“As a general rule, you should always set aside 25% of your income for taxes. You’re taxed only on your net income which is your total income minus all your expenses. Look for line 104 on your tax return where it says ‘employment income not on a T4 slip.’ This is where you report your business income.”
Learn all about filing taxes when you work for yourself: How to file taxes when you’re self-employed
Incorporated business owners: How should you pay yourself?
A salary may be better than dividend income when it comes to tax deductions for child care expenses and RRSP contributions. But as a business owner, you’ll also have to pay CPP contributions on that salary as both the employer and employee.
“Generally speaking, paying a salary is preferable to dividends in most provinces. Paying salary may, for example, allow a business owner to deduct child care expenses. Dividend income is not considered earned income when it comes to child care expense deductibility. Salary is considered earned income for Registered Retirement Savings Plan purposes and generates RRSP room. Dividend income is not. Paying a salary allows a business owner to contribute to Canada Pension Plan (CPP). However, they must contribute both the employee and employer portion. This reduces the “return” on paying into CPP to earn a future retirement pension.”
Learn more about the pros and cons of salary compensation for owners of a corporation: Incorporated business owners: Should you pay yourself a salary?
The best investment for your taxes
Should you put your money in a tax-free savings account (TFSA) or registered retirement savings plan (RRSP)? The question may be simple, but the answer is not—and can vary greatly depending on your financial situation and goals.
“With a TFSA, you pay tax on money you’ve earned before you make a contribution; and with an RRSP you get a tax refund now on money you contribute, but will have to pay tax later, on money you withdraw from the plan. This difference, along with your income, your investment timeline, and other factors will all contribute to making the right decision for your investment dollars. You may find that you can use both vehicles simultaneously.”
More on the differences between these investments here: TFSA vs RRSP: How to decide between the two