General Interest - Business
What Salary is the Right Salary for Business Owners?
April 10, 2023
Fun fact – according to Glassdoor, the average annual base pay salary for a business owner in Canada is$73,246. That may seem disproportionate when you consider the seemingly bottomless pockets of high profile business owners like Jeff Bezos and Elon Musk. But there are good reasons for a business owner to draw a lower salary, most notably:
- They may wish to put more money into building their business by reinvesting assets and profits back into growth initiatives;
- They may be safeguarding against unseen economic changes that could limit cash flow and drawing a lower salary in order to ensure funds remain available to support operations during difficult times; or
- They may choose to direct more funds to other key personnel in the interest of increasing employee retention.
Which begs the question – what is the optimal right salary for a business owner to be drawing?
Consider the Spend Rate
The bottom line is that the higher the salary, the greater the tax burden. So finding that happy medium between living comfortably and minimizing tax liabilities is always a key factor in salary decisions.
The first thing I consider when advising a client on their salary is to look at their spend rate. From there, I work with them to create a base salary based on their spending requirements and individual circumstances. It is an exercise in looking at income tax brackets, provincial differences, and available deductions, all with the end goal of maximizing their take-home amount while ensuring taxation compliance.
How the salary is drawn is another consideration. It could be weekly, bi-weekly, monthly, or even quarterly. It could be a regular stipend supplemented by an occasional dividend payment. When looking at an annual salary of less than $120,000, taking dividends will result in a lower tax liability. Once a client crosses that $120,000 threshold than salary rather than dividends will reduce the tax burden. Dividends are taxed at a lower rate, and these taxes are paid by the company rather than the individual, so I am always careful to consider both the personal and corporation tax impacts when considering salary and compensation.
At the end of the day, the optimal salary will vary from person to person; there is no magic number. Some business owners are happy to survive on a $40,000 annual salary, and others will opt to earn that in a month.
Salary Increases for Business Owners
Business owners should give themselves a salary increase when appropriate, but it is important to strive for sustainability as well. Before committing to an increase, I like to work with my clients to analyze their current ratio, and would typically like to see it coming in at over 1.25 before proceeding with an increase. When deciding how often to give themselves a salary increase, business owners should take into account their overall financial health and successes. The increases should be large enough to reflect a certain degree of achievement, but shouldn’t come at the expense of their company’s budget or reducing profits for reinvestment.
Non-Salary Benefits for Business Owners
Furthermore there are several non-salary bonuses that business owners should consider to increase their total compensation package. I’m a firm believer that every business owner should at minimum have a healthcare spending account. Individual Pension Plans are another benefit that I like to encourage my clients to consider. As well as these, there are several operational business expenses that the CRA deems eligible for deduction at tax time.
Could you use some guidance on your organizational spending? Our team is ready to help you navigate the financial complexities of your personal and professional life. Let’s book a time to chat!
A member of WealthCo’s Integrated Advisory Network, Graham Thiessen is a Partner and Co-Founder with Summit Path LLP. Graham is passionate about educating his clients, enjoys being a sounding board for them, and is deliberate about asking the right questions to show them a different way to look at their business. Graham’s driving purpose is to leverage his client relationships to make a positive difference in the lives of others.
The Integrated Advisory Network consists of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.
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