Owner’s compensation

Owner’s compensation is not one line on one statement. Where it shows up depends on how the business is organized. For a sole proprietor, the Canada Revenue Agency’s T2125 guidance says salary or wages, including drawings, paid to self are not entered as business expenses, so the owner’s pay sits inside the profit. For a corporation, the same value can leave as wages, as dividends, or as personal costs the company covers.

Where it can hide

• Wages paid to the owner as an employee; the CRA says shareholder benefits do not include benefits a shareholder receives in their capacity as an employee
• Dividends, which the CRA describes as a return on the shareholder’s investment, not payment for services
• Personal expenses the corporation pays for its shareholder, which the CRA lists as a shareholder benefit and says cannot be claimed as a business expense

What to ask for

Ask the seller where each form of pay is recorded, and whether the statements and the tax filings agree. Then ask who will do the owner’s job after closing and what that role would cost. For how the adjustment is made, see how owner salary is normalized when valuing a business, and compare the costs in discretionary expenses.