10 Essential Decisions for Business Owners

10 Essential Decisions for Business Owners

Business owners can be busy… they’re busy running a successful business, wearing lots of hats and making a ton of decisions. We’ve put together a list of 10 essential decisions for every business owner to consider.

10 essential decisions for a business owner from considering corporate structure to retirement and succession planning. 

The essential questions include:

  • Best structure for your business (ex. Sole Proprietor, Corporation, Partnership)

  • Reduce taxes

  • What to do with surplus cash

  • Build employee loyalty

  • Reduce risk

  • Deal with the unexpected

  • Retire from your business

  • Sell your business

  • Keep your business in the family

  • What to do when you’re retired

As a financial advisor, we are uniquely positioned to help business owners, talk to us about your situation and we can provide the guidance you need.

The Difference between Segregated Funds and Mutual Funds-Infographic

Segregated Funds and Mutual Funds often have many of the same benefits such as:  

  • Both are managed by investment professionals. 

  • You can generally redeem your investments and get your current market value at any time. 

  • You can use them in your RRSP, RRIF, RESP, RDSP, TFSA or non-registered account. 

There are key differences including:

  • Contract

  • Fees

  • Guarantees

  • Resets

  • Creditor Protection

  • Probate

Contract:

  • Segregated Funds: Policy owner, Annuitant and Life Insurance company

  • Mutual Funds: Account holder, Mutual fund and Investment Company

Fees

  • Segregated Funds: Management Expense Ratio & Insurance Fee (Typically higher)

  • Mutual Funds: Management Expense Ratio

Why is this important?  

  • Since Segregated funds are offered by life insurance companies, they are individual insurance contracts. Which means….

  • Maturity Guarantees

  • Death Benefit Guarantees

  • Maturity and death benefit resets

  • Potential Creditor Protection (depends on the setup)

  • Ability to Bypass Probate

Mutual Funds do not have these features with the exception of possible creditor protection of RRSP, RRIF dependant on provincial legislation.

What are these features?

Maturity and Death Benefit Guarantees mean the insurance company must guarantee at least 75% of the premium paid into the contract for at least 15 years upon maturity or your death. 

Resets means you have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment.

Potential Creditor Protection is available when you name a beneficiary within the family class, there are certain restrictions associated with this. 

Bypass Probate: since you name a beneficiary to receive the proceeds on your death, the proceeds are paid directly to your beneficiary which means it bypasses your estate and can avoid probate fees. 

We can help you decide what makes sense for your financial situation. 

Importance of a Buy-Sell Agreement

Starting a new business venture can be both exciting and nerve-racking at the same time. The hopes and dreams of success, financial freedom and being your own boss are accompanied by many uncertainties and risks. To add to some of the anxiety, comes the facts: about half of all new businesses will not be around within the next 5, and only about one third will survive 10+ years. The situation often becomes more complex when there are multiple owners and the future success of a business is at risk if proper planning is not done. The unexpected ‘exit’ of a partner due to death, disability, illness, retirement or just simply that ‘it’s not working out’ can create a very difficult situation for the remaining business owner(s) and the business itself. Many businesses operate under a ‘handshake’ sort of agreement, but those rarely are upheld when the situation starts to get challenging. In order to protect against all of these pitfalls, it is always advised to have the right structure in place to address any potential challenges that may arise. This is done through incorporating a Buy-Sell Agreement between the owners.

What is a Buy‐Sell Agreement?

A buy-sell agreement is a legally binding contract designed to establish a set of rules or actions for the remaining business owner(s) to carry on the business, in the event one of them is no longer involved in the business – this can be due to death, illness, injury, retirement or a simple desire to ‘get out’. In other words, this document dictates how the remaining owner(s) will interact with each other and how the business will operate when certain situations occur. This agreement creates certainty and a ‘game plan’ in case one or more of the partners are no longer able or willing to commit to the business.

