The business owner’s guide to wealth management - part 2

Oct 26, 2018 | Joshua Opheim


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Do you intend to retire from your 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.

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.
Long-term planning may not be uppermost in your mind when faced with your current day-to-day business challenges, but a business succession plan can improve the overall value of your business and help maintain its strategic direction. Setting goals and timelines helps keep you on track and forces you to think long-term. During the planning process you may also identify talented future leaders and others who could take on pivotal roles. You can then ensure they get the training and experience they’ll need when the time comes.
 
We can help you plan a successful retirement from your business and work with you to build a financial plan to help you reach your goals. Please contact us for more information.
Business planning quick tip Holding some of your retirement savings outside the business can reduce your risk. If you withdraw profits, they may be protected from future business losses. By paying yourself a salary, instead of taking dividends, you can benefit from a personal income tax deferral by contributing to an RRSP or an IPP. Your business is entitled to pay you a retiring allowance when you retire, whether you sell the business or pass it on to a family member. The allowance may qualify for a rollover to an RRSP on a tax-deferred basis, subject to certain limits. It’s also possible to incorporate insurance into your retirement strategy, for example, to help fund buy-sell agreements and maintain operations in case the business loses a key person, or cash values may be accessed to provide income.
The business owner life cycle

Will you sell your business?

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.
Business planning quick tip
Keep your business going strong right up until the time you sell it. The tendency among many business owners is to start winding things down as they approach their retirement date. However, an actively managed business that’s still growing will be much more attractive to potential buyers and will likely fetch a higher selling price.
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.
 
Tax minimization strategies
The following strategies may help you minimize the tax consequences when you’re selling your active business to an outside buyer. Some strategies must be undertaken well before the closing date, so remember to plan ahead.
 
  • If the purchaser is buying the shares of your business, you may be able to claim the capital gains exemption if your shares qualify as QSBC shares.

  • Consider the pros and cons of setting up an IPP or an RCA, which may help you defer some of the tax upon a future sale.

  • If you have a prospective purchaser of your unincorporated business, consider incorporating and selling the shares to utilize the capital gains exemption.

  • If the shares of your business are sold, consider reinvesting some of the proceeds in the shares of another active Canadian private company in the year of sale or within 120 days after the year of sale in order to defer some of the capital gains tax on the sale.

  • If the sale isn’t imminent and the value of your business is increasing, an estate freeze and reorganization of your corporation may allow future capital gains to accrue to other family members and possibly multiply the use of the capital gains exemption.

  • If you pay yourself a retiring allowance before the sale, you may be able to transfer a portion to your RRSP, tax-deferred, if you had years of service before 1996, irrespective of your available contribution room.

  • Use some of the sale proceeds to make a charitable donation in the year of sale. The donation tax credit may help you minimize the tax on any capital gains realized on the sale. If your donation is expected to be at least $25,000, then consider the benefits of setting up your own charitable foundation in the year of sale through the RBC Charitable Gift Program.

  • Consider receiving the sale proceeds over several years using a capital gain reserve to spread the gain and the resulting taxes payable over a longer period of time.

  • If you are selling to management or employees, consider setting up a share purchase plan to facilitate the transition. This type of plan can help you ease into the transition and allow them to fund the purchase over time.

Please ask us for more information on making the most of your business sale proceeds for your retirement. We can help you develop a comprehensive financial plan and provide a wide range of retirement planning and investment services.
The RBC Charitable Gift Program is specifically designed for individuals and families wishing to support charitable causes in a meaningful way, without the time and cost associated with establishing a private foundation. It is an easy and convenient way to support charitable causes you care about, today and in the future, while receiving important tax benefits. Through this program, you can make initial and ongoing contributions to a charitable gift fund administered by the Charitable Gift Funds Canada Foundation (CGFCF), one of the leading charitable foundations in the country. Ask your us for our brochure on the RBC Charitable Gift Program and how this form of charitable giving may be right for you.

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How can you keep your business in the family?

While management buyouts are often more successful than passing the business to family members or third parties, this may not be the case for all industries and businesses. Owners of businesses employing family members often place significant importance on keeping the business in the family compared to owners of businesses not employing family members. This is particularly so for agriculturally based businesses. Many small and medium sized enterprise owners employ at least one family member, and statistically, family businesses often play a bigger role in local communities, place greater emphasis on customer loyalty and foster a culture of shared values. This may allow for a successful and smoother transition.
 
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.
 
