Should you incorporate to avoid CPP contributions?
An unincorporated sole proprietor must contribute to the Canada Pension Plan (CPP) when they file their personal tax return. These contributions can be up to $9,292.90 for 2026.
Some taxpayers may not even notice this, but line 42100 on a T1 tax return is CPP Contributions Payable on Self-Employment Income and Other Earnings. Contributions are calculated on Schedule 8 or Form RC381, whichever applies.
Most self-employed individuals must pay CPP contributions, but there may be alternatives. Whether or not it is worth pursuing them is another story.
Opting out of CPP
If you are under age 65, you must contribute to the CPP if you earn a salary or self-employment income. Once you are 65, until age 70, you can elect to stop CPP contributions.
If you are an employee, you must submit Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election to your employer(s) and to the Canada Revenue Agency (CRA). You must be receiving a CPP or Québec Pension Plan (QPP) retirement pension and be between ages 65 and 70.
Self-employed taxpayers must complete Schedule 8, Canada Pension Plan Contributions and Overpayment (for all except QC) as part of their tax return by the filing deadline for it to apply for the previous tax year. Québec residents can opt out of QPP when filing their TP1 provincial income tax return.
What if you are under 65?
There is an option for younger taxpayers to opt out of CPP or QPP if they are self-employed. If they earn their self-employment income through a corporation they own and pay themselves dividends instead of salary, there are no CPP contributions payable.
An owner-manager of a corporation can pay themselves dividends as a shareholder or salary as an employee. An unincorporated sole proprietor can incorporate to have this flexibility.
Dividends are a distribution of after-tax corporate profits. The corporation pays corporate tax first on the profit, and then a dividend is taxed to the recipient shareholder at a lower personal tax rate to account for the corporate tax already paid.
Salary is a deduction for a corporation. So, if a corporation pays out all its income as salary, it will have no income and therefore no tax. All tax would be paid personally.
Build your retirement savings with 1.50% interest, tax-deferred contributions and zero fees.
Earn a guaranteed 2.75% in your RRSP when you lock in for 1 year.
See our ranking of the best RRSP accounts and rates available in Canada.
MoneySense is an award-winning magazine, helping Canadians navigate money matters since 1999. Our editorial team of trained journalists works closely with leading personal finance experts in Canada. To help you find the best financial products, we compare the offerings from over 12 major institutions, including banks, credit unions and card issuers. Learn more about our advertising and trusted partners.
The combined tax should be comparable between dividends and salary. There are subtle differences between provinces and depending on income level. And some deductions can only be claimed if you have employment income.
At the highest marginal tax rate, Saskatchewan and Northwest Territories are the only places in Canada where dividends result in a lower integrated tax rate than salary. That said, the savings when paying salary are subtle—generally about 0.5% to 1.5%. NWT is the outlier with tax savings of over 3% for a high-income owner-manager to take dividends over salary.
Is CPP a tax?
CPP contributions are not really a tax, although they are administered through the payroll or income tax systems. These contributions provide a future retirement pension as well as potential disability or survivor pensions.
It is a common misconception that the government is going to use the CPP for some other purpose or that it is not a pension that will be available for young people in the future.
The Canada Pension Plan Investment Board (CPPIB) manages CPP funds and is “accountable to Parliament and to federal and provincial ministers, however, [they] operate independently [and are] guided by an independent Board of Directors.” The government cannot take money out of CPP.
The 32nd Actuarial Report on the Canada Pension Plan was recently published and provides sustainable projections for the next 75 years.
Many government public pensions around the world differ from Canada’s funded CPP pension, which has roughly $800 billion in assets. Some use primarily current year contributions to fund current pension payments, which has its risks with aging populations. The U.S. Social Security is projected by its trustees to have a funding shortfall by 2032, barring changes to contributions or pensions. CPP is an outlier.
Do CPP contributions provide a good rate of return?
The rate of return for a business owner who must make the employee and employer contributions to CPP is not great, but not terrible either.
For a typical contributor, it might amount to about a 2% return over and above inflation, so maybe 4% over the long run. However, it can provide a negative rate of return for someone with a short life expectancy, or an excellent rate of return for a contributor who lives well into their 90s or beyond.
It also provides inflation protection since annual pension increases are tied to the Consumer Price Index (CPI). Disability benefits can help if a contributor becomes disabled. Survivor benefits can pay a survivor pension to a spouse or children of a deceased contributor.
Since many business owners do not have traditional pensions, CPP can provide some degree of income stability and longevity protection.
Other considerations
If you pay yourself dividends to avoid CPP contributions, your cash flow may improve, but your forced savings will be less. So, consider this as you plan your saving strategy.
Dividends do not create registered retirement savings plan (RRSP) room like salary, and RRSP contributions are often advantageous for a business owner over building up corporate or personal savings.
Incorporation also has costs including legal and accounting fees and associated complexities that can cost anywhere from a couple thousand dollars per year to many thousands for more complicated business structures.
Summary
Although incorporation can often make sense for high-income earners who are self-employed, the decision to pay dividends over salary has trade-offs.
Avoiding CPP contributions is possible for younger business owners, and is probably most advantageous for low-cost, disciplined investors with a high investment risk tolerance, those with a shorter life expectancy, or people who have an existing defined benefit pension (or their spouse does).
CPP is just one piece of the incorporation and compensation puzzle for business owners, so consider all factors.
Get free MoneySense financial tips, news & advice in your inbox.
Read more from Ask a Planner:
- Can you put an inheritance into a joint account?
- How much cash should you keep in your portfolio?
- How do you take RDSP withdrawals?
The post Should you incorporate to avoid CPP contributions? appeared first on MoneySense.
No comments