How to Pay Yourself Out of Your Corporation (the Right Way)

Running your own incorporated business in Canada comes with a lot of freedom and a fair bit of responsibility. One of the biggest questions owner-operators face is: how do I pay myself properly?

The answer depends on your goals, your corporation’s financial situation, and your long-term plans. Paying yourself the right way can affect everything from your taxes and CPP contributions to your ability to qualify for a mortgage or build retirement savings.

Let’s break down the two main options namely salary, dividends, and also a few other compensation methods and important considerations for each.

1. Salary: Paying Yourself as an Employee of Your Corporation

When you pay yourself a salary (or wages), you’re treating yourself like an employee of your own company. This means your corporation deducts income tax, CPP contributions, and possibly EI (if you opt in) from your pay.

Your company issues you regular pay through payroll, deducts source deductions, and remits them to the CRA. You’ll receive a T4 slip at year-end showing your employment income.

Pros

• Earn RRSP contribution room

• Build CPP benefits for retirement

• Predictable income for mortgage or loan applications

• Salary is deductible to the corporation (reduces corporate taxes)

Cons

• Payroll setup and administration required

• Corporation pays both sides of CPP

• Higher upfront tax withholding

Best for: Owners who want consistent income, RRSP room, and CPP benefits.

2. Dividends: Paying Yourself as a Shareholder

A dividend is a payment to you as a shareholder from your corporation’s after-tax profits. You can pay dividends without running payroll, and they’re reported on a T5 slip at year-end.

After your corporation pays its income tax, you declare dividends via a board resolution (even if you’re the only shareholder). Dividends are taxed at a lower personal rate thanks to the dividend tax credit system, which avoids double taxation.

Pros

• No CPP contributions

• Simpler than running payroll

• Potentially lower overall tax rate

• Flexible timing, take dividends as needed

Cons

• No RRSP room or CPP contributions 

• Harder to qualify for personal loans or mortgages

• Must save for personal tax owed at year-end

Best for: Owners prioritizing flexibility, simplicity, and tax efficiency.

3. A Mix of Salary and Dividends: The Balanced Approach

For many small business owners, the ideal strategy is a combination of both.

Common Strategy Example

• Pay yourself a modest salary (e.g., around the CPP maximum earnings threshold, about $71,300 in 2025)

  • Builds RRSP room and contributes to CPP

  • Provides stable, reported income

• Then pay dividends for any extra income

  • Offers flexibility and potential tax savings

This mix helps balance tax optimization, retirement planning, and cash flow.

4. Other Legitimate Ways to Take Money Out

While salary and dividends are the most common, there are other ways to move money out of your corporation, each with its own CRA rules.

Expense Reimbursements

If you pay for business related expenses personally (like travel or supplies), your corporation can reimburse you. Keep detailed receipts.

Shareholder Loans

You can borrow money from your corporation short-term, but it must be properly documented to avoid being taxed as income.

• Properly document the loan. The shareholder and business should create a legal contract outlining the loan amount, interest rate, and repayment terms.

• Use prescribed interest rates. Shareholder loans must bear interest rates set by the CRA. These prescribed interest rates are recalculated every quarter. As of Q2 2025, the prescribed interest rate for shareholder loans is 4% annually.

• Follow the "one-year rule." If a shareholder borrows money from a corporation and doesn't repay it by the end of the following fiscal year, they have to report the loan as personal income and pay taxes on it. This can also result in double taxation, meaning, both the business and shareholder have to pay taxes on the loan.

• Make sure interest is paid on time. While the principal balance can be repaid by the end of the following fiscal year, any outstanding interest must be paid within 30 days of the following fiscal year.

• Pay tax on interest benefit. If you're given a loan at a lower interest rate than the prescribed rate, the interest benefit (the amount you saved with your low rate) is taxable and added to your personal income.

• Report forgiven loans. Even if a shareholder loan is forgiven, the loan amount is considered a dividend and will still be taxed on your personal income tax return

Rent or Management Fees

If you personally own property or equipment the business uses, you can charge rent or management fees. Just ensure it’s at fair market value and documented properly.

Final Thoughts: Making the Right Choice

Paying yourself strategically is one of the biggest advantages of being incorporated, but it’s also where mistakes can cost you. Taking time to structure it properly now can save you thousands in taxes and set up your long-term financial success.

If you would like to know a bit more, we help small business owners choose and implement the right structure from day one, or when it’s time to level up.  If you already own a business and need help creating systems, customized reporting and deeper knowledge over your financials and taxes, please send us a message. We’re here to help.

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