10 key decisions to maximize your personal and business wealth

Whether you’re already a business owner or thinking about becoming one, the decisions you make will have far-reaching implications. Our guide explains ten key decisions for wherever you may be, on your challenging and rewarding business journey, including:

  • Multiplying the $866,912 lifetime capital gains exemption by adding family members as common shareholders of your company through a family trust.
  • Benefit from the tax-deferral opportunities of the corporate taxation structure – use the additional funds in the corporation to pay off debt, purchase capital assets, acquire investments or fund an insurance policy
  • Greater tax-deductible retirement contributions – by contributing to an Individual Pension Plan instead of a regular RRSP.

Key decision 1: What is the best structure for your business?

Make the right choice for yourself

Whether you already own your business, are thinking of starting a business from scratch or are buying an existing business, choosing the right business structure can have a major impact on the future success of your enterprise as well as your personal tax and estate planning.

Your decision should take into account a range of factors including the nature of your business and where it’s located, the number of people involved, taxation considerations, your potential exposure to liability and the company’s financial requirements.

Consult an experienced legal professional and tax accountant. Your professional advisors can help ensure that you are well informed on the legal and taxation issues you may encounter and that you understand the personal and business implications of your decisions.

Sole proprietorships

A sole proprietorship is the simplest form of business organization and is often the most inexpensive to set up. This can be a good option for small enterprises or when you are just starting your business because you, as the business owner, have direct control over business decisions and receive all the profits. However, with this kind of structure, you are legally responsible for the debts and obligations of the business. This means that both your business and personal assets may be subject to the claims of creditors. This is called “unlimited liability”.

How is a sole proprietor taxed?

You must file a personal tax return to report your business income. You should include the income, or losses, from your business on your personal tax return as part of your overall income for the year. Your net business income is taxed as personal income, so there are limited tax planning opportunities; however, you may be able to deduct your business losses from your other income sources.


Partnerships can be relatively easy to set up and often have low startup costs. A key advantage of having partners is that they generally bring additional sources of investment capital and provide a broader management base. However, finding suitable partners can be a challenge. In addition, this kind of business structure can mean a division of authority, so there is potential for conflict between the partners.

A written partnership agreement, though not required, can help minimize potential conflict. In many cases it sets out the terms of business, protects the interests of individual partners in the event of disagreement or dissolution of the business and generally defines how the partners will share the business profits.

Your personal liability for the business and the actions of your partners can differ depending on the type of partnership. Be prepared for the possibility that your partners’ decisions will be legally binding on you, and ensure you discuss all aspects of this decision with your legal advisor.

If you are considering investing in a partnership, you should review the tax and legal implications carefully with your professional advisor.

How is a partnership taxed?

A partnership is not a taxable entity. This means that instead of the partnership paying tax, the partnership’s income or loss flows to the individual partners, who report their proportionate share of income or loss on their personal tax returns.


Corporations are a very popular business structure. A corporation is a separate legal entity from its shareholders and has the legal characteristics of an individual. It can own property, incur legal liability, lend, borrow and carry on a business.

If you’re thinking of starting or investing in a corporation, there can be a number of advantages. It can provide greater business continuity as shares can be bought and sold without affecting the company’s continued operation. It is also easier to raise investment capital for a corporation, and you may find that the size and resources of an incorporated business make it easier to attract specialized management expertise. In addition, as an owner-manager and a shareholder, your liability is generally limited to your shareholding, so your personal assets are protected from the company’s creditors unless you have provided personal guarantees for loans to the corporation.

It’s important to obtain legal advice when setting up or acquiring an incorporated business. Corporations are more closely regulated than sole proprietorships or partnerships and may be more costly to set up. You will be required to hold annual shareholder meetings, meet certain record-keeping obligations and comply with requirements under the legislation governing their corporation. This can mean more administrative, legal and accounting expenditures.

If you are a professional and are thinking of incorporating your practice, please review Appendix 2 for information specific to professional corporations.

How is a corporation taxed?

Since a corporation is a separate legal entity, a corporation files its own corporate tax return and pays taxes on the income it earns. A corporation’s income is calculated separately from the business owner’s or shareholder’s personal income.

Tax planning for corporations

As an owner-manager, you may be able to benefit from some of the tax planning opportunities available to incorporated businesses:

  • The small business deduction provides potential tax-deferral opportunities and a reduced corporate tax on active business income up to the small business limit that is retained in the corporation.

  • If your business qualifies as a qualified small business corporation (QSBC), all or a portion of any gain realized on the sale of the shares can potentially be sheltered from personal taxation using the capital gains exemption.

  • By incorporating, you may have the opportunity to split income and reduce taxes by paying dividends to adult family shareholders.

  • Adding other family members as common shareholders directly or through a family trust (referred to as an “estate freeze”) can allow you to transfer future tax liability on the growth of the company to lowerincome family members and multiply the use of the capital gains exemption on the sale of QSBC shares.

Key decision 2: How can you reduce taxes?

