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How to pay yourself as a business owner
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If you own a business in Canada, you can pay yourself through a salary (payroll), dividends (from after-tax profits), an owner’s draw for unincorporated businesses or a mix. The right choice depends on structure, cash flow, taxes and compliance. Choosing the right method for you is about balancing tax efficiency, compliance and long-term growth. In this guide, we’ll talk about what you need to think about before deciding, compare salary and owner’s draw and walk you through some steps to make the process easier. So, if you’ve been wondering “How do you pay yourself from your business?” or “What’s the best way to pay myself as a business owner in Canada?,” you’re in the right place!
Table of Contents
What to consider before paying yourself
Before paying yourself from your business, consider your structure, cash flow and tax obligations. How and when you pay yourself will depend on whether you’re a sole proprietor or incorporated, as well as your business’s stability and growth stage.
It’s important to weigh these factors:
- Business structure: Sole proprietorships, partnerships and incorporated businesses all have different rules and tax treatments. For example, sole proprietors typically take an owner’s draw, while incorporated businesses can choose between salary and dividends. Your business type will impact how you can compensate yourself.
- Cash flow and stage of your business: Your ability to pay yourself depends on how stable your cash flow is and how established your business has become. In the early stages, it may make sense to keep pay modest and reinvest profits back into the business. As your company grows and cash flow becomes more predictable, you can move toward a consistent salary, structured dividend or draw strategy.
- Tax implications: Different payment methods come with different tax implications. A salary may give you more predictable tax deductions, while dividends or draws can offer flexibility but require careful tax planning.
- CRA compliance: Paying yourself through payroll means remitting income tax, Canada Pension Plan (CPP) and possibly Employment Insurance (EI) contributions to the Canada Revenue Agency (CRA). If you take dividends, you’ll need to ensure your business has sufficient after-tax profits.
- Value of your time and expertise: Consider what your skills, leadership and time are worth if you were to hire someone else to do the work you do. This process can help you set a fair and realistic level of compensation.
Salary vs. owner’s draw vs. dividends: Which fits when?
Each of these ways can be effective in paying yourself. It all depends on your business structure, tax goals and financial priorities.
How does paying yourself a salary work in Canada?
With a salary, you put yourself on the payroll and pay yourself a regular wage just like an employee. This method is mainly used by incorporated businesses and requires registering for a payroll account with the CRA.
- Advantages
- Provides steady, predictable income
- Builds CPP contributions
- Creates Registered Retirement Savings Plan (RRSP) contribution room
- Provides a deductible expense
- Considerations
- Requires regular payroll processing and remittances
- Involves more administrative work, such as payroll records and CRA filings
How does an owner’s draw work for sole proprietors and partnerships?
An owner’s draw is when you withdraw money directly from your business profits. Because sole proprietorships and partnerships are not separate legal entities, all profits belong to the owner or owners, and money can be taken out as needed.
- Advantages
- Simple and flexible, letting you take money whenever required
- No payroll deductions are necessary
- Considerations
- CPP contributions are only paid at tax time, not through regular deductions
- Doesn’t create RRSP contribution room
- Could make personal budgeting harder if business income fluctuates
- Not a deductible expense for tax purposes since it’s simply taking profits out
How do dividends work for incorporated business owners?
Dividends are payments made from after-tax corporate profits and are declared by the corporation. They are paid to shareholders, which can include you as the business owner, and provide a flexible way to draw money from the company.
- Advantages
- May be taxed at a lower rate than salary, depending on your income level
- Flexible timing, letting you declare dividends when the business can afford it
- Considerations
- Does not contribute to CPP
- Does not create RRSP contribution room
- Requires the business to have sufficient after-tax profits to issue dividends legally
Should you choose salary, owner’s draw or dividends?
For sole proprietors, the decision usually comes down to whether to leave money in the business for reinvestment or take an owner’s draw for personal use. Incorporated business owners, on the other hand, often choose a combination of salary and dividends. This mixed approach helps balance personal income needs with long-term planning by contributing to CPP and RRSP eligibility, while also providing flexibility and potential tax advantages.
Step-by-step process overview: How do you pay yourself from your business in Canada?
Paying yourself as a business owner isn’t as simple as writing a cheque. It requires thoughtful planning to balance your personal needs, tax obligations and company’s financial health. Here’s a practical step-by-step process that Canadian entrepreneurs can follow.
Step 1: Confirm your business structure
The first step is to determine how your business is set up, since this will shape your options. Sole proprietors and partnerships generally take an owner’s draw, withdrawing money directly from profits. Incorporated businesses, on the other hand, have more flexibility. You can pay yourself a salary, dividends or a combination of both. Understanding your structure is the foundation for everything that follows.
Step 2: Review business profits and cash flow
Before paying yourself, review your financial statements to ensure your business can support it. Start by calculating net income after covering operating expenses (like rent, supplies and wages), tax obligations and reinvestment needs. This helps you avoid draining cash that’s needed to keep your business running smoothly, especially if your revenue fluctuates seasonally.
Step 3: Decide between salary, draw or dividends
Once you know what your business can afford, the next step is choosing how to pay yourself. A salary provides stability, builds CPP contributions and creates RRSP room, but requires a payroll setup. An owner’s draw (for sole proprietors) or dividends (for incorporated businesses) give you more flexibility and may be tax-efficient, but they don’t build CPP or RRSP contributions. Many Canadian business owners choose a mix: a modest salary for stability, paired with dividends or draws for flexibility.
