How to pay yourself as a Canadian business owner

Salary basics

Salary is income to you taxed at your personal rate, and a deductible expense to the corporation. It creates RRSP room (18% of earned income up to the annual cap). It requires CPP contributions, which means cost to both you and the corporation.

Use salary when you want to: build RRSP room, qualify for a mortgage, lock in CPP entitlement, or simplify monthly cash flow.

Dividends basics

Dividends are paid from after-tax corporate profit. The corporation does not get a deduction. You get a personal tax credit (the dividend tax credit) to avoid double taxation.

Use dividends when you want to: avoid CPP, simplify payroll, smooth income across years, or extract retained earnings during low-income years.

The hybrid approach

Most successful owner-managers pay a modest base salary (enough to max RRSP and stay in lower tax brackets) and take the rest as dividends. The exact split depends on your province and personal situation.

If your business income is variable, dividends give you flexibility to pay yourself only when there is cash.

Holding companies

Once you have meaningful retained earnings, consider a holding company. It lets you defer personal tax on profits you do not need to draw, and isolates wealth from operating-company risk.

Holdco structures add accounting cost (an extra return per year). Worth it past a certain size, overkill below.

Common mistakes

Paying yourself entirely as dividends in your 20s and 30s, missing CPP contributions you will want at retirement.

Paying yourself entirely as salary, missing the deferral and dividend tax credit advantages.

Not keeping the personal/corporate split clean (using corporate money for personal expenses).

Forgetting to write up board resolutions for dividend declarations.