{{first_name}} Whenever I ask a business owner, how much his company pays him, I usually get a laugh and some version of: “Whatever's left.”
The truck is on the company. So is the phone, the gas, half the meals, etc. etc.
But what about Salary? Dividends?
Whatever the accountant said last year. It's treated as a personal detail, sorted out once a year at tax time, interesting to nobody but the CRA.
Here's what most owners never connect. How you pay yourself quietly shows up in almost every important number your business has. Your bonding capacity reads it. Your bank reads it. And one day, a buyer will read it too. Line by line. The owners who treat their own compensation as a business decision, made on purpose, end up with businesses that can borrow easier, bond higher, and sell cleaner than the ones who treat it as a leftover.
Before we go further. The usual caveat, and this issue needs it more than most. None of this is tax, legal, or accounting advice. Salary versus dividends has real tax consequences that depend entirely on your situation, and the right answer comes from your accountant, not a newsletter. What follows is why this decision deserves a real conversation.
WHERE YOUR PAY DECISION SHOWS UP
1. Salary vs. dividends. The trade-off most owners never actually discuss.
Salary is deductible to the company, builds your CPP and your RRSP room, and shows lenders a predictable income. Dividends can be simpler and sometimes lighter on tax, but they build no retirement room and can make your personal income look lumpy to anyone assessing you. Neither is wrong. What's wrong is how most owners choose. By default, repeating whatever was done last year because nobody re-asked the question. Your situation changes, your mix should also get re-examined with your accountant, on purpose, most years.
2. The personal expenses quietly living in the company.
The truck that's really personal, the family trips with a site visit stapled on, the spouse on payroll at a rate that doesn't match the work. Every one of these feels like winning at tax time. But each one buries your true profitability. You can't run the reverse math from the Build It Backwards issue of my newsletter, if you don't actually know what the business earns. And every buried expense is an “add-back” you'll one day have to argue for. From the exit traps issue of my newsletter, you already know how buyers treat add-backs they can't verify: they discount them, and your price with them.
3. What your pay structure does to your borrowing and bonding.
A surety building your bonding capacity and a banker sizing your loan are both reading the same statements and an owner who strips the company thin every December, or whose statements are cluttered with personal items, is handing both of them reasons to say no. From the bonding issue: equity left in the business is what capacity gets built on. Your compensation decision is the faucet that controls it.
4. What it does to your own retirement math.
“Most contractors' retirement plan is the business itself, “I'll sell it one day.”
That's a plan with a single point of failure. A deliberate pay structure builds wealth outside the company while you run it: CPP that accumulates, RRSP room that exists because salary created it, savings that don't depend on a future buyer showing up at the right time with the right offer. The owners who negotiate best at exit are the ones who don't need the deal to retire.
THE NUMBER THIS WEEK
Market rate for your role. That’s the number your compensation should be tested against, and the one almost no owner knows. What would you have to pay a stranger to do your actual job, run the crews, price the work, manage the chaos? If you're paying yourself far less than that, your profit is inflated and you're subsidizing the business with free labour. Far more, and you're starving the company of the working capital it needs to bond and grow. Either way, you can't know which side you're on until you know the number.
THE QUESTION THIS WEEK
If you had to hire someone tomorrow to do exactly what you do, what would it cost and is that anywhere close to what you're actually paying yourself?
How you pay yourself touches your taxes, your bonding, your borrowing, your retirement, and eventually your sale price. That's too many important numbers to leave on autopilot. Book the meeting with your accountant. Not at tax time, when everyone's rushed, but now, when there's room to actually think it through.
Build deliberately.
Why am I writing this? I've spent over 20 years working alongside construction and trade business owners across Canada. My firm, N3 Business Advisors Inc., has helped hundreds of contractors buy, grow, value, and sell their businesses. I started my career as a teacher, and that part of me never left. So once a week, I put one lesson in your inbox, for free, to help you build a business that buyers line up for. If this was useful, pass it to one owner who needs it. If it wasn't, reply and tell me what you'd rather read about.
Nitin Khanna, CFA · Founder, N3 Business Advisors · Mastering the Business of Construction