Step 4: Set up payroll if paying a salary
If you’ve decided to pay yourself a salary, you’ll need to operate like any employer. That means registering for a payroll account with the CRA, deducting income tax, CPP and EI) (if applicable) and keeping accurate payroll records. Using payroll software or a provider can simplify these tasks and help you meet your compliance obligations.
Step 5: Establish a payroll schedule
Consistency is important. Decide whether you’ll pay yourself weekly, biweekly or monthly. Setting a schedule helps you manage personal budgeting and makes it easier to stay on top of payroll deductions and remittances. For incorporated businesses, it also signals professionalism and helps you track CRA deadlines.
Step 6: Keep accurate records of all payments
No matter which method you use, document every payment. This includes noting the date, amount and whether it was a salary payment, dividend or draw. Keeping thorough records not only makes tax filing easier but also helps you track your compensation history and monitor the overall health of your business.
Step 7: Review your compensation strategy regularly with a professional
As your business grows, your compensation strategy may need to change. Consulting with an accountant or tax advisor can help you adjust between salary and dividends for maximum tax efficiency, meet your CRA compliance obligations and plan for retirement contributions.
How to decide how much to pay yourself from your business
When answering the question, “How much should I pay myself from my business?” it’s important to balance both personal and business needs. Here are some key factors to guide your decision:
- Cover personal expenses: Ensure your pay supports your lifestyle and household needs without putting your company at risk.
- Leave room for reinvestment and growth: Keep funds available not only for day-to-day operations but also for long-term business growth, whether that means hiring staff, upgrading equipment or expanding into new markets.
- Evaluate business performance: Base your compensation on the business's overall performance. During strong financial periods, you may be able to increase your pay. In slower seasons, keeping your draw or salary modest can help protect the business.
- Check industry benchmarks: Compare typical compensation levels for owners in your industry. This process helps you set a realistic and competitive pay level.
- Optimize for taxes: Consider how different pay structures affect your personal tax bracket, CPP and RRSP contributions. For Canadian business owners, a balanced mix of salary and dividends or draws is often the most tax-efficient approach.
Pay yourself with ADP Canada
Paying yourself as a business owner in Canada isn’t just about withdrawing money. It’s about aligning personal income with your company’s financial health. Depending on if you choose a salary, an owner’s draw, dividends or a combination, the key is to stay compliant with CRA requirements, plan ahead for taxes and make sustainable decisions that support both your personal and business goals.
This process can be complex, especially if you’re balancing payroll deductions, remittances and recordkeeping while also focusing on growing your business. That’s where ADP Canada can help.
With ADP Canada’s payroll and HR solutions, Canadian business owners can:
- Automate payroll calculations and tax remittances to the CRA
- Easily manage salary payments, deductions and benefits through a secure platform
- Generate records and reports to simplify tax season and compliance
- Scale payroll processes seamlessly as your business grows
With ADP Canada, you can take the guesswork out of paying yourself, save time on administration and focus on what matters most: building and running your business. Learn more about our payroll solutions.
FAQs
What is owner’s equity?
Owner’s equity represents the total value of a business that belongs to its owner after subtracting liabilities from assets. For sole proprietors and partnerships, it reflects how much of the business you truly own. When you take an owner’s draw, you’re withdrawing from this equity.
Can I pay myself a salary as a sole proprietor in Canada?
No. As a sole proprietor in Canada, you cannot pay yourself a salary in the same way incorporated owners do, because you and your business are considered one legal entity. Instead, you take an owner’s draw from the business profits. Salaries (with payroll deductions and remittances) only apply to incorporated businesses.
Is an owner’s draw taxable?
Yes. While draws themselves are not taxed at the time of withdrawal, they reduce your owner’s equity and are reported as personal income on your tax return. The CRA taxes you on the business’s net profits, regardless of how much you draw out, so you’ll pay personal income tax on the total profit earned.
When can you start paying yourself?
You could start paying yourself once your business generates enough consistent profit to cover both operating expenses and future obligations, such as taxes and reinvestments. Many new business owners delay paying themselves until the company is financially stable, while others begin with a modest draw or salary to cover essential personal expenses.
What are the benefits of receiving a business owner’s salary?
Paying yourself a salary, available only to incorporated business owners, comes with several benefits:
- Provides predictable, stable income for personal budgeting
- Contributes to the CPP, which supports retirement income
- Creates RRSP contribution room, allowing you to save more for retirement
- Can make it easier to qualify for personal loans or mortgages, since lenders often prefer salary income over dividends or draws
Are dividends better than a salary for Canadian business owners?
It depends on your goals and business structure. Dividends, which are paid out of a corporation’s after-tax profits, may be taxed at a lower personal rate than salary and offer flexibility in how and when you pay yourself. However, dividends don’t contribute to CPP or create RRSP contribution room, which can affect your long-term retirement savings. A salary, on the other hand, provides stability, builds CPP contributions and helps with RRSP eligibility but comes with regular payroll deductions and CRA remittances. Many incorporated business owners in Canada choose a blend of salary and dividends to balance stability, tax efficiency and retirement planning.
This guide is intended to be used as a starting point in analyzing how to pay yourself from your business and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not providing legal or tax advice or other professional services.
