In this newsletter, we'll be unpacking the latest updates on the employment front in both Canada and the United States. Despite some changes, the labour situation in North America appears to remain healthy and stable - something we examine in more detail.
Our team's wealth planning expert Elvis Henrique is back, diving into a highly relevant topic for business owners - what are your options when it comes to surplus cash in your business? Elvis explores some of the factors to consider should you have a personal need for your surplus cash.
Lastly, we are sharing the latest episode from Matters Beyond Wealth - the first part in a conversation between Leanne Kaufman (President and CEO of RBC Royal Trust) and Dr. Sara Johnson (VP High Net Worth Planning Services at RBC Family Office Services), where they discuss the unique complexities of art collection and estate planning.
Economic Update
It has been a busy start to the summer: the Bank of Canada raised interest rates as expected, and inflation figures in the U.S. suggest pricing pressures continue to ease. Meanwhile, the second quarter earnings season has officially begun. We also recently received updates on the employment front in both Canada and the U.S. Overall, the labour situation in North America, despite marginal changes, remains healthy. We discuss this more below.
Canadian labour outlook remains healthy
The Canadian economy added 60,000 jobs in the month of June, predominantly in the retail, manufacturing, health care and social services sectors. The unemployment rate increased from 5.2% to 5.4%, an uptick largely driven by a growing labour force as Canada’s population surpassed 40 million for the first time. Wage growth registered at a healthy 4.2%, but that represented the slowest pace in over a year. According to the latest outlook survey by the Bank of Canada, labour availability has become less concerning for businesses. This is a notable change from recent years when access to labour was a dominant issue for most businesses.
US job market also healthy and stable
Meanwhile, the U.S. added 209,000 jobs in the month of June, led by the government, health care, social services, and construction sectors. While that figure was slightly lower than expected, it was offset by a near-historic-low unemployment rate of 3.6% and wage growth of 4.4% that exceeded expectations. The headline data suggest the job market remains tight, even with a slowing pace of job gains.
The 6-month moving average of monthly new jobs, which was close to 445,000 a year ago, is now down to roughly 278,000. Layoffs across the technology sector and some larger companies have garnered a lot of media attention but appear to be contained as the trend of weekly initial jobless claims, which refer to claims for unemployment benefits filed by newly unemployed individuals, has only gradually been moving higher this year.
All this suggests that like in Canada, the U.S. labour market remains healthy and stable, with pressures that are slowly moderating.
Job market having impact on economic resilience – but changes might be coming
Much of the North American economy’s resilience to date stems from a strong employment backdrop. Consumer demand, particularly for services, continues to be strong despite elevated interest rates and prices, thanks to plentiful jobs and rising pay. Emerging signs suggest companies who were recruiting intensely just a few years ago have shifted their plans. Some have taken things further by announcing layoffs. We expect this trend may persist and potentially lead to broader deterioration in the employment picture as more interest rate increases work their way through the economy. This could strain consumer demand and force more companies to recalibrate their workforce. In other words, the pendulum of job creation may be beginning to swing the other way, albeit slowly.
For these reasons, we maintain a cautious approach in managing our client portfolios and are patiently waiting to take advantage of opportunities as they arise.
Business Owners and what to do with Surplus Cash
As all business owners know, having surplus cash within your business is a great outcome for you and your business, but when you do have surplus cash, deciding on what to do with that cash and navigating your options can be challenging at times. This week, we’re taking a look at surplus cash within your business and some of the factors to consider when choosing a path forward.
What is considered surplus cash?
While the name is somewhat self-explanatory, it’s worth adding further context to what can be considered surplus cash.
We’re defining surplus cash as after tax business income that is not needed for any immediate business need, such as major capital expenditures, future tax installments, corporate debt paydowns, or other general business requirements. Using this definition your surplus cash would be funds that exceed your working capital requirements and be a good sign of financial health for Canadian Controlled Private Corporation (CCPC).
What happens next?
As part of your corporate tax planning strategy, this surplus cash would typically be moved into a holding company as a tax-free inter-corporate dividend where it can accumulate until required for a personal need or to be invested for the short or long term.
What are my options if I want to use these funds?
Every business owner’s need is unique and there is no silver bullet or “right” decision to be made here. However, here is a framework you can use to guide your decision making.
Below is a list of discussion points to consider before acting:
- What are your overall goals for the funds?
- - Are these funds required for an immediate need or will these funds be used for your retirement and estate planning goals?
- - If you have an immediate personal need for these funds, you will need to establish your withdrawal strategy – we’ll discuss this below.
- Are there income splitting factors to consider?
- - There is the ability through an investment holding company to potentially pay dividends to family members who are shareholders subject to certain rules. Does it make sense for you to use this mechanism?
- What investment options could make sense?
- - If you are planning on using these funds towards your wealth management objectives, consider your long-term goals and align your investment decision with your overall strategy.
- - Consider the tax implications of your investment decision! Investments that accrue interest income are taxed at a higher rate in comparison to dividends earned from Canadian corporations or from capital gains earned on the sale of capital property. Always consult with your accountant or tax advisor to understand what is best for your needs.
Determining your withdrawal strategy
There are many viable options to use surplus cash to enhance retirement, support estate planning goals, or building equity.
If you have decided to remove your surplus cash from your business or holding company for personal objectives, there are several different withdrawal strategies available to you. Each of these options have different benefits and limitations: choosing which option makes the most sense for you depends on the objectives identified from the discussion points. If you do not have a personal need then there are many retirement, estate and charitable giving solutions that are mentioned below.
Below is a handy chart that summarizes the available strategies:
It is worth noting that the options for the personal use of surplus cash for large items such as a home or a cottage are more limited and require thoughtful guidance from your tax advisor.
Expert advice
We always recommend consulting with your tax advisor, your financial planner, and investment advisor to understand what makes the most sense for your specific situation.
We are always available to speak with you about your options – if you have any questions or want to learn more, please get in touch with us and we’d be happy to discuss surplus cash options and implications with you.
Art: Unique assets in estate planning—Part one
Preserving your art for future generations goes beyond mere financial value because art carries personal and emotional significance.
Join Leanne Kaufman (President and CEO of RBC Royal Trust) as she discusses the unique complexities of art collection and estate planning with her guest, Dr. Sara Johnson (VP High Net Worth Planning Services at RBC Family Office Services).
Listen to part one of this series by clicking here.
Reminder - Summer Hours
A friendly reminder that Elinesky Schuett Private Wealth is recognizing summer work hours through to September 1st, 2023. Please note that during this time, our offices will be closing at 4pm on Fridays. Thank you for your understanding.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