Organize your business assets in the most tax-efficient manner

As a business owner, you may have substantial personal assets invested in your business in addition to the longterm commitment you have made to your business and its employees. This can have significant implications, not only for you and your business but also for your family’s financial security.

To protect your investments, both business and personal, your business strategy should include carefully structured tax and estate planning components to ensure you have organized your assets in the most taxeffective manner and utilized the tax planning strategies that are available for the benefit of your business and your family.

Personal tax planning

There are several income-splitting strategies available to owners of private corporations in Canada that may benefit you and your family. They include:

Income splitting by paying a salary to family members

Consider income splitting with lower-income family members by employing them in the corporation and paying them a reasonable salary based on the services they perform. The salary they receive will also create Registered Retirement Savings Plan (RRSP) contribution room for them and generate Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) pensionable earnings. Note that the tax rules provide a disincentive to paying a salary or bonus that exceeds the value of the services rendered.

Income splitting by paying dividends to adult family members

If you have an active corporation, you may be able to transfer some or all of the future growth of the business to the next generation of your family using an estate freeze with a family trust. This common business succession strategy allows you to income split by paying dividends from the corporation to your spouse and adult children. If they have no other income, they may be able to receive substantial tax-free dividends from the corporation (the amount varies depending on the type of dividends and the family member’s province/ territory of residence). While this strategy may help you minimize and defer tax, there may be situations in the future where you may wish to unwind or dissolve the structure. Ensure that this flexibility is available in the design of your estate freeze before it is initially put into place.

Multiplying the capital gains exemption

It is possible to “multiply” the capital gains exemption available to you and your family on the sale of the qualifying shares of your business. This could significantly increase the family’s after-tax assets following the sale. One way to do this is by having your operating company owned by a family trust where your family members are the beneficiaries of the trust. When you sell the qualifying shares owned by the trust, the resulting capital gains can be allocated to each beneficiary and they can each claim their capital gains exemption. For example, a family of four can claim four times the capital gains exemption versus the business owner, who can claim the capital gains exemption only once. This results in additional tax savings for the family.

You may also wish to consider some potential estate planning opportunities. Freezing the value of your estate can help you limit your tax liability on death. You can also defer capital gains on the future growth of the business and attribute them to the next generation while retaining control of the business. This may also allow other family members to use their capital gains exemptions.

Remember that for these strategies to be effective, the interest, dividends and capital gains must be paid or payable by the family trust to the beneficiaries. The funds will no longer belong to you as the parent or business owner, so ensure this is a practical strategy for your circumstances.

Tax planning for your business

If you’re the owner of a private Canadian corporation earning active business income, consider whether the following strategies would work for your business:

Setting up a retirement plan

Consider setting up an Individual Pension Plan (IPP) as part of your retirement plan. An IPP is a defined benefit pension plan that, in certain situations, provides greater annual contribution limits than an RRSP. IPP contributions increase with the age of the plan holder.

Contributions to the IPP are taxdeductible for your corporation. The investments in the IPP grow on a taxdeferred basis and are only taxable when you start withdrawing from the IPP.

If investment earnings in the plan are lower than expected, you may be able to make additional contributions.

IPP assets may offer creditor protection and typically suit business owners who are age 40 or older and earn significant employment income. This means that you will need to draw a salary from your business.

Maintain the status of your corporation as a qualified small business corporation

By maintaining your operating company’s status as a QSBC, when you eventually sell its shares, you may be able to take advantage of the capital gains exemption. This exemption is available to individual shareholders of active Canadian private corporations and can represent sizable tax savings.

To qualify for the exemption, ensure your corporation meets the QSBC status. Certain corporate structures may make this easier. Since surplus assets may limit your ability to claim the exemption, you may want to transfer non-business investments to a holding company. This can “purify” the operating company and reduce the accumulation of non-qualifying assets.

Earning Canadian dividend income in a corporation

Canadian source dividends from corporations that are not controlled by the shareholder corporation are subject to a flat refundable corporate tax. If you are earning Canadian public company dividends in a corporation, consider paying out a dividend in the same year if you will be paying taxes at a lower tax rate personally.

Life insurance as a tax-exempt investment in the corporation

If you have surplus funds accumulating in your corporation, you may be taxed at a higher rate on the investment income earned in the corporation than if you earned this income personally (depending on the province/territory). You may also face double taxation on the assets within the corporation on death. Tax planning solutions are available that may help you address this problem.

A corporate-owned tax-exempt life insurance policy can provide income protection for survivors, fund buy-sell agreements or pay capital gains tax on death. Life insurance premiums are generally not taxdeductible, but it can be advantageous to purchase life insurance through a corporation rather than personally. The corporation’s surplus assets can be invested in the insurance policy, grow on a tax-sheltered basis during your lifetime, provide a supplementary source of retirement income and be paid to your beneficiaries as a tax-free death benefit.

Key decision 3: What should you do with surplus cash?

Preserve and maximize your surplus assets

If you are the owner-manager of a private Canadian corporation and have surplus cash accumulating in your company, you may be wondering whether to retain the funds in the company or withdraw them while paying as little tax as possible. If so, there are a number of questions you should consider before you take action.

Is there a business need for the cash?

If you have surplus cash in your corporation, ask yourself if you will need it for business purposes in the short term. Will you need to use the cash to pay instalments of income tax or GST/HST? Does your business experience seasonal slow periods when cash flow will need to be supplemented? Consider whether you will have to pay down debts or make any major purchases in the near future.

If you have excess cash that won’t be used for business purposes, the investment income earned on this surplus cash will be taxed at the corporate investment tax rates, which may be slightly higher than top personal tax rates, which vary by province/territory.

Do you need the surplus cash for personal purposes?

Do you have personal expenses that are coming due, such as income tax installments that must be paid on time? You may also be considering a major purchase like a vacation property or planning to help out with a family member’s education costs, wedding expenses or house down payment. If you know you will need to withdraw surplus funds from the corporation to meet these personal expenses, consider when you will need the funds. It’s important to understand the tax consequences of making the withdrawal and whether it will be possible to make several withdrawals over a period of time to minimize tax costs.

What are the funds going to be used for?

If you don’t need the surplus funds immediately for business or personal purposes, what are your reasons for moving funds out of the corporation? Sometimes, it may be beneficial to withdraw the funds from the corporation, as investment income earned on the excess funds remaining in the corporation may be taxed at a slightly higher rate than the highest personal tax rate. A good starting point is to analyze your long-term goals, which could include:

  • Planning for retirement – Are you going to use the funds for your retirement by contributing to an RRSP, IPP or RCA?

  • Estate planning – Do you want to enhance the value of the estate you will pass on to your family? Many potentially effective estate planning strategies involve insurance-based solutions. The funds may grow on a tax-sheltered basis and may be accessed at retirement to supplement retirement income, or they may be paid out tax-free on death.

  • Asset preservation – If you want to mitigate the risk of funds being subject to claims from corporate creditors, consider transferring excess cash to a holding company. There are various ways to accomplish this.

  • Tax planning – Keeping excess investments or an insurance policy in a corporation may disqualify your shares from being QSBC shares so that you are not entitled to the capital gains exemption on the sale of your business. Therefore, you may want to withdraw excess funds from the corporation. A properly structured corporation may allow you to extract cash from the operating corporation on a taxdeferred basis.

Withdrawing funds from the corporation

If you’ve decided to take funds out of your corporation, consider potential strategies that could help you make the withdrawal and minimize the tax consequences.

Tax-free strategies
  • Expense reimbursement – Keep records of business expenses you paid personally. If your corporation reimburses you, you won’t pay tax on the funds you receive and the corporation may get a tax deduction for the business expense.

  • Repayments of shareholder loans to the company – Shareholder loans, such as personal assets you transferred to the company without payment or dividends declared but never paid to you, can be repaid without tax consequences.

You could also consider other nontaxable methods such as paying a capital dividend if your corporation has a positive capital dividend account balance.

Taxable strategies

Taxable methods of withdrawing funds from the corporation include paying yourself a higher salary or dividend. Although paying a taxable dividend results in personal tax, it may at the same time create a tax refund to the corporation if the corporation has a “refundable dividend tax on hand” (RDTOH) balance. In some circumstances, the refund to the corporation may be greater than the personal tax paid on the dividend. Income-splitting opportunities may also be available, for example, by paying a reasonable salary to a lower-income family member for services rendered or paying dividends to adult family member shareholders.

Key decision 4: How can you build employee loyalty?

Provide enhanced benefits to attract and retain top talent

As a business owner you know how important it is to recruit, reward and retain your top talent.

It can help ensure business continuity and protect the knowledge you have accumulated within your organization, and it may help you make effective succession planning decisions when the time comes. The loss of a key employee can be very expensive to an organization, so give some thought to how you can motivate key employees and keep them focused on the company’s priorities.

Employer-sponsored savings plans

Employees are increasingly conscious of the necessity to provide for their retirement. Employer-sponsored savings plans are one of the most important aspects of retirement planning and can help you ensure that your employees enjoy a financially secure retirement. Before setting up a retirement plan, discuss the options with your professional legal, tax and/or financial advisors. Here are some of the more common types of retirement plans offered by employers.

Group Registered Retirement Savings Plans (Group RRSPs)

Group RRSPs are one way you can encourage your employees to save for retirement throughout their careers. They could be an option even for a small business owner. These plans operate like regular RRSPs, possibly with additional restrictions, and can be more cost-effective and easier to administer than pension plans.

Registered Pension Plans (RPPs)

RPPs are employer-sponsored pension plans. In general, employer and employee contributions are taxdeductible and the income earned within the plan grows tax-deferred. Funds accumulating within the plan for individual members are generally locked in by provincial/territorial or federal legislation. There are two kinds of RPPs:

Defined contribution (DC) and Defined benefit (DB) pension plans

Employees with DC pension plans choose the investments within their individual plans, and the retirement benefit is based on the value of the investments in the plan when the employee retires. This can be a less costly option than a DB plan for you as an employer and is easier to administer.

