The usual add-back problem is a salary too small to reflect what the business really costs to run. This is the opposite number, with a live statute behind it a buyer’s model never has.
Short answer
A buyer’s quality-of-earnings review normalizes owner compensation to what a market-rate replacement manager would cost, and adds the difference back to EBITDA — but that is a forward-looking valuation judgment with no statutory test behind it, and it runs on a completely separate track from the Canada Revenue Agency’s own backward-looking test of whether the ACTUAL salary paid was a reasonable, deductible business expense under Income Tax Act s.67.
Section 67 provides: “In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.” That is the entire text of the general reasonableness ceiling on deductible expenses — short, and it bites hard.
Section 67 only reaches the corporation’s PAST deductions: an unreasonable amount already paid and deducted is simply denied, whether or not a buyer’s own model would have added it back. It has nothing to say about the buyer’s forward-looking normalization exercise. The two questions can point in opposite directions on the same file — a salary can be too large to survive a CRA audit and still be exactly the number a valuation should normalize down to a market-rate replacement, with the audit risk priced separately, typically as an escrow rather than folded into the purchase price itself. Sizing the escrow is a negotiation, not a formula: it usually runs to the tax the CRA could reasonably reassess across the open years, not the full historical bonus.
See it decided in the owner-salary case file, the related-party-rent case file and the earn-out-overhead-allocations file.
A 30-minute call is enough to tell you whether your numbers hold up.
Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
No pitch, no listings. One email when the first report lands.
