Updated Checked by the Tax-Services.ca editorial team How we check
The owner’s draw vs salary question has a first answer that surprises people: if you run a sole proprietorship, you can’t pay yourself a salary at all. The CRA says salaries or drawings paid to the owner aren’t a deductible business expense. You’re taxed on the business profit, whatever you pull out. Salary only enters the picture once you incorporate.
How does an owner’s draw work in a sole proprietorship?
A draw is just you moving money from the business account to your own. It isn’t wages and it isn’t an expense. In the books it’s a reduction of what you’ve put in and earned, not a line on the profit and loss statement. Take out $500 or $5,000 and your taxable profit stays exactly the same.
That has two effects. You pay income tax on the profit whether or not you touch it, and nobody withholds anything as you draw. So the tax bill arrives later, in one piece, unless you pay instalments. Our data shows the CRA’s instalment threshold at $3,000 of tax owing, with payments due 15 March, 15 June, 15 September and 15 December. The tax instalments calculator splits a bill into those four dates.
What does a sole proprietor owe on $60,000 of profit?
Here’s the difference that matters most. Take an Ontario freelancer with $60,000 of net business income. The self-employed tax calculator shows $5,155.43 of federal tax and $2,723.99 of Ontario tax. That’s $7,879.42 of income tax. CPP comes to $6,723.50, because a self-employed person pays both the employee and the employer half.
You’re left with $45,397.08, which means 24.3% of the profit is gone. The calculator leaves out EI, GST/HST and business expenses, and half of the base CPP is treated as a deduction.
| On $60,000, Ontario | Employee salary | Sole proprietor profit |
|---|---|---|
| CPP you pay | $3,361.75 | $6,723.50 |
| EI you pay | $978.00 | not in the calculator |
| Employer CPP on top | $3,361.75 | none, you paid both halves |
| Cash you keep before other credits | $47,339.75 | $45,397.08 |
The employee figure comes from the take-home pay calculator. The gap looks small until you remember that the employer paid another $3,361.75 of CPP on top of that salary. Fair comparison? Not quite, since the two lines cover different things, but it shows why the CPP bill surprises new freelancers.
How does a draw show up in your books?
Keep a separate equity account called something like “owner’s draws” and post every transfer to it. Say your profit for the year is $60,000 and you move $4,000 a month to your personal account, so $48,000 for the year. Your taxable profit is still $60,000. The other $12,000 you left in the business is taxed too, even though you never spent it.
That’s why a draw is a poor guide to what you owe. A rough habit that works: for every deposit that lands in the business, move about a quarter of the profit into a savings account for tax, a figure taken from the roughly 24% that the example above takes in income tax and CPP. Your own share will be different, so treat that as a ballpark and run the calculator on your own profit.
When does paying yourself a salary make sense?
Once you own a corporation, you’re an employee of it, and the salary is a deductible cost to the company. The company must then run payroll: hold back income tax, CPP and EI where they apply, and send the money to the CRA. The rates are the ones any employer uses, so a look at the payroll remittance calculator shows what each pay costs.
Salary also counts as pensionable earnings, so it builds your CPP, which is the one real advantage over taking everything as dividends. We can’t give you a number for the right mix, because that depends on the corporation’s profit, your other income and your province, and any figure we made up would be a guess.
What about dividends instead?
Dividends are a return on your shares, not pay for work. The CRA guidance we read says dividends aren’t earnings for CPP, and no payroll runs on them. But the corporation pays tax before the dividend leaves, and you pay tax again on it personally, with a credit to soften the overlap. The dividend tax calculator shows the personal side.
One rule to respect: the CRA says an employer can’t turn salary into dividends after the fact. Decide the mix before the year runs, and record what was actually paid.
Can you change from one to the other later?
Yes, when the business changes shape. A sole proprietor who incorporates stops drawing and starts paying a salary, a dividend or a mix, and the first year is the one to plan with an accountant, because the books switch from “your money” to “the company’s money”. Keep the old records too. The six year rule still applies to the years before you incorporated.
Common mistakes with draws and salary
The first is deducting your own draw as an expense. It’s wrong for a sole proprietor, and it makes the profit look lower than it is. The second is drawing everything you can and forgetting the tax bill. Set some cash aside every month. The third is a mixed-up bank account, where groceries and client lunches go through the same card, and by tax season nobody can tell which is which.
Also, don’t assume a corporation saves money. It adds accounting, payroll filings and a second tax return. We couldn’t confirm any fee levels for accountants, so we haven’t guessed at them. Ask two or three what they’d charge for your setup before you decide.
Our sources
Tax rates, CPP and EI figures are the Canada Revenue Agency‘s 2026 numbers. The rules on drawings, salaries and dividends come from CRA guidance on sole proprietorships and payroll. We checked them on 30 September 2026. We’re an independent site, and no government body is behind it.
Frequently asked questions
Can a sole proprietor pay themselves a salary?
No. The CRA says salaries or drawings paid to the owner aren't deductible, and you're taxed on the business profit either way.
Is an owner's draw taxed?
The draw itself isn't, but the profit behind it is. You owe income tax and CPP on the profit even if you leave it in the business.
Do I pay CPP on an owner's draw?
You pay CPP on your self-employed profit, both the employee and employer halves. On $60,000 in Ontario that's $6,723.50.
Does a corporation owner have to take a salary?
No rule in our sources forces it. Salary builds CPP and creates payroll work, while dividends do neither, so the mix is a choice.
Can I switch from salary to dividends after the year ends?
The CRA says an employer can't change the nature of income paid after the fact. Choose before you pay.
All payroll and salary calculators
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST