BOMCAS Canada – Your Trusted Canadian Accounting & Tax Experts

Payroll and CPP Rules Made Simple for Canadian Businesses

Understanding payroll deductions—especially when you are both the owner and the employee of your corporation—is essential for staying compliant with the Canada Revenue Agency (CRA). At BOMCAS Canada Accounting & Tax Services, we regularly assist small businesses, contractors, and incorporated professionals across Canada with payroll setup, T4 preparation, and CRA remittances.

This guide explains everything you need to know about:

• CPP contributions
• Income tax withholding
• Employer vs. employee responsibilities
• Owner-manager salary rules
• How payroll expenses must be recorded
• What the corporation can and cannot deduct

All information is current and accurate for 2025.

What Is CPP and How Does It Work in Canada?

The Canada Pension Plan (CPP) is a mandatory pension program for most workers in Canada. Both the employee and employer contribute to CPP based on the employee’s pensionable earnings.

CPP Rates for 2025

• Employee contribution: 5.95%
• Employer contribution: 5.95%
• Required up to the Yearly Maximum Pensionable Earnings (YMPE)
• CPP2 (2nd tier) applies above YMPE up to the YAMPE

CPP contributions support:

• Retirement benefits
• Disability benefits
• Survivor benefits

Who Is Responsible for Paying CPP?

Employee Responsibility

The employee is responsible for their portion of CPP.
However, employees do not pay CPP directly to CRA.

Instead, the employer must:

• Deduct CPP from each pay
• Record the amount on the T4
• Remit it on the employee’s behalf

Employer Responsibility

The employer must:

• Withhold the employee CPP
• Pay the employer CPP
• Remit both to CRA
• File T4s and payroll summaries

Failing to remit can result in:

• Penalties up to 20%
• Director personal liability

At BOMCAS Canada, we help ensure your payroll is compliant and remitted correctly.

Do the Rules Change for Owner-Managers?

Many incorporated small business owners assume payroll rules are different if they pay themselves.
However, CRA rules are exactly the same for owner-managers.

✔️ Owner-Managers Must:

• Be treated as employees for payroll purposes
• Have CPP deducted from their salary
• Have income tax withheld
• Receive a T4 slip
• Ensure payroll remittances are submitted correctly

❌ Owner-Managers Cannot:

• Deduct employee CPP as a corporate expense
• Deduct income tax withheld as a business expense
• Avoid payroll rules simply because they own the company

The CRA treats the corporation and the shareholder as two separate legal taxpayers.

Are CPP Contributions Deductible for the Business?

✔️ Employer CPP = Deductible Business Expense

This is a legitimate payroll expense for the corporation.

❌ Employee CPP = NOT Deductible

Even if you are the owner-manager.

The employee CPP:

• Comes from the employee’s gross pay
• Is a personal tax deduction/credit
• Must not be expensed by the corporation
• Is recorded as a liability until remitted

Is Income Tax Withheld a Business Expense?

❌ No. Employee income tax withheld is NOT a corporate expense.

Even when the employee is the owner-manager, income tax withheld belongs to the employee, not the business.

The business only deducts:

• Gross salary
• Employer CPP
• Employer EI (if applicable)

Income tax withheld is recorded as a payable, not an expense.

How Payroll Amounts Are Accounted for in the Business

Below is the proper Canadian payroll accounting method used by professional accountants and required under CRA guidelines.

Example Payroll (Owner-Manager):

• Gross salary: $6,000
• Employee CPP: $300
• Employer CPP: $300
• Employee Income Tax: $1,000
• Net pay: $4,700

1. Journal Entry When Payroll Is Run

DR Salary Expense – $6,000
DR Employer CPP Expense – $300

CR Employee CPP Payable – $300
CR Employer CPP Payable – $300
CR Employee Income Tax Payable – $1,000
CR Bank – $4,700

2. Journal Entry When Remitting Payroll to CRA

DR Employee CPP Payable – $300
DR Employer CPP Payable – $300
DR Employee Income Tax Payable – $1,000
CR Bank – $1,600

This ensures your books match CRA requirements and accurately reflect company expenses vs. employee obligations.

Salary vs. Dividends: What’s Best for Owner-Managers?

Salary Benefits

• Creates RRSP room
• Builds CPP retirement benefits
• Deductible to the corporation
• Helps with mortgage approvals

Dividend Benefits

• No CPP required
• No payroll remittances
• Lower administrative burden

The optimal mix depends on your:

• Corporate profit level
• Shareholder loan balance
• Long-term goals
• Retirement and RRSP strategy

BOMCAS Canada can create a custom salary–dividend tax plan for owner-managers in Alberta and across Canada.

Quick Reference Summary

Need Professional Payroll or Corporate Tax Help?

At BOMCAS Canada, we provide full-service accounting for individuals, small businesses, and incorporated professionals across all provinces and territories.

Our services include:

• Payroll setup and remittance
• Corporate and personal tax filing
• T4, T4A, T5 preparation
• Salary vs. dividend planning
• CRA compliance and audit support
• Bookkeeping and financial statements
• Small business and contractor accounting

We ensure your payroll obligations are accurate, on time, and fully compliant with CRA rules.

📞 Contact BOMCAS Canada Today
Professional Accounting & Tax Services Across Canada
☎️ 780-667-5250
🌐 https://www.bomcas.ca
📧 info@bomcas.ca

Conclusion

CPP, payroll deductions, and owner-manager rules can be confusing, but they don’t have to be. By understanding the difference between employee obligations, employer responsibilities, and what your business can deduct, you can stay compliant while minimizing tax.

BOMCAS Canada is here to help you navigate payroll, accounting, and taxes with confidence and accuracy.