Though most owners of a small business know the details of their operation inside and out, backwards and forwards, not all of them are aware of the tax, retirement and estate planning strategies available to them.
These strategies can potentially minimize your personal and corporate taxes, increase your retirement income, provide an effective succession plan for your business and enhance your estate.
However, every small business owner is different. As a result, a particular tax or retirement income planning strategy that may work for one business owner may not necessarily be appropriate for you. To start determining those strategies that may be appropriate, you should answer the following eight questions:
Have you incorporated your business? If your business is structured as a sole proprietorship, you may be wondering if it makes sense to incorporate. A number of factors will go into making your decision, most of them tax related. This includes weighing the potential loss of personal tax deductions available to sole proprietorships versus the corporate income-splitting opportunities available.
Have you discussed tax minimization strategies with your advisor? If you personally own an incorporated Canadian business, there are many different tax-planning strategies that can benefit you and your family, such as paying dividends to a spouse and adult children.
Do you have excess cash in your corporation? If so, your first step is to determine whether you have a business need for the cash. If you do, choose an appropriate investment solution based on your time horizon.
If you don’t need it for the business, determine the most tax-effective ways to either withdraw it or utilize it for future goals, like estate or retirement planning.
What would happen to your family and your business if you died or became disabled today?
Evaluate whether you have adequate insurance in the event of death or disability. Also consider your plans for passing along control and ownership of your business, including your buy-sell agreement.
Do you have enough assets to meet your retirement income needs?
Consider creating or updating your financial plan to determine if you will have adequate assets and income to meet your tax, retirement and estate planning goals.
Are you aware of opportunities to increase retirement income and reduce corporate tax?
As an owner of a corporation, you have several strategies available to you that can help you to not only reduce or defer corporate income tax, but also enhance your retirement income.
Do you plan on selling your business to someone outside your family?
There are several issues to consider, including whether the purchaser is interested in buying the assets or shares of your business. If they are interested in buying the shares, you may be able to claim a capital gains exemption.
Do you plan on passing your business to at least one of your children?
There are many considerations – everything from ensuring your children have the necessary aptitude and knowledge for running the business to determining strategies to minimize taxes.
Kirbey Lockhart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Consult with a professional advisor before implementing a strategy.