Types of Buy‐Sell Agreements

Buy-sell agreements are generally structured as a cross purchase agreement, promissory note agreement, or a share redemption agreement.With a cross-purchase agreement, each shareholder within the agreement agrees to purchase a specified percentage of the shares owned by the departing shareholder, and if it’s due to death, the deceased shareholder’s estate is obligated to sell the shares to the remaining shareholder(s). A shareholder will generally purchase insurance on the life of the other shareholder(s) and on death, will use the proceeds from the insurance to buy out the remaining shares from the deceased shareholder’s estate.With a promissory note agreement, corporate owned life insurance is placed on the life of each shareholder, with the corporation named as the payor and beneficiary. In the event that a shareholder dies, the surviving shareholder(s) purchases the deceased’s shares from their estate using a promissory note. Once the remaining shareholder(s) owns the deceased shareholder’s shares, the company collects the death benefit on the insurance policy with the excess amount above the adjusted cost basis of the policy in the capital dividend account. The company then provides the surviving shareholder(s) a capital dividend which provides the remaining shareholder(s) the necessary funds to pay off the promissory note.Under the share redemption arrangement corporate owned life insurance is placed on the life of each shareholder with the corporation named as the payor and beneficiary. In the event that a shareholder dies, the company collects the insurance proceeds and places the excess amount above the adjusted cost basis of the policy in the capital dividend account. The company uses the proceeds in the capital dividend account to redeem the shares held by the deceased shareholder’s estate. Once that is done, the remaining shareholder(s) takes over the ownership of those purchased shares.Each structure has their advantages and disadvantages and should be reviewed with a legal professional, tax professional as well as a knowledgeable Financial Advisor.

Why the business needs a buy‐sell agreement

A buy-sell agreement is a crucial component of a business that should be incorporated to protect the shareholders as well as the business itself. It is designed to ensure important things are taken care of if someone leaves the business for whatever reason, so that the business can continue to grow and run successfully. A buy-sell agreement offers several key benefits to your business:

  • It maintains the continuity of your business by ensuring members get to decide what happens to the business before any problems arise.

  • It protects company ownership by laying out a succession plan for departing members. This keeps remaining shareholders from being burdened by untested and unproven successors (like the widow or children of the departing co-owner).

  • It minimizes dispute between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations.

  • It alleviates co-owner stress and uncertainty by specifically identifying which events would trigger a buyout.

  • It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement.

  • It protects the interest of, not just the business entity itself, but also that of the business owners to ensure members (and their families, in the event of death or disability) are handled with respect, courtesy and the utmost fairness.

What to include in the buy‐sell agreement

Since a buy-sell agreement is a legally binding document, it generally should be drafted with a knowledgeable and experienced Legal Professional. Most agreements are started through a generic template, but then are customized for the needs of each business/partner and can be a fairly thorough and comprehensive document. There are several different components of a buy-sell agreement and several different aspects need to be addressed, such as the valuation of the company, ownership interests, buy-out clauses, and terms of payment. The agreement should generally be drafted at the very start of the business, so as to avoid any issues or misunderstandings later on. The agreement will also address certain ‘triggering events’, which are listed below.

Disagreement

Conflict between owners of a business in regards to the direction or management of the business can sometimes occur, and can even push the most successful business off-course. In a situation where no agreement or mediation can be reached, it may make sense to allow for one or more of the partners to be bought out. This would allow the business to continue moving forward and is often referred to as a ‘shot-gun clause’. Sometimes a situation where one owner offers to buy-out the other would also offer to be bought-out for the same value, thus ensuring fair treatment and value of the shares.

Divorce

An owner who is in the midst of a divorce may be bought-out by other partners, to protect the company ownership. A divorce settlement will generally depend on the partner’s share of the business. It’s not uncommon for a family law judge to order a business owner to split his or her interest in a company with the former spouse. To protect the business from this event, a clause should require the shares held by the former spouse of a partner to be acquired by the company or one of the other owners.