In contrast, DB plans guarantee a specific benefit to the employee at retirement, calculated using a formula based on earnings and years of service. DB plans generally specify an age, usually 65, at which employees are expected to start receiving retirement income. As an employer, you face a potentially greater obligation with a DB plan than a DC plan because you are making the investment decisions and guaranteeing a fixed benefit to the employee at retirement. If there are insufficient funds in the plan, you may also be required to top up the plan by making a greater current cash flow commitment to the DB plan than expected. If there is a surplus in the plan, you may have reduced payments.

Enhanced retirement benefits

The following options may help you enhance the retirement savings plans of your key employees:

Supplemental Executive Retirement Plans (SERPs)

Limits on registered plan contributions and benefits can leave your higher-income employees with retirement benefits that are inadequate to maintain their standard of living. A SERP may help bridge the gap between the maximum pension available under the company’s RPP and what a higher-income employee would otherwise have received. It can also be a way to help you retain your valuable employees and encourage their long-term loyalty.

One of the most common forms of SERPs is an RCA. An RCA is a nonregistered pension arrangement that can help you provide supplemental pension benefits for key employees.RCAs have no contribution limits (provided contributions are “reasonable”) and no investment restrictions. Employees may also be able to benefit from certain investment strategies involving life insurance. This can provide supplemental tax-exempt investment income and may yield better results than alternative investments.

Individual Pension Plans (IPPs)

As previously mentioned, an IPP is a DB pension plan.

It can be set up for a business owner but also for key employees to provide for their retirement.

IPPs are typically suited for those who are age 40 or older and earn significant employment income.

Learn from experience

While financial compensation often attracts your key employees, nonfinancial benefits often help you retain them. Sufficient tools and time to do the job are essential to employee satisfaction, while training and career development help to keep them motivated. Aim to foster a social environment and a sense of team, and demonstrate your commitment by ensuring that work/life balance can be achieved.

If you lose a key employee, hold an exit interview so you understand the reasons for their departure. Their dissatisfaction may indicate problems among other key employees and may save you from another costly loss.

We can help you assess the advantages of enhanced employee benefits, including RCAs, IPPs, Group RRSPs, and assist you in setting up these plans. Please contact us for more information.

Key decision 5: How will you reduce your risk?

Safeguard your personal and business assets from creditors

As a business owner, you’ve worked hard to accumulate your assets, so it’s important to take precautions to protect them from risk. Review your situation and consider if you need to “creditor protect” your business. If you operate as a sole proprietor or a partnership, your personal as well as business assets may be at risk from creditors with a claim against your business.

There are a number of potential solutions. One is to keep your personal and business assets separate wherever possible and carefully structure your holdings to minimize your potential liability before any insolvency issues arise. This can be an effective way to protect yourself, particularly if you undertake such planning in the ordinary course of your business. The following are some other strategies that may help:

Protect personal assets
  • Gifting assets – If you gift assets to family members, you may reduce the number of assets that may be available to your creditors, but bear in mind that those assets may now be at risk from creditors of the family members who receive them. Unless the gift is to a spouse, it’s considered a sale at fair market value for Canadian tax purposes and could potentially trigger a capital gain.
  • Using insurance – Depending on the province/territory you live in, placing funds in an insurance policy (life or segregated funds) may safeguard them from potential future claims. In many cases the investment component of an insurance policy and the interests of the beneficiaries under the insurance policy may offer protection from the claims of creditors.
  • Sheltering assets within registered plans – Funds in an RRSP are potentially protected from creditors in certain provinces/territories. In very specific circumstances, some RRSPs have received a favourable judicial ruling following the death of the plan holder, particularly where there was a named beneficiary. Remember that registered pension plans governed by pension legislation may also offer protection from the claims of creditors, subject to specific exceptions.
  • Transferring assets to a formal trust – The legal ownership of the assets passes to the trustee, so, if properly structured, these assets could be protected from future creditors. However, you may lose control of the funds transferred, depending on the nature of the trust. Determine whether you can afford to transfer control of those assets. If you can, choose a trustee who you know will manage them appropriately. Remember there could be significant tax implications in placing assets in a trust, so obtain professional advice to ensure you understand the consequences before you make a decision.
Safeguard your business

When you’re working on a strategy to protect your business assets from risk, certain actions can create the impression that you intend to put assets beyond the reach of creditors. This can work against you in the event of a lawsuit and can be particularly important if your company is experiencing financial difficulties. Try to avoid the following:

  • Transferring property for less than fair market value
  • Paying for property by cash instead of cheque
  • Transferring property without proper documentation
  • Transferring property where the transferring person retains an ongoing interest or continues to behave like the property owner
  • Transferring property without a change in possession

Protecting your corporate assets may involve transferring them between a number of separately incorporated businesses. The idea is that if one business fails, it won’t leave another in a vulnerable position. It is important to demonstrate that each corporation is a legitimate legal entity, carrying on business independently.

