For incorporated professionals and business owners, compensation is more than just a paycheque—it’s a strategy. The way you pay yourself affects not only your personal taxes but also your corporate efficiency, retirement savings potential, and long-term wealth plan. Whether you’re focused on immediate cash flow, building retirement assets, or positioning for an eventual exit, structuring your compensation with intention can unlock significant advantages.
Salary: Stability and Contribution Room
A salary is the most straightforward form of compensation. It is considered earned income and qualifies you for RRSP contributions and Canada Pension Plan (CPP) benefits. It also counts toward personal income when applying for mortgages or lines of credit, making it a useful tool for those who need to show consistent earnings.
For the business, salary is deductible as a corporate expense, reducing taxable income. However, salaried income is subject to higher personal tax rates at the top end and triggers both employer and employee CPP contributions.
When it fits: You want predictable income, need RRSP room, or value the CPP entitlement. It also supports a strong T4 for credit or benefit applications.
Dividends: Flexibility and Tax Efficiency
Dividends offer a flexible alternative. They are paid from after-tax corporate profits and taxed at lower personal rates thanks to the dividend tax credit. Unlike salary, dividends don’t create RRSP contribution room and aren’t considered earned income for CPP or employment insurance purposes.
From a planning perspective, dividends offer more control over timing. For owners with significant retained earnings, they can be a tax-efficient way to extract value without increasing payroll or triggering CPP costs. That said, financial institutions may discount dividend income when assessing credit applications.
When it fits: You’re focused on tax efficiency, don’t need RRSP contribution room, and prefer to avoid CPP payments.
Deferred Plans: Planning Beyond Today
Deferred compensation can be a powerful tool for high-income executives with long-term wealth goals.
- Individual Pension Plans (IPPs): These defined benefit plans are ideal for executives over age 40 with consistent T4 income. They allow for larger annual contributions than an RRSP and are funded by the corporation.
- Retirement Compensation Arrangements (RCAs): Useful for executives earning income beyond the IPP limit or seeking additional retirement security. Contributions are partially refundable, providing flexibility.
- Employee Profit Sharing Plans (EPSPs): These plans allow employers to share profits while deferring tax for employees. Structuring is key to compliance.
- Bonuses or Shareholder Loans: Timing a bonus or using shareholder loans can help manage taxable income across fiscal years.
When it fits: You’re earning a high income, are planning for retirement, or want to lock in value while deferring tax.
What to Consider When Structuring Compensation
There’s no universal formula—your ideal compensation mix depends on multiple factors:
- Your personal tax bracket and overall family income.
- Your corporation’s cash flow and retained earnings strategy.
- Retirement planning, including RRSP and IPP contribution limits.
- Estate planning and succession goals, especially if you plan to sell or pass down the business.
The right balance can evolve as your priorities shift. What works in your 40s may not be optimal in your 60s.
Build a Plan That Works Today and Tomorrow
A well-structured compensation plan aligns short-term income needs with long-term financial and tax objectives. It’s not just about saving tax today—it’s about designing a compensation strategy that supports your goals across every stage of your career and business lifecycle.
Finuity Wealth works with executives and business owners to create tailored compensation plans that integrate income, retirement, and estate strategies. If you’re ready to optimize how you pay yourself, our Executive Planning team is here to help.
