Business -> Salary for business owner?
As A Small Business Owner, Should I Pay Myself a Salary?
What Deductions Would Apply?
Business Not Incorporated
If your business is not incorporated, whether or not you pay yourself a "salary" is irrelevant for tax purposes because you and your business are considered a single entity by Canada Revenue Agency (CRA).
You will be taxed on your net earnings from the business, which you will include on your personal tax return as self employment income. Thus, there are no "deductions" to be taken from payments you make to yourself. You are not required to pay Employment Insurance, but you will have to pay income tax and Canada Pension Plan (CPP) premiums on the self employment income reported on your tax return. You can choose to pay Employment Insurance premiums in order to qualify for EI "special benefits". Depending on the province in which you operate, Workers' Compensation premiums may be payable.
When you file your tax return for your first year of self employment, you will have to pay any income tax and CPP premiums payable on your self employment income.
If your net taxes owing (excluding CPP premiums) exceeded $3,000 in either of the past 2 years, and will exceed $3,000 in the current year, you should be paying instalment payments to CRA for the current year. Thus, you should plan ahead so you will ensure you have funds available if instalment payments are necessary.
Business is Incorporated
If your small business is incorporated, whether or not you pay yourself a salary is a tax planning decision. Another option is to pay yourself (and other shareholders, depending on share structure) a dividend, which is not deductible for the corporation. There are many factors to consider, and professional advice in this area is strongly recommended. If you decide to pay yourself a salary, you will be required to deduct income tax and CPP premiums from your salary, but as owner of the business you will not be eligible to be covered by Employment Insurance. Depending on the province in which you operate, Workers' Compensation premiums may be payable, even if you do not pay yourself a salary.
Since the legislative changes for private corporations came into effect on January 1, 2018, this topic has become a lot more complicated regarding the Tax on Split Income (TOSI) rules. For this reason, we strongly recommend that you receive advice from a Chartered Professional Accountant (CPA) or tax lawyer experienced in this area.
TaxTips.ca Resources
2017 Small Business Corporate Income Tax Changes - re TOSI
Other Resources
July 2017 draft legislation re tax changes for private corporations - in particular "income sprinkling"
Canada Revenue Agency (CRA) Resources
Required tax instalments for individuals
Revised: October 26, 2023