The Four Ways Business Owners Get Paid

Written By Brett Nicholson

How High-Net-Worth Business Owners Should Think About Compensation, Tax, and Legacy.

About This Article

This article is written for High Net Worth individuals, families, and founders who seek to maximize their income tax efficiently.

Executive Summary

For High-Net-Worth (HNW) business owners, wealth is rarely lost through poor investment performance. It is far more often eroded through inefficient compensation decisions, made repeatedly over decades.

Most owners focus on how much they earn. Sophisticated owners focus on how money leaves the corporation, when tax is triggered, and how much control remains after tax.

There are four primary ways business owners are paid:

  1. Salary

  2. Dividends

  3. Capital gains (including surplus extraction under a 50% inclusion rate)

  4. Accessing cash value inside permanent life insurance

Each has a role. The mistake is relying on only one.

This article explains how affluent owners use these tools together to lower lifetime tax, preserve flexibility, and protect family wealth.

1. Salary: Necessary, Transparent—and Expensive

Salary is the most familiar form of compensation.

What It Does Well

  • Predictable personal income

  • Creates RRSP room

  • Fully deductible to the corporation

The Hidden Cost

  • Taxed at top marginal rates

  • CPP contributions increase cash outflow

  • No deferral or flexibility once paid

For HNW owners, salary is best used as baseline income, not as a primary wealth-extraction strategy.

Salary funds your lifestyle. It does not build legacy.

2. Dividends: Simple Cash Flow, Ongoing Tax Drag

Dividends are paid from after-tax corporate profits.

Why Owners Use Them

  • No CPP

  • Lower personal tax rates than salary (in some cases)

  • Straightforward distribution

The Trade-Off

  • No corporate deduction

  • Personal tax is triggered every year

  • Excess dividends can quietly erode long-term wealth

  • Passive income may reduce future corporate tax advantages

Dividends are effective for ongoing personal spending, but inefficient when used to extract large surpluses over time.

3. Capital Gains: The Most Tax-Efficient—When Done Properly

Capital gains benefit from Canada’s 50% inclusion rate, making them one of the most tax-efficient ways to move wealth.

Why Sophisticated Owners Prefer Capital Gains

  • Only half the gain is taxable

  • Tax is deferred until realization

  • Often aligns with succession or exit planning

  • Can materially reduce lifetime tax versus dividends

Capital gains can arise through:

  • Business sales

  • Share redemptions

  • Estate planning strategies

  • Corporate reorganizations

Because these strategies are closely monitored by the Canada Revenue Agency, they must be carefully structured and supported by professional advice.

Capital gains reward patience and planning. Shortcuts create risk.

4. Accessing Cash Value Inside Life Insurance: Liquidity Without Tax

This is the least understood—and most powerful—form of compensation for affluent business owners.

Permanent life insurance, when properly structured inside a corporation, creates tax-advantaged capital that operates alongside traditional investments.

How It Works

  • Corporate funds pay premiums

  • Cash value grows tax-deferred

  • Liquidity can be accessed through:

    • Policy loans

    • Collateralized lending

Critically:

  • No salary

  • No dividends

  • No immediate personal tax

This allows owners to access capital without triggering income.

At Death

  • Insurance proceeds flow to the corporation

  • The Capital Dividend Account (CDA) is credited

  • Funds can be distributed tax-free to heirs or the estate

Insurance is not income—it is timing control.

Why the Wealthy Use All Four—Not One

Each compensation method solves a different problem:

PurposeBest ToolStable personal incomeSalaryLifestyle cash flowDividendsStructural wealth extractionCapital gainsTax-free flexibility & estate liquidityInsurance CSV

Problems arise when owners rely too heavily on salary and dividends and ignore long-term tax compounding.

The most effective strategies:

  • Blend compensation methods

  • Shift tax to the future when rates may be lower

  • Preserve corporate capital

  • Ensure liquidity is available when tax is unavoidable

What This Means for Your Wealth Strategy

For HNW owners, the key question is not:

“How do I pay myself?”

It is:

“How do I extract capital over my lifetime with the least tax and the greatest control?”

Answering that question requires coordination between:

  • Tax planning

  • Corporate structure

  • Investment strategy

  • Insurance architecture

  • Estate planning

This is where firms like Senatus Wealth operate—not by selling products, but by engineering outcomes across decades.

Key Takeaway: Compensation Is a Strategy, Not a Payroll Decision

High-net-worth business owners who preserve wealth across generations do not optimize annually.
They optimize over a lifetime.

They understand:

  • Taxes are predictable—even if timing is not

  • Liquidity matters most when it is hardest to create

  • Structure determines outcomes

The most valuable compensation decision you make is not how much you earn this year—but how little tax you pay over the next 30.

Take Action

What do you think? Does this fit with your views? Let us know, and let’s have a conversation.

Reach out to me directly at brett@senatuswealth.com.

Brett Nicholson
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