Business Owners

6 Questions To Ask Your Financial Advisor

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Table of Contents

Question #1: What is the Capital Gains Exemption and how do I make sure I qualify for it?

Answer:

When you make a profit from selling a small business, farm property, or fishing property, the lifetime capital gains exemption (LCGE) could spare you from paying taxes on all or part of the profit you have earned.

If you were to sell qualifying shares of a Canadian business in 2022, the LCGE is $913,630. What exactly does that mean?

Let us look at an example:

    • You sell shares of a small business corporation in 2022 and make a $950,000 profit (also called capital gains).
    • Without the LCGE, you would have to pay taxes on half of this amount, i.e., $475,000. In other words, add $475,000 to your 2022 taxable income.
    • However, since the LCGE allows you to subtract $913,630 from your $950,000 of profits in 2022, you only pay taxes on the following
    • ($950,000 – $913,630) x 50% = $18,185 rather than on $475,000.

There are rules regarding the LCGE that must be considered.

For example, if at any point in time more than 10% of the assets inside your corporation are not specifically used in the day-to-day functions of your business, you would be considered “offside” and could lose your LCGE.

So, if you have investments or an insurance policy with a cash surrender value inside your corporation, you’ll want to ensure those assets do not comprise more than 10% of your businesses assets. Getting this wrong can easily result in over $250,000 in additional taxes being owed.

 

The video below provides an example regarding the capital gains exemption

Question #2: What is a corporate investment shelter and how does it work?

Answer:

If you have excess cash in your corporation that you will not need to fund your business or lifestyle, utilizing a corporate investment shelter might make sense for you.

Your investments inside your corporation are subject to income tax, and that can greatly prohibit your wealth accumulation over time.

Here’s an example of how a tax-deferred investment inside your corporation can alleviate the burden of unnecessary taxes paid:

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.

In this scenario, approximately 50% of the interest earned on his investments will go to taxes each year, leaving him with an after-tax return of 3%.

If John was to properly structure his investments tax -efficiently, the same $100,000 investment at 6% could grow on a tax-deferred basis, resulting in $0 taxes owing.

How is this possible?

By utilizing life insurance as an investment vehicle, or what is called an MTAR Account.

The tax-code allows for the over-funded cash portion of an insurance policy to be invested and grow on a tax-deferred basis, within certain parameters.

Utilizing this tax break can be a great wealth generation tool, but only makes sense for a business owner with excess cash that they are fairly certain they do not need to fund their business or lifestyle.  

 

See the video below for more information:

Question #3: What is an Individual Pension Plan (IPP) and could it make sense for me?

Answer:

IPP stands for Individual Pension Plan, and it is essentially a “supercharged” RRSP for business owners and incorporated professionals. Its benefits are twofold:

    1. It functions similarly to a defined benefit plan which will provide you with income in retirement and,
    2. Allows you to tax shelter large sums of money from your corporation, reducing your corporate income tax.

The ideal candidate for an IPP would be a business owner who has T4 income, is aged 38-71, and has strong cash flows with the need to tax shelter.

The most obvious advantage the IPP has over the RRSP account is the ability to contribute a higher percentage of your earnings.

For example, if you earned $162,278 in 2021 your IPP and RRSP contribution limits would look like this:

*Source – GBL – Ryan Ackers – Q2 Best Practices Webinar

 

This allows you to invest more cash on a tax-deferred basis, which is a huge advantage.

So, if you do own your business and have excess cash flow and you’re at least 38 years old, ask your advisor about establishing an IPP as it could be an extremely valuable retirement planning tool for you and your family.

Question #4: Can I run personal medical expenses through my corporation?

Answer:

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.

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

Answer: Deferred Profit - Sharing Plan (DPSP)

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

A deferred profit-sharing plan (DPSP) is an employer-sponsored profit-sharing plan that is registered with the Canada Revenue Agency (CRA). The purpose of a DPSP is to permit an employer to share business profits with its employees. The plan can be set up for all employees or a certain group of employees. 

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

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

 

Here is a video that illustrates the DPSP:

Question #6: Should I leave cash in my corporation and invest it, or withdraw as salary and make an RRSP contribution?

Answer:

If you have a corporation, you have the option of building a portfolio of investments within the corporation. You also have the option of paying yourself a salary, making an RRSP contribution, and building a portfolio within the RRSP.

Which is better? To over-simplify a complex issue:

When the following two conditions are met,

    1. You’re an investor that’s comfortable with an all-equity portfolio.
        • You have no fixed-income investments like bonds or GICs. You own strictly equity investments like stocks, or ETFs that track stock indices.
    2. You will defer all the capital gains on your investments.
        • You won’t be actively buying and selling, resulting in realized capital gains annually. Instead, you’ll buy and hold an investment, with the intention of deferring any capital gains for a very long time.

If these two conditions are met, then investing in the corporation would make sense compared to the RRSP.

Here’s how it would look over a 30-year period:

Some interesting trends are revealed:

    • Interest: Investing in an RRSP is always a better option than corporate investing over a 30-year time period.
    • Eligible dividends: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, after 15 years the RRSP would outperform corporate investments.
    • Annually realized capital gains: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, in the longer run (after 31 years) the RRSP would outperform corporate investments.
    • Deferred capital gains: Corporate investing always outperforms an RRSP.
    • Balanced portfolio: Your after-tax cash would initially be slightly higher with corporate investments than with an RRSP; however, after eight years the RRSP would outperform corporate investments.

 

Here’s a video that discusses this philosophy:

Summary - 6 Questions To Ask Your Financial Advisor

We hope you found the topics above insightful and valuable. The issues we discussed have many complexities and variables within them, and there is a never a “one-size-fits-all” solution when it comes to financial planning.

If you feel you have unanswered questions or would like to learn more about the topics discussed, please schedule a consultation using the link below, and we’d be happy to help.

Disclaimer

Adam Henry 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 Adam Henry, Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.