Ensure that transfers between companies occur at fair market value and are documented as though they occurred at arm’s length. To reinforce this, if you have a number of corporations with a common trade name, ensure that all documentation is prepared in the correct corporate name and signed by the authorized signing officer. Each corporation should have separate management, so try to avoid shared processes like accounting, banking and inventory management.

To protect your valuable business assets, an operating company should aim to own only the minimum number of assets necessary to carry on its business. If possible, these assets should be owned by another company and leased back to the operating company so they are not available to creditors in the event of a claim.

Benefits of incorporation

Incorporating your business may be one way to protect personal assets. As an owner-manager, you are only liable to the extent of your shareholding, so you are not personally liable for the debts of the company. Compare this with sole proprietors, who are personally liable for all the debts and obligations of their businesses, and partnerships, where you can be personally liable for the actions of other partners. If you do incorporate, be careful about giving personal guarantees for loans to your business. The protection provided by incorporation can be lost in such a case and you could be personally liable for the repayment of the loan.

Surplus assets in your business

Consider keeping cash reserves low. If you have accumulated surplus assets in your business that you don’t need for operating expenses, consider transferring them to a holding company. This can help protect them from creditors of the operating company. You should also consider the pros and cons of having your company contribute to an IPP. This can help boost your retirement funds and assets in an IPP are creditor protected.

Key decision 6: What can you do to deal with the unexpected?

Prepare a plan to protect your business before adverse events occur

Would your business be prepared if a catastrophic event occurred? Do you have a plan to cover the potential loss of a key person who leaves by choice or due to a serious illness, a disability or death, or to mitigate the consequences of a divorce, which can have a substantial impact on a family business?

Planning ahead can help you limit the damage to the business you have worked so hard to build and to which you have committed so many resources. You protect yourself by insuring against risks like fire, damage to your premises and theft of equipment, but an unforeseen event for which you haven’t planned can seriously affect your ability to deliver services to your customers. Lack of planning can be detrimental to the value of your business, company morale and business performance.

Insurance solutions

Insurance can provide some financial security if you are unable to work or earn an income due to an accident or illness. As a business owner, your continued presence may be critical to the company’s ongoing success. Several insurance strategies may be particularly significant in ensuring business continuity and security:

  • Purchase insurance to help you pay overheads and specific expenses you will continue to be responsible for, even if you are temporarily incapacitated.
  • Fund a buy/sell agreement through an insurance policy. It can be a cost-effective way to enable business owners to purchase the shares of a partner or shareholder in the event of their death, a disability or a serious illness. This may allow you to take immediate steps to minimize the potential damage by reassuring employees, creditors, suppliers and investors; and ensure that the family of the partner or shareholder receives financial support.
  • Insure against the loss of a key person. Key person protection can be a cost-effective way to help protect your business against the consequences of losing a critical individual, whether they leave by choice or due to death, a critical illness or a disability. You estimate the financial impact of this loss on your company and insure against the occurrence of specific events. Your business may receive compensation to the extent of the coverage you have purchased, and this can help you manage unexpected expenses resulting from the loss.
  • Consider the potential benefits of providing group insurance for your employees. This can be a valuable addition to your compensation structure, can help ensure longterm employee loyalty and may make your company attractive to talented prospective employees.
Retaining top talent

Many organizations misunderstand what employees and prospective employees are looking for from an employer. This may be one reason why organizations have difficulty attracting employees with the skills they need.

For a large percentage of organizations, mental health is a major cause of short-term disability claims. The trend appears to be increasing. Employees claim that the main reasons for leaving their employer were stress, lack of confidence in management, dissatisfaction with opportunities for promotion, base pay and lack of work/ life balance.

Analyse the potential business consequences of losing your most talented employees. To retain these valuable people, get to know them, reward them, keep them challenged and engaged, foster a team environment, offer them growth opportunities and provide a comprehensive and competitive remuneration package. These factors may help you maximize productivity and ensure business continuity.

Consider a family business divorce strategy

Divorce can have a major financial and emotional impact on a family business. It can also have an adverse effect on non-family members who work in the business. Consider the impact a divorce could have on the company morale, relationships and business performance. You may be able to minimize some of the negative effects through careful legal, succession and tax planning, but don’t overlook the benefits of a comprehensive family business divorce strategy. It can be an invaluable piece of forward planning.

Consider a pre-nuptial agreement as a way to avoid some of the conflict associated with divorce. While it may be difficult to discuss the subject, such an agreement can be a great tool.

If the family business is the family’s largest asset, a divorce can result in the sale of the business and division of the proceeds between the former spouses. In such a case the valuation of the business is often the central issue. It can be highly contentious and should be an essential element of a family business divorce strategy.

A business valuation expert used in a family business divorce strategy can help:

If you plan for the unexpected, you can help your business weather developments that may otherwise have a potentially negative impact. In addition to insurance and strategies to retain your key employees and mitigate the effects of divorce on the family business, don’t forget basic precautions. Ensure that computer systems are backed up and that important business and operational information is effectively communicated throughout the company to reduce risk in the event of the loss of key individuals.

