How to Pay Yourself as a Business Owner in Canada

Salary is paid through payroll software with tax deductions and CPP contributions. It builds RRSP room and stable income history.

Dividends are paid via e-transfer from after-tax business profits. Lower tax rate but no CPP or RRSP benefits.

Hybrid Approach (Salary + Dividends) balances tax efficiency, cash flow, and financial stability.

Taylor’s Situation: A Common Business Owner Mistake

Taylor, a marketing agency owner in Vancouver, used to withdraw money from the business without structure. Tax season was a mess—no clear records, potential CRA issues, and mortgage rejections due to inconsistent income.

After consulting an accountant, they learned that business owners typically pay themselves through salary, dividends, or a combination of both.

Option 1: Paying Yourself a Salary

A salary makes the business owner an employee of their corporation. Taxes and CPP are deducted at source.

How It Works:

Set Up Payroll – Requires a CRA payroll account and software like Wagepoint or QuickBooks.

Deduct Taxes & CPP – Income tax, CPP contributions, and (optional) EI are withheld.

Remit to CRA – Withholdings must be sent to the CRA regularly.

Pros:

Predictable income

Qualifies for mortgages more easily

Creates RRSP contribution room

Reduces corporate taxable income

Cons:

Requires payroll setup and admin work

Immediate deductions reduce cash flow

Mandatory CPP contributions

Option 2: Paying Yourself Through Dividends

Dividends are issued from business profits, bypassing payroll. No tax is withheld at source.

How It Works:

Ensure Business Has Profits – Dividends come from after-tax corporate earnings.

Declare and Record Dividends – Must be documented in business records.

Pay via E-Transfer or Cheque – No payroll deductions, but taxes are due later.

Pros:

Lower tax rates than salary

No payroll setup or remittances

Higher immediate cash flow

Cons:

No CPP contributions or RRSP room

Harder to secure mortgages with inconsistent income

Requires tax planning to avoid surprises

Option 3: The Hybrid Approach (Best of Both Worlds)

Many business owners combine salary and dividends to balance tax efficiency and financial stability. Taylor chose:

$40,000 salary – Covers essential expenses, qualifies for mortgages, contributes to CPP, and builds RRSP room.

Remaining income as dividends – Lowers overall tax burden while keeping cash flow flexible.

Why This Works:

Keeps personal taxes manageable

Ensures some CPP contributions for retirement

Allows flexibility in how and when they receive income

Final Takeaways

Salary = Stability – Predictable pay, tax deductions at source, better mortgage approval chances.

Dividends = Flexibility – Lower tax, no payroll deductions, but no CPP or structured savings.

Hybrid Approach = Balance – Best for optimizing taxes while maintaining financial security.

For business owners like Taylor, structuring pay properly prevents tax surprises, supports long-term financial goals, and keeps both personal and business finances in order.