Retirement planning can be a complex process for us all, but if you are the owner of a small business it may can get even more complicated, due to the various factors and circumstances that you have to take into consideration. A common mistake made by small business owners is reinvesting extra money to grow their business, at the expense of putting it aside to save for their retirement.
Although there is no magic formula for getting started on a retirement strategy for your business, there are some general principles which might help you to get a handle on the steps that you need to take. One of the key ideas is the consideration of both your business and your personal finances and how to structure and integrate the two in order to create a robust retirement financial strategy.
Here are some tips on how to get started on a retirement plan.
- Set aside time to plan for the future – It’s important to make retirement planning a priority, or you run the risk of never getting around to it. A professional financial planner can help you to assess your personal circumstances and create a personalized plan that suits you and your business, with the right balance between saving and reinvestment to help your business to grow.
- Think about your future retirement income – Here are the main sources of retirement income that small business owners usually rely on:
- Equity held in your business – If your business is successful, you are likely to benefit from equity from it in your retirement. Selling your company is an option, particularly attractive to some as, in some cases, you could benefit from the lifetime capital gains exemption on the sale. Of course, finding the right person to run your business in the future is easier said than done. A clear succession plan, created in advance of your retirement, can help you to ensure that business continuity will be affected as little as possible and will give you peace of mind as you approach your retirement. You may also want to consider using the expertise of an accountant or mergers and acquisitions specialist to help you to value your business correctly and also look after your interests when liaising with potential purchasers.
- Alternatively, you may choose for your children to inherit your business, or you may decide to retain ownership of dividend-paying preferred shares in order to maintain an ongoing source of income.
- Registered plans – A Registered Retirement Savings Plan (RRSP) can offer personal tax deductions on your contributions, plus your savings will grow as tax-deferred whilst in the plan. In addition, tax-free savings accounts (TFSAs) can be a useful way to save tax-free in particular circumstances.
- Consider offering a retirement savings plan to your employees – Paying your statutory contribution of the Canada Pension Plan is just the minimum – many small businesses choose to offer their employees enhanced pension contributions as an incentive or employee benefit. For example, you could match their RRSP contributions to a set limit, to help their retirement nest grow more quickly. Alternatively, you could offer a benefit plan with an investment contribution package from an insurance company, which can be a more straightforward and cost-effective choice.
- Be sure to diversify – As a small business owner, you should avoid putting all of your eggs in one basket, financially speaking, as this could leave you vulnerable to changes in the market. Try to diversify your investments and spread your funds in order to protect yourself and engage the help of a professional where necessary to help you to do so.
In summary, it’s important to remember that retirement planning is a process which is unique and personal to your own and your business’ circumstances and there is no uniform approach which works across the board. Take time to take stock of your current situation, as well as your goals for the future and this will help you to create a retirement plan that is right for your needs, both current and future.
Working with a professional to help you to make sense of your finances can be a wise move, but for this relationship to work effectively it is important that you understand what to expect from your financial advisor.
What can your financial advisor help you with?
- Defining your financial goals and creating a step by step plan or strategy to achieve them.
- Planning for the future, including for retirement, future education or housing needs.
- Choosing the mix of investments and assets that suit your goals, lifestyle, time horizon and appetite for risk.
- Building a solid estate for your family to inherit in the future.
- Choosing the most tax-efficient methods of saving and investing.
What should your financial advisor inform you of?
- The range of services that they offer and how much and by which method you will compensate them.
- Your mutual responsibilities and obligations towards each other.
- What the planning process will look like and the documents that they will provide you with.
What will your financial advisor need from you or need to ask you about?
- What your financial goals are.
- What your personal circumstances – such as your marital status, any dependents, your job, earnings and tax situation.
- Any investments or assets that you currently have – such as registered accounts, workplace pensions, property etc.
- Your appetite for risk and investment preferences.
- Information on your income and also your outgoings, including debts such as mortgages, loans or credit cards.
- Whether or not you have a will, and its contents.
- Your estate and inheritance planning situation.
If you’re looking to achieve your financial goals, talk to us. We can help.
Last summer, Finance Minister Morneau announced a number of tax reforms for Small Business Owners, including the changes to income sprinkling, minimizing the incentives to keep passive investments and reducing the transfer of corporate surpluses to capital gains.
This year’s Federal Budget focused on tax tightening measures for business owner:
● Small Business Tax Rate Reduction from 10% to 9%.
● Passive Investment Income held within the corp (Reduction begins at $50,000)
● Tax on Split Income
Since these changes will be effective January 1, 2019, a discussion and plan should be prioritized now, since 2018 will be the “prior year” of 2019. Life insurance is a great solution to help business owners address these problems.
Reduced Small Business Tax Rate
● Key Change: Effective January 1, 2019, the small business tax rate will be reduced from 10% to 9%
● Problem: Lower corporate tax rates result in more capital trapped inside the corporation.
● Possible Solution: Life Insurance Proceeds credit the capital dividend account on death allowing for tax-efficient distribution of funds from the corporation to the estate.