Key decision 7: Do you intend to retire from your business?

Create an exit strategy for a smooth transition into a well-funded retirement

If you should ever decide to retire, consider that some business owners develop a strategy for exiting their business, but many who are approaching retirement age haven’t yet discussed their plans with family or business partners.

Whether you intend to sell the business to a third party, transfer it to family members, structure a management buyout or wind it up, advance planning can help you make better long-term decisions and increase the chances of a successful transition. It can increase the funds you will be able to withdraw to help fund your retirement, make management transitions easier and give you a wider range of options. In the next few decades, many small businesses will be changing hands. If you haven’t yet discussed a business succession plan, or even considered your intentions for the business when you retire, now is the time to think about it.

Will your business provide enough to fund your retirement?

A family-owned business often represents more than half the value of the owner’s estate. Consequently, if much of your net worth is tied up in the business, you may be less well diversified than those who have a more traditional retirement portfolio. Remember that unlike a salaried employee, it’s up to you to fund your own retirement. Do you have a strategy? Are you relying on being able to sell your business for a sum that will enable you to enjoy a financially secure retirement? If you haven’t given further thought to that far-off day, consider that many business owners are unable to sell their businesses for a variety of reasons. These include difficulties finding a suitable buyer and obtaining financing for the successor once they have been identified.

To avoid the situation where you’re ready to retire but can’t find a purchaser of the business, consider grooming your own replacement so that they’re ready to step in and buy the company when you’re ready to retire. Your options could include a current co-owner, key employees or a younger family member who is already active in the business.

If members of your management team are interested in purchasing the company, consider a management buyout or setting up a share ownership plan to transition your business. This may help you ensure business continuity, harness the business experience of your management team, and by reducing disruption during the transition period, you may increase the likelihood that the company will retain its existing customers and suppliers. For these and other reasons, management buyouts are often more successful than passing the business to family members or third parties.

Don’t leave the planning to the last minute

Don’t expect to put together an effective succession plan in a short period of time. Many business owners underestimate how long it takes to create a plan. Now is the best time to start thinking about succession planning for your business. This may seem a low priority when you’re consumed with the pressures of dayto- day operations, but it’s the best time to do it. Begin by writing down your goals and get professional legal, tax and accounting advice on setting up a succession plan.

Be conservative when you’re planning for retirement. It’s often natural to be optimistic, particularly if your business has always provided well for you and your family and you’ve assumed that it will be your main source of retirement savings. Maximize other sources of retirement income, like RRSPs or IPPs for example, and however much you love what you do, don’t leave your retirement planning too late. Allow time to find potential buyers to ensure you get the best possible offer for your business. Here are some tips to consider:

  • Start working on your succession plan as early as possible
  • Set realistic goals
  • Review your plan regularly
  • Identify the qualities you’re looking for in a successor (e.g. skills, resources)
  • Assemble a team of professional advisors (e.g. business broker, experienced legal advisor, tax specialist, financial advisor) to help you put your plan together
Where is your business in its life cycle?

Where your business is in its life cycle can influence your retirement planning. Your focus will change as the business moves through different stages, so be flexible in your approach.

Early on you may have few resources or little time to give to retirement planning. Later on when you’re established, you may have more time and resources – however, it’s never too early to start planning for retirement.

During the early years and periods of growth, build retirement planning into your decisions by diversifying and directing surplus assets to RRSPs, IPPs, tax-exempt life insurance and/ or non-registered investments. Obtain professional tax advice to help maximize cash flow to build these assets. You may also be able to split income with family members and that can be beneficial when you eventually sell the business. Build a comprehensive estate plan, including putting Wills and Powers of Attorney/Mandates in place, and keep them up to date as circumstances change.

If your established business is generating surplus cash flow, you could be paying taxes in the highest tax bracket. While you’re focused on further expansion, remember to continue to diversify and direct surplus assets to retirement planning. You may now have funds for more sophisticated strategies that may help you save tax and further your retirement and estate planning objectives.

By the time your business is mature, you should have an exit strategy. Consider the following:

  • Can the business generate enough income to fund your retirement?
  • If you intend to sell the business, will you sell shares or assets? On the sale of QSBC shares, you may be able to utilize the capital gains exemption.
  • Can you utilize opportunities like a payment of a retiring allowance and repayment of shareholder loans to help fund your retirement?
  • Will you transfer the business to a family member? Have you identified a potential successor?
  • Is an estate freeze a possibility? See “Key decision 2 – How can you reduce taxes?” to learn more about estate freezes.

Key decision 8: Will you sell your business?

Get top dollar by making your business more attractive to potential buyers and minimize taxes on the sale

If you are planning to sell your business to a non-family member, you are not alone. Many business owners in Canada will exit their business by selling to a non-family member, but only a small percentage of owners planning to transfer their business in the near future have a succession plan. This apparent lack of succession planning is often due to the difficulty in finding a suitable buyer with financing to close the purchase.