Retirement

The value of the business comprises a significant component for the retirement of many business owners. Allowing the remaining partners to reclaim the interest in the business keeps the business intact and provides the retiring partner with a market to liquidate their ownership, thus providing the retiring partner with a cash infusion to enjoy their retirement. There may also be some distinction in the agreement between early retirement and regular retirement and how the shares of the departing owner are to be valued.

Bankruptcy

Borrowing money to expand or grow the company, or to purchase equipment or goods, is common for many companies. However, lending institutions often require personal guarantees from the owners/shareholders of the business. Having one or more owners that are not able to provide this guarantee can lead to higher fees and impact the overall financial well-being and growth of the business. Therefore, a provision should be considered to allow the other shareholders the opportunity to acquire shares of the defaulting shareholder(s).

Disability

An owner who has become disabled and unable to perform their duties can impact the overall well-being of the business. The agreement should address several situations and questions, such as whether the partner will continue to receive a salary, and for how long, or whether they will continue in the day-to-day management of the company.The buy-sell agreement also needs to clearly define what is considered a disability and should include a timeline for which the disabled partner would be given the opportunity to return. Often the business will purchase disability buy-sell insurance and link the definitions to the plan. This has the added benefit of providing an independent third party to determine when the criteria for the buy-out are satisfied.

Death

The death of a partner is an unfortunate and difficult situation for both the family and business partners alike. To deal with the stress of continuing the business, establishing the rules of business continuity upon death provides peace of mind to both the surviving partners and the family of the deceased. The surviving partners benefit from the assurance of not having to deal with an unwanted partner and the family is assured that they will be treated fairly.Generally, all partners/co-owners will be covered by a ‘key person’ life insurance policy, which can be paid by either the company or the other partners, where the death benefit would be used to buy out the deceased owner’s shares (as mentioned above).

Funding the buy‐sell agreement

Without sufficient resources to fund a potential buy-out, the agreement itself can fall apart. The partners need to decide where the money will come from to complete the buy-out – whether it will be the responsibility of individual owners or from the company itself. While not all events can be protected, two can: the death and disability of a shareholder. By using an insurance policy, funds can be made available at the time they are needed, thus minimizing potential liquidity issues, protecting the business and the impacted shareholders, as well as the family of the deceased shareholder. Using insurance provides the protection needed at a fraction of the cost to the alternatives and can provide immediate capital and significant tax benefits.

Working as a partnership between 2 or more individuals is never an easy task, and the situation only gets more complicated when one or more of them exits the business. Protecting not only the business, but your personal interests, as well as your family’s future are very important objectives for any business owner, and should not be overlooked. Although no business can be certain of success, there are strategies and structures that can help protect the business from failure in the future. Working with a knowledgeable and experienced Financial Advisor, Legal Professional and Tax Professional, you can be assured that you can have the proper Buy-Sell Agreement in place so that all parties involved benefit.

Tax Lines to Look Out for 2018 Income Tax Year

Tax Lines to Look Out for:

2018 Income Tax Year

It’s that time of year again, when many of us sit down to complete our income tax return and hope that we have done enough preparation to ensure a smooth tax return. We’ve outlined the key lines to look out for in the 2018 Income Tax Year:

Expenses relating to medical expenses have been expanded to include service animals and can be claimed for non-refundable tax credit. You should also be aware that you can claim for yourself, your spouse or common law partner and any dependent children under the age of 18.

Tax on Split Income (TOSI) (Line 424)

As of January 1, 2018, in addition to applying to certain types of income of a child born in 2001 or later, TOSI may now also apply to amounts received by adult individuals from a related business.

Interest Expense & Carrying Charges (Line 221)

Any fees paid for specific advice about your investments or for tracking your income from investments.

Any fees paid for management of your investments, except administration fees paid for your registered retirement savings plan or registered retirement income fund.

Interest you paid to borrow when borrowing to invest for investment income only except if investment income is considered capital gains.

Insurance policy loan interest you paid in 2018 to make income. To claim this amount, the insurance company must complete Form T2210 before your tax return deadline.

