6 Questions

Business Owners should be asking a Financial Advisor

by Kevin Anseeuw
by Kevin Anseeuw

Chartered Investment Manager

Welcome!

Thank you for downloading our Business Owners Guide: Six Questions for a Financial Advisor.

We hope you find the guide helpful. If you have additional questions or are looking for a specific answer, feel free to reach out and we can help get you the information you are looking for.

Table of Contents

1. Capital Gains Exemption

Question for your advisor: How do I make sure I qualify for the Capital Gains Exemption?

Tax planning should be an essential part of your financial plan. From proper contributions through the years when you are accumulating assets and even more important when you decide to sell, transition, or take a step back.

If you have investments or an insurance policy with cash surrender value inside your corporation, it’s imperative that a discussion is had about how the capital gains exemption works to prevent you from being inadvertently offside when it comes to selling your business. Getting this wrong can easily result in over $250,000 in additional taxes being owed. “

2. Corporate Investment Shelter

Question for your advisor: How does a corporate investment shelter work?

Investing tax-deferred inside of your corporation is an advantage you have available and something you need to be aware of if you are starting to build up cash inside your corporation.

We will use John, a 45-year-old, as a quick example. John has $100,000 of liquid cash invested in his corporation. That investment is in a non-registered account earning 6% of interest. We will assume John is in the highest tax bracket both personally and corporately.

In this scenario, about half of the interest earned yearly will go to taxes, leaving him with an after-tax return of 3%.

If John was to structure this tax -efficiently, the same $100,000 investment at 6% grows on a tax-deferred basis, resulting in $0 taxes owning.

How is this possible? An MTAR Account, see the video below for more information

3. Individual Pension Plans

Question for your advisor: What is an Individual Pension Plan (IPP)?

With our government working tirelessly to extract additional tax revenue from our small Canadian businesses it’s important for you to understand IPPs. Historically, business owners have used their corporations as their retirement accounts. They’ve kept earnings inside of their corporation in lieu of pulling money out and paying personal income taxes. I’ve touched on the capital gains exemption (Question 1) and how too much cash inside your corporation can prevent you from using it. Another downside of having investments inside your corporation is the potential reduction of your small business deduction limit.

Corporate investment portfolios are producing what is called passive income – income that isn’t active (business) income. Recent tax changes have made passive income inside of corporations something you must stay on top of.

For every dollar of passive income generated over $50,000 the small business deduction limit is reduced by $5.

Where is this from? Can we add a source?

For example, if you generate $75,000 of passive income, your small business deduction will be reduced to $375,000 vs. $500,000. This means, instead of paying the low corporate tax rate of 9% on your business income below $500,000, you’ll only pay a low tax rate on the first $375,000 of business income, while the rest will be taxed at the more standard rate.

75,000 – $50,000 = $25,000

$25,000 X $5 = $125,000

$500,000 – $125,000 = $375,000

Generate over $150,000 of passive income and your full small business deduction of $500,000 has been eliminated.

Individual Pension Plans (IPPs) can be used to withdraw some of this built-up capital in your business tax efficiently.

In a nutshell, IPPs allow:

Can we expand this out so it isn’t in a nutshell?

  1. Business owners to move money out of their corporation into a tax-sheltered savings vehicle
    • A great way to transfer wealth prior to a sale or wind down
    • Helps purify your corporation to ensure you qualify for the capital gains exemption
  2. Business owners to deduct their IPP contribution resulting in a decrease in corporate taxes

4. Personal Medical Expenses

Question for your advisor: Can I run personal medical expenses through my corporation?

Yes, you can. With the use of private health care spending accounts, you’re able to convert personal medical expenses into corporate expenses.

The tax savings can be substantial. Instead of personally paying $10,000 per year for your medical expenses (and having to withdraw $15,000+ from your corporation pre-tax to net $10,000 personally) you can have your corporation pay the $10,000 instead, thus saving you around $5,000.

How do you set this up? What is the first step?

See the video below for a detailed example of how this works.

5. Deferred Profit-Sharing Plan (DPSP)

Question for your advisor: What’s the best way for me to help my employees save for retirement?

If you own a small business (under 100 employees), consider using a Deferred Profit-Sharing Plan (DPSP).

INSERT WHAT IS A DPSP?.

From an employee’s perspective, a DPSP acts just like an RRSP. When the employee retires, they transfer their DPSP into an RRSP or RRIF and start making withdrawals.

From your perspective as a business owner, your contributions to your employee’s DPSP do not attract additional payroll expenses as you would see with a bonus or RRSP contributions.

Furthermore, you can add additional benefits to DPSPs such as vesting periods, meaning if an employee leaves within the first 2 years of being hired, your contributions to their DPSP would revert to you as the employer.

See below for a cost breakdown along with a video explaining the savings in more detail.

  1. CPP – Does not affect employees earning more than the YMPE ($61,600 for 2021)
  2. EI – Does not affect employees earning more than the MIE ($56,300 for 2021)
  3. WCB – Assumes a rate of 4.30%. The actual rate will vary.
  4. Taxes can be reduced at source for Group RRSPs. Provincial health premiums and payroll taxes could also apply

WHAT IS YMPE, MIE?

**** Example provided above is for illustrative purposes only and may vary by company****

6. Accountant vs Fin Advisor OR When is the right time?

Question for your advisor: When is the right time to hire a financial advisor?

Even though this seems like an obvious question to ask, many business owners don’t inquire. They assume financial advisors understand the many intricacies that go into business planning, but the truth is, many financial advisors don’t have a clue. Their idea of giving advice to business owners is “invest some money and buy insurance from me.”

Business owners have hundreds of different tax planning strategies at their disposal to take advantage of. It’s crucial for your advisor to understand the bulk of them. Ask your advisor how many business owners they have as clients? What experience do they have working with business owners? What are some planning strategies they’ve used with business owners that have resulted in a significant impact on their financial well-being?

Word of caution, advisors, like any other professional, only get paid if you become a client, so they’ll answer these questions with what they believe you want to hear. The best thing you can do is ask for references and poke around their website. Are the references business owners? Does their website mention business owners and how it’s their specialty? 

Summary - Six Questions for a Financial Advisor

  1. How do I make sure I qualify for the Capital Gains Exemption?

  2. How does a corporate investment shelter work?

  3. What is an Individual Pension Plan (IPP)?

  4. Can I run personal medical expenses through my corporation?

  5. What’s the best way for me to help my employees save for retirement?

  6. What makes you qualified to work with business owners

About Kevin

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Disclaimer

Kevin Anseeuw is a Winnipeg-based investment & financial advisor with Harbourfront Wealth Management. His specialty is working with Business Owners.

Disclaimer: The views expressed are those of Kevin Anseeuw, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.

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