10 Ways to Build Wealth in Your Business To Fund Your Exit Strategy

Business owners work hard at perfecting their business to make a living, earn a profit and ultimately sell or transition the business to another group of owners or family members. At the end of the year, our income statements and balance sheets generally indicate whether we were successful. You work incredibly hard to streamline operations, manage costs and perfect processes to leverage your ability to build wealth for yourself and your family. If you’re successful in building your business and making it profitable, wouldn’t you want to ensure to get money out of your business tax-effectively and efficiently?

Also, you want to mitigate against something getting in the way of those long-term plans. You want to ensure you create business wealth management for your organization. Also, you want to create a business exit strategy that you control and allows for the maximum sale price for your company when it becomes time to sell.

Whether you are looking at creating a business retirement plan, starting a business exit strategy, creating tax deferral strategies or creating better corporate financial planning, these tips will help you get to that financial sweet spot.

Tip #1: Managing For the Unexpected

When a business owner is asked, “what is your biggest financial asset?” many will say their business. But in actuality, it’s the business owner’s ability to earn a future living. Many business owners, especially in the earlier stages, are integral to their company’s success and growth. If the business owner were to become disabled, sick or die, their family’s future, business, and employees would take a precarious path. Ensuring that business interruption insurance, critical illness, disability and life insurance are discussed, and contingency plans are laid out if such a tragic occurrence occurs.

Tip #2: Start Your Succession Planning Early

Creating the right business exit strategy takes time to occur. Having a potential successor to the business is only part of the equation. Agreeing to the right purchase price, the seller is content with it, and the buyer is willing to pay a huge consideration. Often the two parties are emotionally years apart. Leveraging a permanent life policy can soften the buyer’s sticker shock, but the seller is far more likely to get the price they demand. Succession plans take time to come together. If undertaking overpaid insurance policies, the discussions must take place at least a decade in advance for this strategy to succeed.

Tip #3: Minimizing Your Tax Obligation

We are not talking about bilking the government out of their pound of flesh but legitimate strategies to either defer paying taxes or significantly reduce your tax load. For example, utilizing a Pension Plan for business owners or leveraging permanent life insurance can dramatically reduce your tax payables.

Tip #4: Utilizing Alternative Capital Solutions

The cost of capital can be the lifeline for business owners. When you don’t need them, the bank is there and nowhere to be found when you need financial alternatives. Secondary lenders may be more lenient, but borrowing can be expensive. Paying yourself in the form of a permanent life insurance policy can be tax favourable and tax-deferred growth and expense to the business. Shareholder buyouts and succession plan strategies should consider leveraging insurance as an alternative strategy.

Tip #5: Setting Up Your Own Individual Pension Plan

Setting up a private pension through your business is a concept introduced previously. Creating a Pension Plan for business owners has allowed greater flexibility regarding contributions on a year-to-year basis. There are many tax and contribution advantages for the IPP over RRSPs. The PPP or IPP has been called a supercharged RRSP for business owners. So now, a business owner can take advantage of those outstanding years and hold off in those leaner years. The IPP can still benefit business owners or professionals on a fixed and more predictable income. Still, the IPP has proven to be a better pension option for most business owners with unpredictable cashflows and income fluctuations. Here’s a great video to explain the benefits.

Tip #6: Retirement Plans For Business Owners

If you are taking a salary of at least $162,000 (RRSP maximum level for 2022) and utilizing the full level of an IPP or PPP, consider an IRP. An IRP (Individual Retirement Plan) owned by your corporation grows tax-free (whereas investments within your corporation are taxed at the highest corporate tax level.) Depending on how you want to access the cash value within an Insurance Retirement Plan, you can access it or leverage it in a tax-advantageous manner.

Tip #7 Corporate Charitable Giving

Donating to charities is a way to benefit your favourite cause and an opportunity to receive a substantial corporate tax credit. So, when given a choice, would you rather donate to a cause you’re passionate about and build a tremendous legacy for yourself and your family, or pay taxes to the government? Here are some significant opportunities to consider when donating to a charity.

Tip #8: Is Dividending or Bonusing Out Profits The Best Solution?

