Maximizing Returns: A Comprehensive Guide to Structuring Compensation for Canadian Business Owners

Guide to Structuring Compensation for Canadian Business Owners

Understanding what a compensation plan is and choosing the appropriate compensation method for your Canadian corporation can be challenging for business owners.  Making informed decisions about Canadian tax structuring your compensation depends on assessing your personal and business goals. From retailers and manufacturers to operations and consultancies, as well as practitioners like medical doctors, attorneys, and accountants, all businesses have discretion as to how funds are withdrawn from a Canadian corporation. 

When choosing the best payout structure for business owners in Canada, executives must consider their personal and financial objectives and the Canadian personal and corporate taxation implications. This involves going through how to define compensation planning and conducting annual compensation planning to ensure alignment with the company’s goals.

As you navigate the complex world of compensation planning in 2023 and beyond, it is crucial to consider these factors and seek professional advice to ensure compliance with regulations and optimize your compensation strategy.

Salary vs. Dividends: Making the Right Choice for Your Business and Personal Finances

Traditionally, a compensation plan refers to a structured approach adopted by companies to determine how they will reward their employees for their work and contributions. 

Compensation planning involves developing and implementing a comprehensive framework to attract, retain, and motivate employees while aligning with the organization’s goals and objectives.  Most small and medium sized business owners in Canada may also be employees of their companies.

The compensation planning process typically involves several steps. It begins with job analysis, where job roles and responsibilities are assessed to determine the appropriate compensation levels. This is followed by job evaluation, where different positions’ relative worth and value are established. Then, market research is conducted to gather data on industry standards and compensation trends. 

Develop a compensation structure using this information, which includes base pay, bonuses, incentives, and benefits. Finally, the compensation plan is communicated to employees, implemented, and periodically reviewed to ensure its effectiveness.

Compensation, including salary, bonuses, and benefits, is typically regarded as taxable income for employees. As such, it is subject to income tax and other necessary deductions by relevant tax laws and regulations. Employers are responsible for withholding and remitting the appropriate taxes from employee compensation.

Deferred compensation plans refer to arrangements where employees defer a portion of their compensation to be received later, typically after retirement. The taxation of deferred compensation plans varies depending on the specific plan structure and tax regulations. Employers and employees must understand the tax implications of deferred compensation plans.

Looking ahead to compensation planning in 2023 and 2024, organizations must stay updated with changes in tax laws, regulations, and market trends that may impact compensation practices.

Using Corporate Income to Fund Your Tax-Free Savings Account (TFSA)

Though anyone can contribute to a Tax-Free Savings Account (TFSA), companies also have the option to contribute earnings to the account as part of their compensation planning process. Understanding the tax implications of corporate TFSA contributions, annual compensation planning, and the taxable nature of compensation income is crucial. Additionally, considering deferred compensation plan taxation and future compensation planning in 2023 is essential.

Before allocating corporate income to a TFSA, businesses must assess the amount of business income needed after tax obligations are fulfilled. This assessment includes determining whether the revenue qualifies for the small business deduction (SBD income) or falls under general income, as it impacts the calculation of business profits and available contribution room.

It is also important to clearly understand the available contribution room. TFSA contribution room is based on age, residency status, and past contributions. For individuals under 18 years old who have yet to open a TFSA, the contribution room allows an immediate contribution of up to $81,500.

To navigate the complexities of corporate TFSA contributions and optimize compensation planning, it is recommended to seek guidance from tax professionals or financial advisors well-versed in the intricacies of compensation planning, annual compensation planning, deferred compensation plan taxation, and the specific requirements of compensation planning in 2023. These experts can provide valuable insights and ensure compliance with applicable tax laws and regulations.

Contributing to Your RRSP: How Salary Income Can Help You Invest in Your Future

An individual must have sufficient RRSP contribution room based on earned income to invest in an RRSP. Your 2022 RRSP contribution room is calculated as 18% of income earned in 2021, up to a maximum of $29,210. In contrast, the salary earned from the corporation as an employee creates an RRSP room, dividends received as a shareholder do not. To take advantage of the benefits of an RRSP, one must earn sufficient income to generate an RRSP contribution room. Conversely, leaving money in a corporation for investment often results in those funds being withdrawn later as dividends.

When considering compensation planning, it is important to consider the implications of RRSP contributions. The annual compensation planning process should consider the taxable nature of compensation income and the potential benefits of contributing to an RRSP. Deferred compensation plan taxation should also be considered, as it can impact the overall compensation structure and tax obligations.

