Introduction

An incorporated contractor generating $400,000 in net corporate income annually — after labour, materials, equipment, and overhead — is operating at a level where the small business deduction limit ($500,000) is not yet binding, but the volume of retained earnings being generated each year demands a deliberate approach to both compensation and corporate investment strategy.

The Corporate Tax Position at $400,000

On $400,000 of net active business income, the corporation pays the small business deduction rate on the full amount — approximately 12.2% combined in Ontario. Corporate tax: approximately $48,800. After-tax retained income: approximately $351,200.

Key Planning Considerations at This Level

The compensation decision is high-stakes: At $400,000 of corporate income, the difference between a well-optimised salary/dividend mix and a default approach can be $20,000–$35,000 in annual combined tax. The contractor's personal income needs, RRSP strategy, and CPP position all affect the optimal split.

Cash flow seasonality is a constraint: Unlike a professional practice with relatively stable monthly billings, a construction company's income arrives unevenly. The compensation decision must account for cash flow — salary must be payable on a schedule the corporation can support, even in slower months.

The equipment investment decision affects corporate tax significantly: A contractor at this income level is likely making annual equipment acquisitions. CCA deductions and immediate expensing incentives can materially reduce the taxable income base — meaning the compensation decision and the capital expenditure decision interact. In a year of large equipment purchases, corporate income may be significantly lower than the $400,000 base, affecting the ideal salary level.

The Compensation Structure at $400,000

A reasonable baseline at this income level:

Salary: $130,000–$160,000

Generates RRSP room at or near the maximum ($32,490 at $180,500+ of salary — a $160,000 salary generates $28,800 of room).

Provides CPP entitlement on a portion of the income.

Personal marginal rate at $130,000–$160,000 is approximately 43.41%–46.41% in Ontario — high, but not at the 53.53% peak.

Balance retained or distributed as non-eligible dividends

The $240,000–$270,000 retained in the corporation compounds at the small business after-tax rate. Non-eligible dividends can be paid in amounts and years that maintain a manageable total personal income.

Year-end bonus accrual

For a contractor with a non-December fiscal year end, a bonus accrual at year end — deducted in the fiscal year, paid within 180 days — creates a timing benefit that supplements the base salary structure.

The Holdco Threshold at $400,000

A contractor retaining $200,000+ per year in the corporation will reach the holdco-warranting threshold (approximately $500,000–$700,000 in accumulated passive investments) within three to four years. Beginning the holdco conversation now — before the passive income is generating $50,000 annually — is the right timing.

The PSB Checkpoint

As discussed in Article 55, a contractor at any income level should confirm annually that their working arrangements do not expose them to personal services business risk. At $400,000, the stakes of a PSB determination are very high — losing the SBD on $400,000 of income adds approximately $57,000 in additional corporate tax.

When to Speak With a CPA

At $400,000, the annual CPA engagement should include a specific equipment purchase review (CCA and immediate expensing implications), a salary/dividend/bonus decision, an RRSP contribution plan, and a first conversation about holdco timing if not already underway.

Rotaru CPA works with incorporated contractors on compensation planning, equipment strategy, and corporate structure. Book a consultation to review your position.