Owner Compensation Made Simple
Are You Paying Yourself the Right Way?
As the leaves fall and year-end approaches, many Canadian business owners start thinking about their finances—especially how to pay themselves from their corporation. Whether you’re a new or established corporation owner, understanding your owner compensation strategy is more than just a box to tick.
It’s about clarity, compliance, and making sure you’re not leaving money (or peace of mind) on the table!
The Core Issue: Salary, Draws, and Dividends—What’s the Difference?
One of the most common questions I hear is, “How do I pay myself as a business owner?” The answer depends on your business structure and goals.
Here’s a quick rundown:
Salary: Treated as employment income, subject to payroll taxes (CPP, EI, income tax). It’s a regular, predictable way to pay yourself and helps with RRSP contribution room.
Dividends: Paid from after-tax corporate profits. They’re taxed differently (often at a lower rate) and don’t create RRSP room or require payroll deductions.
Draws: Often confused with salary or dividends, a “draw” is simply taking money out of the business. For corporations, draws aren’t a formal compensation method—they’re just advances against future salary or dividends.
Mislabeling these payments can cause headaches:
If you call a payment a “salary” but don’t run it through payroll, you risk CRA penalties. If you take a “draw” but don’t declare it as a dividend or salary, you could face double taxation or messy books.
The right owner compensation plan keeps you compliant and tax-efficient!
Practical STEPS:
Setting Up a Smart Owner Compensation Plan
Decide on Your Mix: Most owners use a blend of salary and dividends. Salary is great for steady income and RRSP room; dividends can be more tax-efficient, especially if your corporation has after-tax profits.
Set Up Corporate Payroll: If you’re paying yourself a salary, set up a proper **corporate owner payroll setup**. This means regular paycheques, source deductions, and T4 slips at year-end.
Document Everything: Keep clear records of all payments. Label them correctly—salary, dividend, or reimbursement. This makes year-end and CRA reviews much smoother.
Review Annually: Your ideal strategy can change as your business grows. Revisit your **owner compensation strategy** each year, especially if your income or tax situation changes.
Real-World Example: Avoiding a Costly Mix-UP
A client, an established corporation owner, used to take “draws” whenever she needed cash.
At tax time, we had to scramble to reclassify these as dividends, leading to unexpected taxes and a stressful CRA review. Now, with a clear owner compensation plan, this client pays herself a mix of salary and dividends—no more surprises, just confidence and clarity.
Quick Checklist:
- [ ] Salary run through payroll?
- [ ] Dividends properly declared?
- [ ] All payments clearly documented?
- [ ] Annual review scheduled?
owner draw vs salary
Understanding the difference between owner draw vs salary and dividends is crucial for compliance and tax efficiency.
Ultimately, the best way to pay yourself from a corporation is the one that fits your goals, keeps your records clean, and minimizes tax surprises.
Ready to simplify your owner compensation strategy?
At Arnason Accounting & Co., we help Canadian small business owners with clear, proactive tax planning, bookkeeping, and year-end preparation.
Book a discovery call today to get started on the right foot for year-end!
