Solo Startups

How to Pay Yourself from Your Business

Dividend vs. Salary

With your solo service business, you’re both the sole shareholder and the sole employee. This means you can take compensation from your corporation through a salary or a dividend, or a combination of both.

  • Salary – wages paid to you, the employee, from your corporation’s revenue
  • Dividend – an investment return paid to you, the shareholder, out of your corporation’s profits

Tax Considerations

The taxes on salaries are paid:

  • in your personal income tax (since your salary is income to you but a deductible expense for your corporation, your corporation will not pay tax on your salary).

The taxes on dividends, on the other hand, are paid in two places:

  • in your corporate income tax (since dividends to shareholders are paid from after-tax corporate income), and
  • in your personal income tax (since dividends are a form of personal income and are taxed as such).

It’s important to note that there is little short term difference between the total tax on a dividend and the total tax on a salary. Canadian corporate and personal tax rates were designed with this outcome in mind.

CPP Considerations

The key difference between salaries and dividends, given that the taxes owing are very similar, is that salaries are subject to the CPP and dividends are not.

In 2025, the combined employee/employer contribution to the CPP is calculated as 11.9% of the salary paid, to a maximum of $8,068.20 – half of which is paid by the employee, and half by the employer. As both employee and employer in your corporation, you pay both halves of the CPP when taking a salary.

While paying into the CPP is not necessarily a bad thing — the amount you receive from CPP in retirement is based on your contributions over your working life — the fact that you pay it twice, as employer and employee, makes it a bigger outlay for you than it is for typical employees.

Retirement Savings

One advantage of taking a salary from your company is that you would be able to save for retirement as most Canadians do: via involuntary CPP and voluntary RRSP contributions. These retirement savings vehicles would not be available to you if you were to compensate yourself through dividends.

Dividends do not trigger CPP contributions or earn additional RRSP contribution space. With dividends, it becomes incumbent on you to invest both the CPP you save and the money you make in excess of your personal expenses in a corporate or non-registered personal investment account.

If you choose the dividend route, your company can be viewed as an RRSP, but in reverse. Whereas an RRSP contribution is made from the amounts saved from an employee’s salary and then deducted from taxable income, the contributions to retirement savings of a dividend receiving owner are made from funds not withdrawn from the company in the first place, and, as such, never included in personal taxable income.

Assuming retirement funds are invested primarily in equities, there is a strong argument to be made for investing within the corporation rather than in an RRSP. While it’s true that funds invested in an RRSP — unlike funds invested in the corporation — grow tax free while invested, the growth is fully taxable when the funds are eventually pulled out.

On the other hand, the growth of funds invested in the corporation is taxed as it occurs but at the favourable effective rates applied to dividend and capital gains income rather than the taxpayer’s full marginal rate. Here’s a more detailed discussion of this argument (pdf).

Personal Service Businesses

There is a type of Canadian corporation that we believe should never pay dividends: the personal service business.

The Income Tax Act defines a personal service business as a business carried on by a corporation through which services are provided by an individual who would, but for the existence of the corporation, be thought of as an employee of the entity receiving the services. For practical purposes this means that nearly all single shareholder corporations contracting with, predominantly, a single client could be considered personal service businesses.

Unlike any other corporation, a personal service business is not allowed to deduct most non-salary business expenses and is ineligible for the general rate reduction.

This means that if the CRA were ever to deem a corporation that reported as an active small business a personal service business, the increase in corporate tax payable as a result of the reassessment would be dramatic and punitive.

This is particularly bad if the small business paid out dividends, because the corporate income subject to the punitive personal service business tax rate would be higher (as dividends are not expenses and do not reduce the corporate income).

What’s more, in order to reduce the punitive personal service business taxes that would be re-assessed on prior year corporate income, the company would have to declare additional salary for the owner in the current year (to be applied back as an expense against corporate income from previous years). Additional personal taxes would be triggered on this additional salary. The net result is that prior year income taken by an owner as dividends would be taxed once as dividends and again as salary.

Closing Thoughts

Generally speaking, we think that salaries are a great choice for solo service business owners to compensate themselves. In our opinion, corporations consisting of a single person contracting with, predominantly, a single client are at risk of being deemed a personal service business and should always pay out salaries rather than dividends.

Your Solo Startups CPA will discuss salaries vs. dividends and how to compensate yourself with you in detail as part of the upfront meeting when you subscribe to our service.