If you’re selling your business outside the family, consider the factors that can make your business more attractive to a prospective purchaser. It will be easier to find a buyer for a business that has potential for future growth. Other corporations in your business sector may also be interested in acquiring your business with a view to improving its profitability.

Valuation is of central importance. You can get an indication of this by researching the selling price of similar businesses in your area. Remember that small businesses can sell for significantly less than the asking price. Buyers may evaluate your business on its projected cash flow for the next few years and assess the value of that cash flow against the business risks.

To help you find a purchaser and obtain a better offer:

  • Have a valid reason to sell – But try not to disclose personal information that could weaken your negotiating power.
  • Don’t wait until you’re under pressure to sell for economic or emotional reasons – This can force you to accept a poor offer.
  • Gather essential information – This may include:
    • Three years’ financial statements and tax returns
    • Lists of fixtures and equipment
    • Lists of employees and customers
    • Copies of leases for premises and equipment
    • Franchise agreement
    • Lists of loans and payment schedule
    • Names of professional advisors, for example, business broker, qualified legal advisor and tax specialist
  • Have financial statements audited or reviewed by a professional for the sale - This will increase the confidence potential buyers will have in the accuracy of the documents you provide.
  • Consider hiring a business broker to help you identify a purchaser – A broker can act as your agent while you’re looking for a purchaser and during the negotiations.
  • Maintain confidentiality – Don’t divulge information about your day-to-day business activities that can be used by competitors. Ask a potential buyer to sign a non-disclosure agreement and provide financial information only to potential buyers who have paid a deposit
  • Don’t let the business decline while you’re preoccupied with the sale – Maintain your premises, inventory and normal business hours.
  • Learn to judge whether a potential buyer is serious – Don’t waste time on tire kickers.
Assemble a team of experts to help you

Your team of experts should include an experienced tax advisor to ensure you have planned your sale in the most tax-efficient manner, a qualified legal professional to prepare legal documentation and a business valuator. By working with your RBC advisor, you can create a financial plan that can give you an idea of what level of after-tax sale proceeds will be adequate to meet your retirement goals. They can also help you manage the investment of the sale proceeds.

Hiring a business broker

Give your broker information about your business and then follow their advice. Here are some factors to consider:

  • You can maintain confidentiality during the early stages of the sale process and let the broker deal with potential purchasers on your behalf until they identify an acceptable prospect.
  • Potential buyers may be more comfortable talking to an intermediary.
  • Some brokers specialize in a particular industry and may have contacts at corporations that may be interested in buying your company.
  • Brokers’ fees are usually a percentage of the final sale price. Weigh this expense against the benefit they provide before you hire them.

We strongly advise you to consult an experienced legal professional when you’re selling your business. A professionally prepared document summarizing your business for potential purchasers can be invaluable and may help you avoid potential litigation and suggestions of misrepresentation if the purchaser finds the business less successful than expected. Your legal advisor should also prepare the sale and purchase agreement so that all contingencies are covered and you minimize the risk of future litigation.

Key decision 9: How can you keep your business in the family?

Plan ahead to maintain stability in the business – and the family
What are the challenges to keeping a business in the family?

There are a number of challenges unique to running a family business and planning its future. Consider the interaction of family, business and ownership values and interests. There are long-standing relationships between family members that will still be there long after the transition, so don’t overlook family dynamics. Is there a suitable successor within the family, and if so, can they work with others in the family who may also be involved in the business?

The high failure rate of intergenerational business transfers can be attributed to a combination of factors. These include the lack of a formal succession plan, a tendency to leave succession planning too late and the absence of clear communication. When you involve family members and discuss their concerns, such open communication helps clarify expectations of everyone’s roles and commitment to make the transition a success. Don’t assume that you understand the needs and perspectives of your relatives and employees. Address potential issues, perhaps by means of a family council, rather than avoiding them.

Involve your heirs and key employees in your succession planning

Owners of family businesses often assume they are “on the same page” as their chosen successors. This may be one reason why they are less likely to have a formal succession plan than those selling the business outside the family. It’s a risk to assume that one of your children or another family member wants to take over the business. They may have other plans. When you have identified a successor, involve them in your succession plan and share your long-term goals with them, your family and key employees. Their input can minimize potential conflict and help maintain stability in the business and the family.

It’s never too early to start building your succession plan

Don’t underestimate the value of starting the process early. If you start to design your succession plan many years ahead of your expected exit date, you can build the interest of potential successors within the family by involving them in meetings and asking for their input. This can help them make an informed decision about whether they want to participate and to what extent.

If you don’t have one family successor in mind yet, consider splitting the business and its responsibilities between family members. Who has been actively involved in the business and shown an aptitude and desire for leadership? Given the differing levels of commitment that your children may have shown, should you divide the business equity equally between them? The business may be your largest asset. Can you recognize their contributions in other ways and is it appropriate for children who are not actively involved in the business to be shareholders?

