The First Thing to Know

There’s no single “right way” to pay yourself — it depends on your business structure, your goals, and your cash flow.

But there is a right way to think about it:
You’re not taking money out of your business — you’re paying yourself for running it.

That mindset shift changes everything.

If You’re a Sole Proprietor: Use Draws

If your business isn’t incorporated, everything you earn belongs directly to you.
That means you don’t pay yourself a “salary” — you take what’s called an owner’s draw.

You can transfer money from your business account to your personal account anytime. It isn’t an expense to the business — it’s just you withdrawing profit.

At tax time, your income is the net profit of the business, not how much you withdrew.
So even if you leave money in the account, you’ll still pay tax on the year’s profit.

Key takeaway:
Sole proprietors don’t run payroll for themselves. They record draws as equity withdrawals and report net profit on their personal tax return (T2125 form).

If You’re Incorporated: You Have Two Options

Once you’ve incorporated, your business becomes its own legal entity — and now there are two ways to take money out: salary or dividends.

Option 1: Salary

A salary is paid through payroll, just like any employee.
The corporation deducts income tax, CPP, and possibly EI, and remits them to the CRA.

Advantages:

• Builds CPP credits for retirement.
• Provides consistent income for mortgage or loan applications.
• Creates an expense for the corporation, which lowers its taxable profit.

Disadvantages:

• Higher administration (you must run payroll and remit monthly).
• You’ll pay both the employee and employer portions of CPP.

Salary makes sense if you want regular income and CPP contributions, or if you prefer to keep personal taxes more balanced throughout the year.

Option 2: Dividends

Dividends are paid from the corporation’s after-tax profits.
They’re not considered “employment income,” so no CPP or payroll remittances are involved.

Advantages:

• Simpler — no payroll setup or monthly CRA remittances.
• Often lower combined tax rate, since dividends are taxed at a different rate than salary.

Disadvantages:

• No CPP contributions.
• Income can fluctuate, which makes budgeting harder.
• Lenders may view dividend income as less stable.

Dividends work well when you have clean books, consistent profitability, and want to keep payroll admin light.

The Hybrid Approach

Most established owners use a combination of both.
For example:

• A modest salary to create CPP and RRSP room.
• Dividends for additional income and tax efficiency.

This mix gives you predictability and flexibility — and your accountant can fine-tune the balance at year-end based on actual profits.

How to Keep It Clean

No matter how you pay yourself:

• Keep personal and business accounts separate.
• Record all owner payments clearly (as payroll, dividends, or draws).
• Don’t mix personal expenses into business accounts — it complicates bookkeeping and CRA audits.

The goal is to make every owner payment traceable and intentional — not random transfers.

The Takeaway

Paying yourself is more than just moving money — it’s how you reward your time, manage your taxes, and build long-term financial security.

Sole proprietors take draws.
Corporations pay salary, dividends, or both.
The key is knowing what each means and choosing the one that supports your business stage.

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