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Pay Strategies for Canadian Business Owners

Paying yourself from your business isn't always straightforward. The best approach depends on your income level, whether or not you're incorporated, and your long-term financial goals.

In this post, we walk through three real-world scenarios and show how incorporation and compensation strategies play out in practice. You'll get simple explanations, rough tax estimates, and our take on what we'd do in each situation.

TL;DR

• A freelancer with $125K of net income – Staying self-employed is often the simplest and most efficient option.
• A business owner with $225K of income – Incorporating starts to make more sense at this level. We would incorporate and pay ourselves a salary or a mix of salary and dividends.
• A corporation with 2 shareholders earning $500K of net income – Paying full salaries to each owner is what we would likely do if we were in this situation.
• Dividends can give you slightly more cash today but don’t build CPP or RRSP room.
• Salaries are great for long-term planning and create RRSP contribution room while supporting CPP benefits.

But first, a quick note of caution. 

Please know that these examples are general in nature and it’s important to consult your accountant to discuss your specific situation before choosing how to pay yourself or when to incorporate.

Freelancer Making $150K with $25K in Expenses

Let’s say you’re a self-employed freelancer in British Columbia making $150,000 in revenue, and you’ve got about $25,000 in business expenses.

That leaves you with $125,000 in net income. Now you’re wondering: should you stay self-employed, or would it be better to incorporate?

Option 1: Stay Self-Employed

If you stay self-employed, you’ll report the $125,000 on your personal tax return as self-employment income.

At that income level in BC, you’d pay about $27,000 in income tax and $8,000 in CPP contributions. The high amount of CPP contributions is because you’re responsible for both the employee and employer portions of CPP when you’re self-employed.

So, you’d be left with around $90,000 in after-tax cash.

This is the simplest setup, no corporate filings, no extra admin, and just some basic bookkeeping and one personal tax return to deal with.

Plus, self-employment income also builds up your CPP and RRSP contribution room, which can help you out in the future.

Option 2: Incorporate and Pay a Salary

After paying around $5,000 for bookkeeping, corporate taxes, and legal fees, the company has $120,000 left to work with.

That could fund a gross salary of about $116,000, with the remaining $4,000 going to employer CPP contributions.

On the personal side, you’d pay about $25,000 in income tax and $4,000 in employee CPP. That leaves you with roughly $87,000 in after-tax income.

In this version, you’re still contributing to CPP and creating RRSP contribution room, but after-tax cash is a bit less than the self-employed option. This mainly boils down to the added costs of running a corporation.

Option 3: Incorporate and Pay Dividends

What if you go the dividend route instead?

After the same estimated $5,000 in admin costs, your corporation is left with $120,000 in profit. You’d pay about $13,000 in corporate tax, which leaves $107,000 to pay out as dividends.

Once those dividends hit your personal tax return, you’d owe about $15,500 in personal tax, leaving you with around $91,500 in after-tax income.

So this is the highest take-home option today, but there are two big tradeoffs:

• You don’t pay into CPP, which means less retirement income down the road
• You also don’t create RRSP contribution room when your income is all dividends

So while it’s efficient now, it may not support your long-term financial plan the same way salary or self-employed income would.

What We’d Do

If this were us, and we were earning $125,000 in net income as a freelancer, we’d likely stick with being self-employed for now.

The tax savings from incorporating aren’t significant once you factor in the extra admin costs. As a self-employed business owner, you’d also get to keep things simple and still build up CPP and RRSP room, which helps with retirement planning later on.

That said, taxes aren’t the only thing to consider. There are other factors that might make incorporation a good move, like limited liability protection.

If you want to explore those details, check out our blog post on whether or not you should incorporate your business.

And if you’re staying self-employed for now, we’ve got two great free resources to help you:

• Our free bookkeeping template makes it easy to track your income and expenses
• Our guide on how to file your tax return for free walks you through the process step by step

Business Owner Making $275K with $50K in Expenses

Let’s say you’re bringing in $275,000 in revenue and you’ve got about $50,000 in business expenses. That leaves you with $225,000 in net income.

Option 1: Stay Self-Employed

If you’re self-employed in BC and earning $225,000 after expenses, you’ll pay around $70,000 in income tax and another $8,000 in CPP.

That leaves you with about $147,000 in after-tax income.

