How to Pay Yourself From Your Corporation in Ontario

If you own an Ontario corporation, the money it earns is not automatically yours. The corporation is a separate legal person, and moving cash into your own hands has to happen through one of a handful of recognized methods, each with its own paperwork and records.

The question owners ask first — how much to take as salary versus dividends — is a tax-optimization question that belongs to your accountant. The right mix depends on your income needs, marginal rates, CPP, RRSP room, and the corporation's tax position, and it shifts year to year. This article does not answer it.

A lawyer focuses on the other half: whichever methods your accountant recommends, the corporation must authorize and document them so the records hold up when a bank, a buyer, the CRA, or a co-shareholder eventually looks. Getting the tax split right but skipping the governance leaves you exposed.

Owners commonly use five routes to extract value from a private corporation, usually in combination and guided by their accountant:

• Salary or bonus — you are paid as an employee or officer, with source deductions withheld and a T4 issued
• Dividends — the corporation distributes after-tax profits to you as a shareholder, reported on a T5
• Shareholder loans and draws — you borrow from the corporation, or are repaid money it owes you, through a shareholder loan account
• Management fees — one corporation pays another in your group for services actually rendered
• Capital dividends — a tax-free distribution from the corporation's capital dividend account using a specific election

Each is legitimate, each is treated differently under the Income Tax Act, and each requires its own authorizations and records. The sections below cover the legal side; which to use, and in what proportion, is for your accountant to model.

Paying yourself a salary means the corporation is treating you as an employee — even if you are also its sole shareholder and director. That triggers obligations unrelated to the size of your paycheque:

• The corporation needs a payroll account with the CRA and must remit source deductions (income tax and CPP, and EI where it applies) on schedule
• A T4 slip must be issued and the payroll reported on the corporation's filings
• Compensation should be authorized by the board — a director's resolution approving management remuneration is the record that supports the amount

Keep your capacities distinct on paper: you may be a shareholder (who receives dividends), an employee (who receives salary), and a director (who authorizes both). The salary should also be reasonable for the work actually performed — an issue that matters to the CRA. Whether salary is the right tool is a question for your accountant; ensuring it is authorized and remitted is the governance question.

A dividend is not simply a transfer to your personal account labelled after the fact. In law, it must be declared by the directors before it is paid.

Both the Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA) prohibit paying a dividend where there are reasonable grounds to believe it would leave the corporation unable to pay its liabilities as they come due, or would reduce the realizable value of its assets below what it owes plus its stated capital. Directors who approve a dividend that fails this solvency test can face personal liability, so before one goes out they should confirm the corporation can afford it — and record a resolution declaring it.

Two further points matter:

• Share class and rights. Dividends must follow the rights attached to each class of shares. With multiple classes or shareholders, you cannot pay one and skip others of the same class — which is why owners who want to distribute flexibly often use a purpose-built share structure.
• The record. Each dividend should be supported by a director's resolution and reflected in the corporation's records and the T5 issued for it.

Many owners take money out through the year and let their accountant characterize it at year-end — some salary, some dividends, and the balance in a shareholder loan account. That works only if the account is genuinely tracked.

The account records what the corporation owes you and what you owe it. If you loaned the company money — for startup costs, or by leaving earnings in — repayments come back tax-free, because you are simply being repaid. Draw more than the company owed you, and you are borrowing from it — the direction where the tax rules bite.

The Income Tax Act can include an unrepaid shareholder loan in your personal income if it is not repaid within the timeframe the Act sets out, and can impute a taxable benefit on loans carrying little or no interest. The exact timing is an accountant's analysis; the legal hygiene is straightforward: record loans in writing, keep the balance and its direction current, and make sure repayments actually move through the bank. An account that only ever grows, with nothing documented behind it, is one of the first things a CRA auditor or a buyer's lawyer will question.

Two further methods appear in more structured setups, and both draw closer attention.

Management fees. Where you operate through more than one corporation — say an operating company and a holding company — one may pay the other a management fee that you draw your compensation from. The fee is supportable only if real services were provided and the amount is reasonable, resting on a written management services agreement, regular invoices, and evidence of the work done. A round fee that changes each year to match profit is exactly the pattern auditors are trained to notice. Because these are related-party transactions, the same arm's-length discipline applies.

Capital dividends. A private corporation can sometimes pay a tax-free capital dividend out of its capital dividend account — a notional account tracking tax-free amounts it has received, such as the non-taxable portion of capital gains. Whether a balance exists is an accountant's calculation, and a formal election must be filed for the dividend to be tax-free. The corporate side still applies: the directors declare it by resolution like any other, recorded in the minute book. Getting the election wrong carries real tax cost, so use it only with your accountant driving the numbers.

Whatever combination you and your accountant land on, the legal requirements converge on the same short list:

1. 1.Authorize it. Salary, dividends, and management fees should each be supported by the appropriate director's — and where required, shareholder's — resolution
2. 2.File it in the minute book. Resolutions declaring dividends, setting remuneration, and approving related-party fees belong in the corporate records, not a drawer
3. 3.Keep the share register straight. Dividends follow share ownership, so the register must reflect who owns what, in what class
4. 4.Be consistent across filings. What the corporation records as salary, dividend, or loan should match the T4s, T5s, and the loan account
5. 5.Respect any shareholder agreement. Many set a dividend policy or make distributions a matter requiring approval; ignoring it is a breach of contract
6. 6.Keep capacities distinct. Where a spouse or family members hold shares or draw salary, keep those arrangements at arm's length and documented

None of this dictates how much you take home; it makes sure the paper trail supports however you take it.

Paying yourself from your corporation is a cross-disciplinary exercise. Your accountant owns the numbers — the salary-and-dividend mix, the CPP and RRSP interplay, the capital dividend account balance, the tax cost of each dollar out. This article has deliberately left those there.

Alongside the numbers sits the governance: a share structure that lets you distribute the way your accountant recommends, resolutions that authorize each payment, a shareholder loan account that is actually maintained, and corporate records a lender, buyer, or the CRA can rely on. When the structure is wrong, even the best tax plan hits a legal wall.

At Lamba Law, we work alongside owners and their accountants to put that legal foundation in place — the share structure, the resolutions, and the records that let a compensation plan function and survive scrutiny. Whether you are setting up how you pay yourself or cleaning up years of undocumented draws, the two sides are best sorted together, before the numbers are locked in.