Paying Yourself as a Sole Proprietor – A Complete Guide by a Montreal CPA Firm Near You

One of the biggest misconceptions among new freelancers and self-employed

Canadians is how to “pay themselves.” Many believe they must issue themselves a

salary, pay payroll taxes, or create pay stubs. None of this is required. As a sole

proprietor, you are the business—meaning any money you withdraw is not salary but

simply a drawing from your business profits. Understanding how paying yourself works

as a sole proprietor in Canada is essential to avoid CRA mistakes, budget properly for

taxes, and prevent cash-flow problems. This guide explains how sole proprietors take

money out of the business, how taxes apply, and how to plan effectively.

Legal and Regulatory Framework

Sole proprietorships are governed by the Income Tax Act, which treats business

income as personal income. Key rules include:

• Sole proprietors do not pay themselves a salary—all income earned by the business

is taxed personally.

• Drawings are not a deductible business expense.

• Business income is reported on Form T2125 and taxed at personal marginal tax rates.

• CRA expects sole proprietors to track business revenue and expenses, regardless of

drawings.

• CPP contributions apply to net business income, not based on drawings.

• Income tax is paid through year-end filing or quarterly instalments if tax owing

exceeds $3,000.

These regulations form the legal structure for how sole proprietors are compensated in

Canada.

Key Court Decisions

Several cases illustrate the principles of sole proprietor compensation.

In MacDonald v. Canada, the court confirmed that sole proprietorship profits belong

directly to the taxpayer—making salary payments to oneself meaningless for tax

purposes.

In Hicks v. The Queen, CRA challenged a taxpayer who attempted to deduct personal

withdrawals as payroll expenses; the court upheld CRA’s denial.

In No. 704739 Alberta Ltd. v. Canada, although involving a corporation, the court

emphasized the importance of correctly classifying owner compensation—a principle

that applies even more strongly for sole proprietors.

These decisions reinforce that drawings are not deductible and that business income

flows directly to the owner.

Why CRA Targets This Issue

CRA frequently reviews sole proprietor filings because of recurring mistakes:

• deducting owner withdrawals as expenses

• failing to set aside money for taxes

• mixing business and personal accounts

• ignoring CPP contributions

• inaccurate Form T2125 income reporting

• failing to pay instalments when required

• misclassifying business income as salary or dividend income

CRA also compares bank deposits with income declared on T2125, and discrepancies

trigger audits. Understanding how sole proprietors pay themselves correctly reduces

these risks.

Mackisen Strategy

At Mackisen CPA Montreal, we help self-employed individuals build simple, audit-proof

compensation systems. Our strategy includes:

• setting up a separate business bank account

• teaching clients how to withdraw funds properly as drawings

• forecasting personal tax liability based on expected net income

• creating a monthly tax savings plan (e.g., setting aside 25–35%)

• identifying whether quarterly instalments are required

• integrating CPP contributions into the financial plan

• advising clients when incorporation would be more tax-efficient

• providing year-round support for tracking income and expenses

This ensures that sole proprietors pay themselves efficiently while staying compliant

and avoiding surprises at tax time.

Real Client Experience

A freelance designer paid herself a biweekly “salary” and deducted it as an expense.

CRA denied the expense and reassessed income. We corrected her books and

implemented proper drawing procedures.

Another client mixed personal and business income in one account. CRA questioned

missing deposits. We rebuilt her bookkeeping system and separated funds.

A contractor failed to set aside taxes and owed $14,000 at year-end. We developed a

monthly tax budgeting plan and moved him to instalments, stabilizing his cash flow.

Common Questions

Self-employed taxpayers often ask whether they can “pay themselves payroll.”

No—only corporations do that.

Others ask whether drawings affect taxable income. They do not—earnings are taxed

regardless of withdrawals.

Some ask how much to set aside for taxes. Typically 25–35%, depending on income.

Another question: Does paying yourself more increase taxes? No—income, not

withdrawals, determines tax.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

sole proprietors manage income, taxes, and cash flow with ease. Whether you need

help budgeting, organizing your books, or deciding when to incorporate, our expert team

ensures precision, clarity, and full CRA compliance.