Obtain professional advice from your legal advisor, tax specialist and possibly a family business facilitator. A facilitator can help you discuss issues with family members, provide objectivity, find constructive ways to resolve conflicts, review plans, establish priorities and involve stakeholders in the succession process.

Create and implement a business succession plan
  • Develop a leadership profile – What do you want to see in a future leader?
  • Identify suitable candidates – Who demonstrates the commitment and leadership qualities you’re looking for? Assess their experience and the gaps in their education. How can these be remedied?
  • Prepare management and personal development plans – Project the company’s future management needs and guide the career paths of individuals to meet them.
  • Mentor and evaluate candidates – Develop their skills and leadership qualities. It can be difficult for a parent to do this objectively due to conflicting roles of parent/business owner. Choose someone else as mentor.
  • Select a succession – Your choice could be clear due to years of preparation, or if not, use set criteria to make your selection.
  • Your business facilitator can help.
  • Communicate your plan – Ensure everyone understands the plan and their proposed roles. A business facilitator can help with communication and coaching.
  • Manage the transition – Withdrawing from daily business activities can be difficult. A gradual transition may work best.
Continuing involvement after succession

Will you have an ongoing role after the transition, perhaps in an advisory capacity? This is common among entrepreneurs. The longer they have been in control, the more personally attached they are and the more likely they will want to stay involved. This can gradually reduce the business’s dependence on you and may make it easier to separate your identity from the business role you’ve held for so long. It can also help you gradually transition into retirement.

Key decision 10: What will you do once you’ve retired?

Develop a plan to ensure your retirement is as successful as your business

Retirement planning requires you to consider a whole new lifestyle with new priorities and perspectives. A common misconception about retirement planning is the idea that money is the most important element and that you should focus your planning on creating after-tax cash flow. There are many other essential factors to consider.

Build an estate plan

If your business interests represent a significant part of your estate, have you thought about how the transfer of this wealth will affect you, your family, your relationships and your personal legacy? Family members may have played different roles in the business. Consider these differences when planning your estate and deciding how you will treat active and non-active family members; for example, equal versus fair treatment. In considering what income you will need, remember to provide for possible unplanned events. Try to be proactive in planning for an unforeseen event, such as a health crisis, and do your planning well in advance of your potential retirement date. Ensure you review your Will and Power of Attorney/Mandate on a regular basis so they continue to meet your estate planning objectives.

What are your plans after you exit your business?

As a business owner, the demands of running a successful business keep you very busy and engaged. Have you thought about how you want to spend your time after you retire? You may have a succession plan for your business, but do you have a plan to help ease the personal transition as well? It is a good idea to develop fulfilling new hobbies and interests while you’re still working. You have left your mark on a successful business. Now you have an opportunity to leave your mark on your community and other areas of interest that are important to you.

Discuss your personal goals with your family and friends if possible. Working together to plan for the next phase of your life can be beneficial for everyone. If you have a spouse who has not been involved in the business, their transition may be different from yours. Remember to include them and develop a post-retirement plan together. This should include fine-tuning your personal finances for the last few years before you retire to ensure you’re in good financial shape to proceed with your plans after you exit the business. Establishing clear personal goals will make this process simpler.

Financial considerations

There are a number of financial factors to consider as you plan your retirement. Tax and estate planning should be ongoing considerations throughout your working life to ensure that your plan continues to reflect your changing circumstances and is still on track to help you achieve your retirement goals. As a business owner, however, in addition to assessing your sources of retirement income, you will need to review your succession plan periodically to ensure that the projected proceeds from the sale or transfer of your business will last as long as your retirement does. It can be difficult to replace an income stream in later years. Remember to factor in the effect of inflation and consider strategies that can increase the value of the funds you will receive from the sale, well before your planned retirement date.

What are your sources of retirement income and when will they be available?

It’s important to understand your sources of retirement income and how much recurring income will be produced by these and by existing income sources. These could include the CPP/QPP, OAS, RRSPs, proceeds from the sale of the business, income from an ongoing interest in the business, income from a new business, an IPP or an RCA.

Consider how to manage these sources of retirement income to maximize their efficiency. Where will you obtain funds if you have a cash flow shortfall? A common strategy is to withdraw funds from non-registered investments before redeeming funds held in tax-sheltered plans. This ensures you continue to defer paying tax on registered investments and preserves the power of tax-free compounding as long as possible.

Your RBC advisor can help you decide how to draw on your various sources of retirement income in the most efficient manner to minimize tax, maximize flexibility and make the most of the available tax credits. They can also help you identify the issues that are relevant for your situation and keep your long-term financial plan on track.

Plan your retirement early

Will you need all the proceeds from the sale of the business to fund your retirement? Ensure your succession plan has taken this factor into account. How will you convert the funds received from the sale into an income stream so it’s available for you in retirement?

If you are transferring the business to family members, perhaps for little or no cost, your planning should incorporate this and the need to ensure that there will either be sufficient income from the business to meet everyone’s needs or that other sources of income will be available.

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