.

You want to leave profits in the corporation rather than paying yourself.

That's retained earnings — the money stays in the corporation and is taxed at the lower corporate rate. This is a common strategy when personal income is already high. Your Mesa CPA advisor can model out the tax comparison.

You're paying a family member through the business.

Paying family members (spouse, children) through salary or dividends can be legitimate income splitting — but the CRA scrutinizes it closely. The pay must be reasonable for the work done and documented. Get advice before doing this.

FAQ

Can I just transfer money between the corporate and personal account whenever I want?

Legally, no — the corporation's money belongs to the corporation, not you personally. Moving money out without documenting it as salary, dividends, or a shareholder loan creates accounting and tax problems. Every transfer needs a proper classification.

Do I need to pay myself to prove the business is active?

No. You can leave all profits in the corporation (retained earnings) without paying yourself. Many owners do this in the early years to build capital.

What's the best split between salary and dividends?

There's no universal answer — it depends on your provincial tax rates, retirement savings goals, CPP strategy, and the corporation's profits. Your Mesa CPA advisor will model the options and recommend a split at year-end.

Does paying myself a salary affect my corporate tax rate?

Yes — salary is a deductible expense, which reduces corporate taxable income. A lower corporate profit may keep you in the small business deduction range (the first $500,000 of active business income taxed at the lower rate). This is one of the reasons salary timing and amounts are part of year-end tax planning.