Looking ahead to compensation planning in 2023, it is crucial to stay informed about changes in tax laws, regulations, and contribution limits that may affect RRSP planning and overall compensation strategies. Seeking guidance from tax professionals or financial advisors specializing in compensation planning and tax optimization can help individuals and businesses make informed decisions regarding RRSP contributions and maximize the benefits of these plans.

Maximizing Investment Returns by Leaving After-Tax Business Income in Your Corporation

One potential strategy for effective compensation planning is to leave after-tax business income within your Canadian small business corporation to capitalize on tax deferral advantages. By incorporating your Canadian business, you can increase investment income over time compared to non-registered plans. This approach allows your company to distribute after-tax income as dividends, which can continue even during retirement. It’s worth noting that in 2022 the deferred taxes may vary in provinces. For instance, Alberta currently has a relatively low top marginal rate of 37%, while Newfoundland and Labrador have the highest rate of 43% on eligible small business income.

When engaging in annual compensation planning, it is essential to consider the tax implications of different compensation options. Understanding whether compensation is taxable income is crucial to determine specific compensation structures’ tax obligations and benefits accurately.

Moreover, deferred compensation plan taxation should be taken into account. The tax treatment of deferred compensation plans can vary based on the plan structure and applicable tax regulations. It is important to assess the potential tax consequences and plan accordingly.

Understanding Tax Rates for Different Types of Income in Canada

The tax rate varies for the different types of income in Canada. This information is crucial for companies and individuals and proper financial planning. Here is an overview of tax rates for different types of income in Canada:

  • SBD Income (active business income that qualifies for the small business deduction) is taxed at rates between 9.00% and 12.20%, depending on the province or territory.
  • General Income (active business income not qualifying for the SBD) is taxed between 23.00% and 31.00%, depending on the province or territory.
  • The top personal marginal tax rate for ordinary income ranges from 44.50% to 54.80%, depending on the province or territory.
  • Capital gains are taxed at 50% of the tax rates for ordinary income, ranging from 22.25% to 27.40%, depending on the province or territory.
  • Dividends paid from General Income are eligible for an enhanced dividend tax credit to compensate for the relatively high corporate income tax.
  • The top personal tax rate for eligible dividends is between 28.33% and 46.20%, depending on the province or territory.
  • Most income not taxed at the General Income rate, including SBD Income, can be distributed to you as non-eligible dividends.
  • Non-eligible dividends are taxed at higher rates than eligible dividends, with the top personal tax rate ranging from 36.82% to 48.96%, depending on the province or territory.

Deciding on the right compensation plan to maximize investment returns is crucial, but it is essential to consider the company’s current status and financial aspirations. Seeking the counsel of a financial advisor or tax specialist ensures that all potential choices are considered and decisions about investments are educated ones. By selecting the appropriate compensation structure, you can help maximize your financial well-being and the long-term success of your business.


Q. What is the annual compensation planning cycle for Canadian business owners?

A: The annual compensation planning cycle for Canadian business owners refers to the process of planning, reviewing, and adjusting employee compensation on a yearly basis. It involves assessing performance, setting salary adjustments or bonuses, and aligning the objectives of compensation with the objectives of the organization. The cycle includes how to define compensation planning objectives, evaluating market benchmarks, and implementing changes to the compensation structure.

Q. How do I calculate my annual compensation?

A: To calculate your annual compensation, consider all forms of income received from employment, including base salary, bonuses, commissions, and other compensation elements. These could also include funds received as a shareholder of the company including dividends and expense reimbursements.  Add up these amounts to determine your total annual compensation.

Q. What is the most common compensation plan?

A: The most common compensation plan is the base salary plus benefits structure and dividends as a shareholder. It provides employees with a fixed salary as the primary form of compensation, supplemented by benefits such as health insurance, retirement plans, paid time off, and other additional perks.

Q. Is compensation taxable income?

A: Yes, compensation is generally considered taxable income. This includes wages, salaries, bonuses, commissions, and other forms of compensation. The specific tax treatment and applicable tax rates may vary based on the jurisdiction and local tax laws.

Q. How to implement a compensation plan?

Implementing a compensation plan involves several steps. It begins with defining the plan’s objectives and ensuring alignment with organizational goals. Conducting job analysis, market research, and evaluation of job roles helps determine appropriate compensation levels. 

Q. What should a compensation plan include?

A: A comprehensive compensation plan should include elements such as job analysis, base salary or wage rates, incentive programs or bonuses tied to performance, benefits packages (e.g., health insurance, retirement plans), compensation policies and guidelines, clear communication to employees, and regular review and evaluation of the plan’s effectiveness.