Plan for contingencies
Incorporate personal planning considerations into your succession plan. Have you prepared a Will and a Power of Attorney/Mandate? Who will run the business if you become incapable of doing so or pass away before the transition? Should you have a buy/sell agreement in place? Your tax planning may also include discussion of family trusts, estate freezes and structuring your business succession to maximize the capital gains exemption.
 
Business planning quick tip Family businesses have increasing rates of failure with each successive generation due to lack of realistic planning. Take a hard, honest look at the capabilities and interests of your younger family members. Are they really capable of taking over the family business? Do certain family members have more aptitude and interest than others? Or is someone outside the family a better choice? Once you’ve made your decision, start grooming your successor right away, giving them progressively more responsibility. As you approach your retirement date, give them the lead in planning the succession, which can improve the odds of a successful transition.
Benefits of a business succession plan
Business owners who implement a succession plan well in advance report significant benefits. The business enjoys improved financial stability as it moves through a well-planned and managed transition, and relationships with employees and family members also benefit. A large percentage of business owners feel that a succession plan has helped them provide for their family’s future, and many report that they have been able to minimize their future tax liability and improve their business’s financial stability. Those who acquired their business through succession agreed that succession planning yielded significant benefits and helped prepare them for their future as a business owner.
 
Please contact us for more information on successfully “handing over the reins” of your family business to the next generation.
 

What will you do once you’ve retired?

If you should ever think of retiring from your business, like many successful business owners, you may need help with retirement and tax planning matters. If your work has consumed much of your daily activities, the transition from this busy and demanding working life into retirement can be a challenge.
 
Give some thought as to how you and your spouse will spend your time in retirement and develop a plan to ensure that your new life will be fulfilling. This doesn't necessarily mean leisure and recreation. You could have an ongoing role in the business, become involved in a new one or work with a charity, non-profit organization or in the community.
 
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.
 
We 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. We 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.
 
At the Opheim Wealth Management Group we can help you design your financial plan, maximize your after-tax income streams and help you estimate how much wealth you will need for retirement. This will also help you determine whether you will have any surplus and, if so, how much. If there is a significant surplus, we can help you plan the transfer of this wealth to your intended beneficiaries in the most appropriate and tax-efficient manner.
 

Special tax rules for farmers and fishermen

Tax-deferred transfers to family members
If you own certain qualified farm or fishing property located in Canada that you use directly for your farming or fishing business, you may be able to transfer the property to your children on a tax-deferred basis during your lifetime, or when your estate is settled. This also applies when a family corporation or an interest in a family partnership is transferred from a parent to their child.
 
If your business qualifies for a tax deferred transfer at the time of death or if you choose to transfer it during your lifetime, you may be able to postpone the payment of tax on any taxable capital gain until the child sells the property. You can also transfer such business property to your spouse or common-law partner during your lifetime and potentially postpone payment of tax on capital gains until your spouse decides to sell.
 
The capital gains exemption
A capital gains exemption may be available on the sale of your qualifying farm or fishing property, subject to some conditions. If your business meets the “ownership and usage” criteria, you may be eligible for the exemption. If you have previously claimed the exemption on a disposition of qualified property, the amount you claimed will reduce the amount of exemption available on the sale or transfer of your farm or fishing property.
 
If you transfer the property to a qualifying family member at its fair market value or at less than fair market value, there may be an opportunity to multiply the use of the capital gains exemption. Talk to your professional legal and tax advisors to determine whether these opportunities could work for you and your business.
 
Who will inherit/purchase the family business?
When deciding who will inherit your family farming or fishing business, there are many factors to consider. The choices you make can determine how the business will prosper in the years ahead, so take some time for discussions with family members. A large percentage of agricultural businesses consider it important to keep the business in the family, but relatively few family businesses survive to the second generation.
 
Do you intend to retire from the business and pass it on to the next generation during your lifetime, or on your death? If one of your children/ grandchildren is to take over the business, ask yourself whether they have the business acumen, experience or desire to do so successfully. If there are several children in the family, are any other children likely to be involved in the ongoing ownership and management of the business, and, if not, are you making other arrangements for these children?
 
Have other family members made a commitment to the business, financial or otherwise, or a contribution that you should recognize?
 
Determining what is fair
Treating your children fairly does not necessarily require that you provide each of them with an identical inheritance. If only one of your children will inherit the business, and there are insufficient funds to provide an equivalent-sized inheritance to your other children, try to structure a division of property that is fair to everyone.
 
If there are children who are not involved in the farming/fishing business, have you already provided gifts to these children? For example, have you funded their university education? Can they inherit nonbusiness assets? If any of them already hold an interest in the business, have you provided for this in the transfer arrangements? In some cases you may be able to structure more equivalent sized inheritances for each of your children through the use of life insurance policies.
 