Limited Access to Small Business Tax Rate
● Key Change: Passive investment income greater than $50,000/year reduces the small business tax rate limit for small business tax rate. The business limit is reduced to zero at $150,000 of investment income.
● Problem: For companies with passive income over $50,000, the small business limit will be reduced and thus, increase the total amount of tax you have to pay.
● Possible Solution: Exempt life insurance does not produce passive investment income unless there is a disposition. Put a portion of corporations passive investments into a life insurance policy and reduce passive investment income and limit the erosion of the small business limit. Concepts such as Corporate Estate bond, Corporate Insured Retirement Program, Corporate held Critical Illness with Return of Premium
Tax on Split Income
● Key Change: Tax on split income (TOSI) rules extended to cover adult children in certain cases. Different rules depending on age of adult children
● Problem: For adult children receiving income and don’t pass the TOSI rules, income is taxed at the highest personal marginal tax rate on the first dollar. More trapped funds inside the corporation due to fewer tax-effective strategies.
● Possible Solution: Put a portion of corporation’s trapped surplus into a corporate owned life insurance policy which results in tax-efficient distribution of funds from the corporation to the estate.
The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)
Here are the highlights:
Small Business Tax Rate Reduction Confirmed
Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.
Limiting Access to the Small Business Tax Rate
A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new regulation will go hand in hand with the current business limit reduction for taxable capital.
Limiting access to refundable taxes
Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.
The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.
Health and welfare trusts
The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.
BC Finance Minister Carole James delivered the province’s 2018 budget update on February 20, 2018. The budget anticipates a surplus of $219 million for the current year, $281 million for 2019 and $284 million in 2020.
Corporate and personal tax rates remain unchanged.
The biggest changes are:
- Elimination of Medical Services Plan (MSP Premiums) effective January 1, 2020
- Addition of the Employer Health Tax (EHT)
- Provincial Property Taxes
The Employer Health Tax and Medical Services Plan premiums:
Effective January 1, 2020, the Medical Services Premium (MSP) will be eliminated. In last year’s budget update, MSP was reduced by 50% effective January 1, 2018. Starting in 2019, the budget introduces the Employer Health Tax (EHT). The EHT is to help fund the elimination of the MSP premiums.
The Employer Health Tax will be calculated as a percentage of payroll:
Provincial Property Transfer Taxes
Effective February 21, 2018, the following will occur:
- The provincial property transfer taxes (PTT) will increase to 5% (from 3%) on residential property values above $3 million.
- The PPT applies to foreign purchasers of residential properties in BC will increase to 20% (from 15%) and the tax will extend to include the Fraser Valley, Capital, Nanaimo and Central Okanagan Regional Districts.
- There is a new speculation tax on residential property in BC. This tax is targeted at foreign and domestic homeowners who don’t pay income tax in BC. Starting in 2018, it’s a rate of $5/$1,000 of assessed value, in 2019, this will increase to $20/$1,000.
There will be a new affordable child care benefit that will reduce child care costs by up to $1,250 per month per child by 2020. The new benefit will apply in September 2018. Families with pre-tax incomes of $45,000 or less will receive the full benefit, (up to the cost of care) while those who make up to $111,000 will receive a reduced amount, scaling based on income. The government will be releasing an online benefit calculator to help parents budget.
The budget will provide up to $350/month directly to licensed child care providers to reduce fees. They will be the following:
- Up to $350/month for group infant/toddler care
- Up to $200/month for family infant/toddler care
- Up to $100/month for group care for children aged 3-5
- Up to $60/month for family care for children aged 3-5
To learn how these changes will affect you, please don’t hesitate to contact us.
It has certainly been a busy week in terms of announcements regarding financial policies for small businesses. Following the series of proposed tax reforms that the government announced back in July, various tweaks and changes have subsequently been made, owing, perhaps in part, to confusion and frustration expressed among the small business community. This week Finance Minister, Bill Morneau, has made further clarifications and adjustments to his original set of proposals, aiming to bring more of a sense of balance to the plans. Like all policy changes, the detail can be a little overwhelming, so here is a summary of the key points for your reference:
- The government intends to honor a commitment made prior to the election, to reduce the small business tax rate from 10.5% to 9% by the year 2019.
- Morneau confirmed that the government has scrapped the proposal to limit access to the Lifetime Capital Gains Exemption.
- The plans announced earlier in the year to reduce the value of passive investments made by corporations will continue in principle, but with few key changes. There will be a threshold of $50,000 of income per year, which will be excluded from the newly set higher rate of tax.
- The government has agreed to “simplify” the rules related to the new plans, to prevent income splitting for family members, who are not active in a business, but the plan will still move ahead in principle.
- Morneau has confirmed that the government will still provide good entrepreneurial incentives for venture capitalists and angel investors. The criteria for which still needs to be established.
- The proposed rules to limit the conversion of income to capital gains have been abandoned due to the concerns that many related to intergenerational transfers and insurance policies were held inside corporations.
Of course, this is one area of government policy which is not only constantly changing, but particularly controversial in the current climate, so keep yourself updated regularly on new announcements and news, to ensure your understanding in this area and its potential impact on your family and business. If you have any questions, please talk to us.
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