Methods of Personal Compensation for Small Business Owner

Being a business owner is hard work that has a lot of potential upside and rewards. One such reward is it can provide financial flexibility, but many business owners question the best and most effective way to compensate themselves from their business. There’s a lot to consider, and this guide will do a deep dive into the options available to owners. We’ll cover each option and some advantages and disadvantages of each method.

After each section, we’ll provide some additional thoughts to consider for the approach described, so be sure to not miss “Wayne’s Take”.

1. Wage or Salary

This is likely the most common choice for business owners. They are being paid as an employee so income tax and CPP would be deducted from their pay and remitted to CRA with all other employees’ remittances. It is important to note that because they are an owner, they would be exempt from EI deductions as they are self-employed.

Benefits to the Owner

  • Automatic income tax and CPP deductions.
  • Steady income.
  • Paid as an employee, which can make applying for personal loans slightly easier as there is consistent proof of income.

Benefits to the Business

  • Wages and employer CPP contributions are additional expenses. These can aid in decreasing net income, which can result in lower corporate income tax owing.
  • Paying a steady wage to an owner can make budgeting more accurate and cash flow more consistent.

2. Dividends

Dividends are a very common option for owners and can be taken in addition to either of the two options listed above.

Benefits to the Owner

  • Taxed at a lower rate personally.
  • Can be taken at any time and in any amount

Disadvantages to the Owner

  • While taxed at a lower rate than a salary, you are still responsible for remitting personal income tax on this income.

Benefits to the Business

  • Dividends is a balance sheet account so will not show up on the income statement, resulting in a higher net income.

Disadvantages to the Business

  • Higher net income can be perceived as both good and bad. Dividends not being an expense means higher corporate income tax.
  • Can affect cash flow. Dividends can negatively affect cashflow as they aren’t always a projected withdrawal. The company may be able to accommodate the dividend financially, but perhaps the operations side has to re-evaluate other plans for those funds such as paying off financed inventory.

Shareholder Loans

Many owners also take advantage of the shareholder loan availability. Shareholders are permitted to take a loan from a corporation they are a shareholder of. The loan is to be paid back within a year or it would be included as the shareholder’s personal income.

Wayne’s Take:

This is something that you keep an eye on whether they’ve taken more out of the company than they’ve put in. Once you have what we call a shareholder debit in the shareholder loan account, it has to be bonused out the following year. You can essentially end up paying tax on two years’ worth of income as a result. You can have a year where you didn’t pay enough followed by a year where you may pay an increased tax amount.


 

Don’t Forget About Worksafe/WCB

Regardless of how an owner is paid, their income is subject to WCB/Worksafe remittances up to the maximum annual amount. Dividends are considered shareholder earnings and would need to be included in these calculations as long as they are paid as compensation for activity within the company.

Recommendation

While every owner’s situation is different, a general recommendation that benefits both the owner and the business is to have the owner on a consistent payroll schedule. This allows the business to be able to account for a fixed monthly amount and the owner will have CPP and tax deductions automatically taken off of their income.

Wayne’s Take:

One of the advantages to having a business owner on salary is the bookkeeping is up to date and you have the opportunity for better tax planning before the end of the year. It is advantageous to do tax planning before year end than after year end.

A hybrid between wages or salary and dividends is most recommended for an owner that is taking over $150,000/year in compensation. For owner’s receiving compensation under $150,000 per year, dividends would be recommended.


What compensation method keeps the most money for the business? Which compensation method pays you the most with the least taxes as a business owner?

Wayne’s Take:

Dividends would be the most preferred compensation method that keeps the most money for the business. The corporate tax rate the company is paying is relatively low in BC (see chart) and the business owner will typically pay less in taxes with receiving dividends. *please note: Quebec and Alberta do not currently have corporate tax collection agreements with CRA so they are excluded from the below chart.

*please note: Quebec and Alberta do not currently have corporate tax collection agreements with CRA so they are excluded from the below chart.

Province or territoryLower RateHigher RateBusiness Limit
Newfoundland and Labrador3%15%$500,000
Nova Scotia2.5%14$500,000
New Brunswick2.5%14%$500,000
Prince Edward Island1%16%$500,000
Ontario3.2%11.5%$500,000
Manitobanil12%$500,000
Saskatchewan0%*12%$500,000
British Columbia2%12%$500,000
Nunavut3%12%$500,000
Northwest Territories2%11.5$500,000
Yukon0%12%$500,000

* 1% effective July 1, 2023

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/corporations/corporation-tax-rates.html

Talk to a Professional

There are many factors involved to determine the best way to compensate yourself as an owner. It is always recommended you speak to a qualified accounting professional for advice and direction. Click here to schedule a free consultation with one of our small business accounting experts.

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