Carry forward information (Line 208 and 253)

If you are not deducting all your RRSP contributions you made in 2018 and the beginning of 2019, your unused contributions can be carried forward.

Generally, if you had an allowable capital loss in a year, you have to apply it against your taxable capital gains for that year. If you still have a loss, it becomes part of the computation of your current year net capital loss. You can use a current year net capital loss to reduce your taxable capital gains in any of the 3 preceding years or in any future year. Capital losses can be carried forward indefinitely and are only deductible against capital gains.

Charitable Donations

As of January 1, 2018, the first-time donor’s super credit has been eliminated.

If you owe money when your income tax return is complete, the only way to delay payment is to delay the filing until the April 30th deadline. Alternatively, if CRA owes you money, then file as early as possible.

This article and infographic are for illustrative purposes only. You should always seek independent legal, tax, financial and accounting advice with regard to your situation.

2019 Federal Budget

2019 Federal Budget

The 2019 budget is titled “Investing in the Middle Class. Here are the highlights from the 2019 Federal Budget.

We’ve put together the key measures for:

  • Individuals and Families

  • Business Owners and Executives

  • Retirement and Retirees

  • Farmers and Fishers

Individuals & Families

Home Buyers’ Plan

Currently, the Home Buyers’ Plan allows first time home buyers to withdraw $25,000 from their Registered Retirement Savings Plan (RRSP), the budget proposes an increase this to $35,000.

First Time Home Buyer Incentive

The Incentive is to provide eligible first-time home buyers with shared equity funding of 5% or 10% of their home purchase price through Canada Mortgage and Housing Corporation (CMHC).

To be eligible:

  • Household income is less than $120,000.

  • There is a cap of no more than 4 times the applicant’s annual income where the mortgage value plus the CMHC loan doesn’t exceed $480,000.

The buyer must pay back CMHC when the property is sold, however details about the dollar amount payable is unclear. There will be further details released later this year.

Canada Training Benefit

A refundable training tax credit to provide up to half eligible tuition and fees associated with training. Eligible individuals will accumulate $250 per year in a notional account to a maximum of $5,000 over a lifetime.

Canadian Drug Agency

National Pharmacare program to help provinces and territories on bulk drug purchases and negotiate better prices for prescription medicine. According to the budget, the goal is to make “prescription drugs affordable for all Canadians.”

Registered Disability Savings Plan (RDSP)

The budget proposes to remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit. (DTC) and the requirement for medical certification for the DTC in the future in order for the plan to remain open.

This is a positive change for individuals in the disability community and the proposed measures will apply after 2020.

Business Owners and Executives

Intergenerational Business Transfer

The government will continue consultations with farmers, fishes and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses.

Employee Stock Options

The introduction of a $200,000 annual cap on employee stock option grants (based on Fair market value) that may receive preferential tax treatment for employees of “large, long-established, mature firms.” More details will be released before this summer.

Retirement and Retirees

Additional types of Annuities under Registered Plans

For certain registered plans, two new types of annuities will be introduced to address longevity risk and providing flexibility: Advanced Life Deferred Annuity and Variable Payment Life Annuity.

This will allow retirees to keep more savings tax-free until later in retirement.

Advanced Life Deferred Annuity (ALDA): An annuity whose commencement can be deferred until age 85. It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.

Variable Payment Life Annuity (VPLA): Permit Pooled Retirement Pension Plans (PRPP) and defined contribution Registered Retirement Plans (RPP) to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.

Farmers and Fishers

Small Business Deduction

Farming/Fishing will be entitled to claim a small business deduction on income from sales to any arm’s length purchaser. Producers will be able to market their grain and livestock to the purchaser that makes the most business sense without worrying about potential income tax issues. This measure will apply retroactive to any taxation years that began after March 21, 2016.

To learn how the budget affects you, please don’t hesitate to contact us.