Depending on the circumstances, you may wish to transfer to the farming or fishing child only those assets that are essential for the economic viability of the business. To ensure the transfer is fair to all your children, consider the resale value of the assets transferred, the profit your business successor is likely to make and the contribution that person may have already made to the business.
 
Is the business profitable enough to support more than one household?
When you transfer the business during your lifetime, remember to take into account the financial position of all the households involved. If you are to receive a lump-sum capital payment, when will it be paid and will it involve indebtedness for the transferee household? What level of debt repayment can they tolerate and what rate of debt repayment can you accept that will provide you with adequate retirement income? Consider your household’s lifestyle needs and retirement goals and factor in any financial commitments you have made to any children in the family, other than those you have transferred the business to.
 
Think about the transition period
Will you retain control of the business for a period of time? Consider the structure of the new business, for example, a partnership or a corporation. Will you continue to be involved, perhaps as a manager, and, if so, for how long? Give some thought as to how responsibilities will be divided in the new business. There may be matrimonial circumstances affecting the children who are taking over the business. Are there safeguards in place to prevent the family business from being adversely affected by a matrimonial dispute or marriage breakdown?
 
We can help you collect the information you will need in the decision-making process and review the critical issues of the business transfer to ensure your retirement goals remain on track.  We can also work with you to invest the proceeds of sale in a manner that’s consistent with your needs and goals and, if necessary, act as an objective third party to help you identify issues that may need to be addressed. Ask us how this kind of succession planning could work for your business.

Incorporating your professional practice

There are significant differences between a professional corporation and other corporations.

If you are a professional such as a doctor, dentist, lawyer or accountant, you might consider the advantages of incorporating your practice if you haven’t already done so. Incorporation is permitted by certain professional regulatory bodies, and may provide potential tax savings and tax-deferral benefits. It may also enable you to take advantage of enhanced retirement plans such as IPPs or RCAs.
 
Characteristics of professional corporations
There are significant differences between a professional corporation and other corporations. A professional corporation is generally subject to the rules and guidelines of the regulatory body governing its profession. These include restrictions on the name of the professional corporation and who may be named as a voting shareholder. For example, in some provinces and territories, only members of the same profession can be voting shareholders of a professional corporation. Generally, the officers and directors of the corporation must also be voting shareholders. Before deciding to incorporate your practice, make sure you understand the regulatory guidelines applying to your profession in your province/territory.
 
Advantages of professional incorporation
There are a number of potential benefits to incorporating your professional practice. You may be able to:
 
  • Enjoy potential tax savings due to the reduced federal and provincial/ territorial corporate tax rate that applies to active business income

  • Benefit from the tax-deferral opportunities of the corporate taxation structure and use the additional funds in the corporation to pay off debt, purchase capital assets, acquire investments or fund an insurance policy

  • Take advantage of the capital gains exemption available on the sale of shares of a professional corporation, provided certain conditions are met 

  • Achieve potential tax savings through a number of income splitting strategies, depending on your province/territory of residence

  • Limit your commercial liability to trade creditors

  • Choose from flexible remuneration options depending on your province/territory of residence

Planning for retirement
Professional incorporation provides retirement benefits not available to sole proprietors or partnerships, including the ability to establish IPPs and RCAs. These retirement savings vehicles can greatly enhance your retirement benefits and potentially provide creditor protection.
 
Considerations
In addition to the many advantages offered by professional incorporation, there are some considerations to bear in mind. The costs of establishing and maintaining a professional corporation can be higher than those of a sole proprietorship. There are greater tax filing and compliance obligations. You can’t use business losses to offset your income from other sources. And you may also have to pay a health tax levy when your corporate payroll exceeds a certain level (depending on the province/territory).
 
Creditor protection
If you decide to incorporate, you should also keep in mind that a professional corporation can only protect you against business creditors and not personal liability for professional negligence. Consider investing in malpractice insurance and other creditor protection strategies such as setting up an IPP inside the corporation.
 
We can help you implement several strategies made possible by professional incorporation, including IPPs and RCAs. Please contact us for more information.
Business planning quick tip
There are several strategies incorporated professionals can consider to reduce taxes. However, there is at least one tax strategy available to unincorporated professionals – “cash damming”. With cash damming, you convert the interest on your personal debts to a tax-deductible business expense by using the revenue from your business to pay off your personal debts. You then use a separate line of credit or other loan facility exclusively to pay your business expenses. If you would like to learn more about how this strategy works, please ask us for more information.
 

 

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