Introduction

Incorporation changes how income is paid, but it does not automatically eliminate CPP contributions. Many incorporated business owners are unsure whether CPP still applies once they start paying themselves through a corporation.

Understanding how CPP works for incorporated owners helps inform compensation decisions and long-term planning.

Key takeaways

CPP applies when owners pay themselves a salary
Dividends are not subject to CPP
CPP contributions affect future retirement benefits
The decision impacts cash flow and long-term planning

Who this applies to

This applies to owner-managers of Canadian corporations who pay themselves through salary, dividends, or a combination of both.

How CPP works for incorporated owners

CPP applies only to employment income. When an incorporated business owner pays themselves a salary, CPP contributions are required, just like for any employee.

Because the owner is both employee and employer, the corporation pays the employer portion and withholds the employee portion from the salary.

Dividends and CPP

Dividends are paid from after-tax corporate profits and are not considered employment income. As a result, CPP does not apply to dividends.

This is one reason some incorporated owners choose dividends, particularly when cash flow is tight.

What this means in practice

Avoiding CPP may increase short-term cash flow, but it also reduces future CPP retirement benefits. Over time, consistently paying only dividends can significantly lower CPP entitlements.

Many owner-managers choose a blended approach to balance CPP participation with cash flow flexibility.

Common misunderstandings

Some owners believe CPP is optional once incorporated. In reality, CPP is mandatory on salary and cannot be opted out of unless specific exceptions apply.

Others underestimate the long-term impact of not contributing.

Frequently asked questions

Can I choose not to pay CPP on salary?
No. CPP is mandatory on employment income.

Is CPP ever optional for incorporated owners?
Only in limited situations, such as owners over a certain age who elect to stop contributions.

Does paying CPP increase my taxes?
CPP is a contribution, not a tax, but it does affect cash flow.

Closing

CPP decisions are an important part of owner-manager compensation planning. Understanding how salary and dividends affect CPP helps incorporated owners make informed choices that balance present needs with future security.