Financial Planning for Business Owners

Financial Planning for business owners is often two-sided: personal financial planning and planning for the business.

Business owners have access to a lot of financial tools that employees don’t have access to; this is a great advantage, however it can be overwhelming too. A financial plan can relieve this.

A financial plan looks at where you are today and where you want to go. It determines your short, medium and long term financial goals and how you can reach them. For you, personally and for your business.

Why do you need a Financial Plan?

  • Worry less about money and gain control.

  • Organize your finances.

  • Prioritize your goals.

  • Focus on the big picture.

  • Save money to reach your goals.

For a business owner, personal and business finances are connected. Therefore both sides should be addressed: Personal and Business.

What does a Financial Plan for a Business include?

There are 2 main sides your business financial plan should address: Growth and Preservation

Growth:

  • Cash Management- Managing Cash & Debt

  • Tax Planning- Finding tax efficiencies

  • Retaining & Attracting Key Talent

Preservation:

  • Investment- either back into the business or outside of the business

  • Insurance Planning/Risk Management

  • Succession/Exit Planning

What does a Personal Financial Plan include?

There are 2 main sides your financial plan should address: Accumulation and Protection

Accumulation:

  • Cash Management – Savings and Debt

  • Tax Planning

  • Investments

Protection:

  • Insurance Planning

  • Health Insurance

  • Estate Planning

What’s the Financial Planning Process?

  • Establish and define the financial planner-client relationship.

  • Gather information about current financial situation and goals including lifestyle goals.

  • Analyze and evaluate current financial status.

  • Develop and present strategies and solutions to achieve goals.

  • Implement recommendations.

  • Monitor and review recommendations. Adjust if necessary.

Next steps…

  • Talk to us about helping you get your finances in order so you can achieve your lifestyle and financial goals.

  • Feel confident in knowing you have a plan to get to your goals.

Financial Planning for Business Owners

Financial Planning for business owners is often two-sided: personal financial planning and planning for the business.

Business owners have access to a lot of financial tools that employees don’t have access to; this is a great advantage, however it can be overwhelming too. A financial plan can relieve this.

A financial plan looks at where you are today and where you want to go. It determines your short, medium and long term financial goals and how you can reach them. For you, personally and for your business.

Why do you need a Financial Plan?

  • Worry less about money and gain control.
  • Organize your finances.
  • Prioritize your goals.
  • Focus on the big picture.
  • Save money to reach your goals.

For a business owner, personal and business finances are connected. Therefore both sides should be addressed: Personal and Business.

What does a Financial Plan for a Business include?

There are 2 main sides your business financial plan should address: Growth and Preservation

Growth:

  • Cash Management- Managing Cash & Debt
  • Tax Planning- Finding tax efficiencies
  • Retaining & Attracting Key Talent

Preservation:

  • Investment- either back into the business or outside of the business
  • Insurance Planning/Risk Management
  • Succession/Exit Planning

What does a Personal Financial Plan include?

There are 2 main sides your financial plan should address: Accumulation and Protection

Accumulation:

  • Cash Management – Savings and Debt
  • Tax Planning
  • Investments

Protection:

  • Insurance Planning
  • Health Insurance
  • Estate Planning

What’s the Financial Planning Process?

  • Establish and define the financial planner-client relationship.
  • Gather information about current financial situation and goals including lifestyle goals.
  • Analyze and evaluate current financial status.
  • Develop and present strategies and solutions to achieve goals.
  • Implement recommendations.
  • Monitor and review recommendations. Adjust if necessary.

Next steps…

  • Talk to us about helping you get your finances in order so you can achieve your lifestyle and financial goals.
  • Feel confident in knowing you have a plan to get to your goals.

The Buy-Sell Agreement a.k.a. The Elephant in the Room

Financial independence and the idea of being “your own boss” leads many Canadians to go into business for themselves in a passionate attempt to bring their dream to reality. In order to raise the start-up capital and resource the business with the necessary skill sets to give the company the best chances of success, it often involves more than one shareholder.