You’ll also need to stay on top of your own bookkeeping and personal tax filing, but there’s no corporate structure to manage.

The upside here is that your self-employment income still builds CPP contributions and RRSP contribution room.

Option 2: Incorporate and Pay a Salary

After setting aside $5,000 for bookkeeping and legal costs, your corporation has $220,000 available to cover salary and employer CPP.

That allows for a gross salary of about $216,000 and $4,000 in employer CPP contributions.

On the personal side, you’d pay around $67,000 in income tax and $4,000 in employee CPP. 

That leaves you with about $145,000 in after-tax income.

Like self-employment, this option also contributes to CPP and builds RRSP room.

Option 3: Incorporate and Pay Dividends

After the estimated $5,000 in extra admin costs to run a corporation, the business has $220,000 in profit.

It pays about $24,000 in corporate tax, leaving $196,000 to be paid out as dividends.

You’d owe about $48,000 in personal tax, leaving you with around $148,000 in after-tax income.

So this ends up being the highest after-tax income of the three options, but again there are two tradeoffs:

• You’re not contributing to CPP which means less pension income when you retire
• You’re not generating RRSP contribution room which limits your ability to reduce tax and save up for retirement through RRSP contributions

What We’d Do

If this were us, and we were earning $225,000 in net income, we’d seriously consider incorporating.

At this level of income, the benefits of incorporation start to outweigh the costs, especially if you’re planning to grow the business, build some savings inside the company, or just want more flexibility.

We would do some calculations and either pay all salary, or use a mix of salary and dividends to strike a balance between tax efficiency and long-term planning.

For more context on this decision, check out our articles on whether or not to incorporate and salary vs dividends.

Two Shareholders, $1.2M Revenue, $700K in Expenses

Let’s say you’ve got an incorporated business with two shareholders. Both are active in the business, and you’re earning $1.2 million in revenue with $700,000 in expenses to run the company.

That leaves $500,000 in net income to split between the shareholders.

Option 1: Pay Salaries to Both Shareholders

That allows for a gross salary of $246,000 each, with about $4,000 in employer CPP contributions per person.

On the personal side, each would pay about $81,000 in income tax and $4,000 in employee CPP. That leaves around $161,000 in after-tax income per shareholder.

In this option, you’re contributing to CPP and building RRSP contribution room. It’s a solid option for long-term planning.

Option 2: Pay Dividends to Both Shareholders

The corporation would pay about $55,000 in tax on the $500,000 in profit, leaving $445,000 to distribute as dividends.

Split evenly, that’s $222,500 in dividends per shareholder. Each would pay about $59,500 in personal tax, leaving around $163,000 in after-tax income each.

So, take-home is slightly higher than the salary option. But again:

• No CPP contributions
• No RRSP contribution room

What We’d Do

In this situation, we’d likely go with paying full salaries to the shareholders instead of using dividends.

We ran some preliminary calculations, and at this level of income, a mix of salary and dividends actually ends up being less tax efficient than just paying salaries.

With full salaries, the after-tax income is slightly lower than dividends, but you're contributing to CPP and creating RRSP contribution room, which adds long-term value. 

Final Thoughts

There’s no one single perfect answer when it comes to paying yourself. It really depends on how much your business makes, whether or not you’re incorporated, and what your goals are.

Hopefully these examples gave you a better idea of how the different options work in real life, and what we’d do if we were in your shoes.

If you would like some help figuring this out for your own business, please feel free to contact us. We’d be happy to see how we can help.

FAQ

Is it better to pay myself a salary or dividends in Canada?
It depends on your income level and goals. Salary creates CPP and RRSP room but comes with more admin. Dividends may give you more cash today but no long-term benefits like CPP or RRSP contributions.

When should I incorporate my business in Canada?
Generally, incorporation makes more sense once you're earning above $200,000 and want to reinvest in the business or reduce personal taxes. Here’s our full post on when to incorporate.

Do I pay less tax if I incorporate in Canada?
Not always. Incorporating lets you defer some tax if you leave profits in the company, but if you pull all the money out, the overall tax savings may be small.

Is dividend income eligible for CPP or RRSP room?
No. Dividends don’t generate CPP contributions or RRSP contribution room. Salary or self-employment income does.

Can I switch between salary and dividends each year?
Yes, but it’s smart to plan ahead. The best approach depends on how much you earn, your cash flow needs, and your retirement goals.