Optimal Compensation, Saving, and Consumption for Owners of Canadian Controlled Private Corporations

The optimal compensation structure for individuals with a corporation residing in Ontario was investigated in terms of sustainable spending and final after-tax net worth. Four independent variables: salary, retirement age, monthly spending, and asset allocation were varied along with RRSP/IPP strategies. Sustainable spending was solved for by maximizing spending while constraining the Monte Carlo success rate to be ≥90%. The results indicate that combining a systematically varying compensation structure that prioritizes passing through dividends such that notional account values are minimized prior to taking a salary and utilizing an IPP is optimal for individuals with a strong preference for maximizing multi-generational wealth. Alternatively, for individuals with a preference towards maximizing personal consumption, an IPP with maximum salary was preferable. Compensation with only dividends failed to outperform the IPP cases but was able to outperform the max RRSP strategy in terms of sustainable spending. In all cases, distributing capital dividends as they became available generated increased amounts of net worth due to lost purchasing power in real terms when the capital dividend account accumulates inside the corporation. These results suggest that despite often being framed as a one vs the other approach, a corporate compensation structure that consists of both salary and dividends is preferrable for most individuals.