Introduction

An incorporated contractor has the same structural compensation options as any corporation owner — salary, dividends, or a blend. What makes contractors' situations distinct is the cash flow reality of project-based work. Revenue arrives in irregular instalments, project costs front-load expenses, and the gap between billing and collection can be significant.

Compensation planning for an incorporated contractor needs to account for this variability — not just optimise for tax in a steady-state scenario.

The Cash Flow Reality of Contracting

Before discussing compensation mechanics, it is worth acknowledging the environment in which these decisions are made. A general contractor or trades company may complete a major project, send a progress draw invoice, and wait 30, 60, or 90 days for payment — sometimes longer on public sector work. In the meantime, subcontractors and suppliers need to be paid, payroll runs every two weeks, and HST remittances fall due on their own schedule.

In this environment, drawing salary on a fixed regular schedule is both a tax planning tool and a cash management discipline — it creates predictability on the personal side while the corporation manages project cash flow.

The Salary Route: Predictability and Entitlements

Salary drawn from the corporation is deductible as a business expense, reducing corporate taxable income. On the personal side, salary is employment income — subject to payroll deductions (income tax, CPP) withheld and remitted by the corporation.

For incorporated contractors who want to maximise RRSP contribution room, salary is the path to doing so. RRSP room accrues at 18% of the prior year's earned income, and only salary (not dividends) generates earned income for this purpose.

CPP contributions on salary are a cost — both the employee and employer portions are effectively borne by the owner-manager — but they also build CPP entitlement for retirement, which may be relevant depending on other retirement assets.

The Dividend Route: Flexibility and Lower Friction

Dividends paid from after-tax corporate earnings do not require payroll infrastructure — there are no source deductions to withhold or remit, no T4s for the dividend itself, and no CPP obligations. For a contractor in a year where corporate cash is tight, the ability to declare a dividend when funds are available (rather than on a fixed payroll schedule) has practical appeal.

The trade-off is no RRSP room generation and no CPP contributions. For contractors who do not have a defined benefit pension or other retirement accumulation mechanism, relying entirely on dividends can create a retirement savings gap that is costly to address later.

Managing Variable Income Years

Construction and trades revenues are not uniform year to year. A particularly strong project year may generate significantly more corporate income than a slower year. Compensation strategy should adapt to this variability.

In a strong year, a combination of salary (up to a threshold that generates desired RRSP room) plus dividends can distribute additional profits at lower personal tax rates than an equivalent salary bump would.

In a leaner year, paying a lower salary and deferring additional distributions preserves corporate cash — which may be needed to fund the next project's mobilisation costs.

The Construction Holdback and Tax Timing

In Ontario, the Construction Act requires that project owners hold back a percentage of each payment (generally 10%) as a construction lien holdback until the lien period expires. For a contractor, these holdback amounts are receivable but not yet collected — and depending on how the corporation recognises revenue, they may or may not be included in income before collection.

The tax treatment of holdbacks — when they are included in income, and whether the corporation is on a cash or accrual basis — affects the corporation's taxable income and, by extension, how much cash is available for distribution to the owner in a given year. This is a specific issue that a CPA familiar with construction accounting should be reviewing annually.

When to Speak With a CPA

For incorporated contractors managing variable cash flow, irregular project cycles, and seasonal fluctuations, compensation planning is not a once-a-year decision made at filing time. A CPA who reviews the position mid-year — not just at year end — can help time distributions in a way that reflects the corporation's actual cash position and tax situation.

Rotaru CPA works with incorporated contractors and construction businesses across Ontario to build compensation strategies that work with the realities of project-based cash flow. Book a consultation to discuss your situation.