When a business owner dividends or bonuses out profits at the end of the year, they receive this money and pay taxes at their highest marginal tax rate. In Ontario, that could mean as much as 53.53% in taxes! Exploring alternatives like an Individual Pension Plan or an Insured Retirement Plan may make much better long-term sense for your financial well-being.9

Tip #9: Building Creditor-Protected Assets

As Business Owners, we protect our personal and business assets, but this is only sometimes possible. We can keep assets in a Holding Company (moving assets from our Operating company) to help safeguard against creditors in case of a lawsuit. You may want to further protect your assets by keeping them in a segregated fund, creating an Insurance Retirement Plan within your HoldCo or sheltering your pension within a Personal Pension Plan or Individual Pension Plan or setting up a Retirement Compensation Arrangement. Although no means is entirely foolproof, this will create an added layer of protection for your hard-earned money.

Tip #10: Set Up a Health Care Spending Account

Many business owners provide benefit plans for their employees. There is a tremendous cost to a business in doing so. Many plans are not comprehensive and often include copays and deductibles. Many business owners have themselves on the regular employee benefit plan and thus are subjected to the same plan exclusions and copays. These exclusions, (including orthodontics, glasses, major dental or paramedical practitioners) are often paid for in after-tax dollars. These out-of-pocket, after-tax benefits can be run through the business as a legitimate business expense, provided that the costs are fair and reasonable. The best means of doing this is through a Health Spending Account available through any number of adjudication and administrative service providers.

CONCLUSION:

Many of the concepts discussed in this blog were foreign to me when I owned my last business. If I had undertaken even a few of these ideas, my financial situation would have been much different when we closed the company. Whether your motivation is protecting your family, business or retirement, all of these ideas should be explored and considered.

Only some solutions may be appropriate for your situation, but it’s essential to understand some of the opportunities available to you as a business owner. It’s also crucial to consult with your Business Financial Advisor to ensure that these corporate tax planning strategies are appropriate for you and your business.

If you find these concepts valuable, I encourage you to subscribe to my blog, and you’ll be sent our newest post upon publication.

Chris Coulter is the Founder and President of The Finish Line Group. Chris works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies and allow them to create a strategy to exit their businesses on their terms. Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing many opportunities to create significant wealth. Chris found out the difficult way and now educates business owners on avoiding many of his former oversites and ultimately controlling their finish line.

Building Wealth

Owning and operating a business requires lots of hard work, sacrifice, and risk-taking. Although entrepreneurs certainly deserve to be paid well for their efforts, tax laws can make it extremely difficult for them to pay themselves without handing over a bunch of money to the government. Without guidance, building wealth as a business owner can be just as much of a challenge as running the business itself.

Chris Coulter is a former mid-sized business owner who became a financial advisor after the 2008 stock market crash. He knows first-hand how difficult it can be to "pay yourself”, and is committed to helping business owners achieve their financial goals while avoiding costly mistakes.

On this page, we have included information about the common challenges that business owners face throughout the life cycle of their organization when it comes to building wealth, and how business owners can pay themselves more and the government less.

Start-Up Phase
Growth & Profitability Phase
Succession Planning & Exit Strategy Phase
Legacy Phase

“Chris showed me some strategies that will help keep a lot more money in my pocket when I decide to slow down one day. He’s helped to safeguard my future income and significantly grow my retirement income with some unique and clever strategies.”

Jim R, Founder & Owner, Media Company

Start-Up Phase

This is usually in the first five years of a business when the company is using start-up capital to build something sustainable. The new business incurs a lot of expenses with not a lot of income coming in at first. The owner has likely put their personal assets on the line (house, investments) to help finance the business.

Although business owners may not be pulling a lot of wealth out of their business during this stage, there are still ways to maximize wealth. It is equally important to ensure that your assets and hard work are protected, as the first five years of a business can be some of the most vulnerable.

Even if you aren’t married or have children, owning a business is like having a family. Your employees become a part of your extended family. You feel a responsibility and obligation, to not only look after your employees, but their families as well. It's important to think about things like life insurance and critical illness insurance early on, so that you can protect yourself - and your employees - if something bad should happen.

Additionally, the largest threat to a business owner's income is a disruption to their ability to earn a living. Fortunately, business protection insurance can not only manage business risk, but can also be a great way to build wealth and be a key part of your corporate tax planning strategies.

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Most business owners think of profit as what is left over after all the expenses are paid for. Although this is technically true, a “profit first” mindset can prove to be a powerful way to improve your business.

By taking profit first, we have a better sense of how much potential profit escapes because of how we look at expenses. Being mindful of expenses to bolster profits is a much different approach, than spending in spite of profit. A subtle difference, but a monumental shift in thinking. Also, it promotes an environment of operational efficiency and excellence. We will think of better ways to conduct our businesses because of profit, not in spite of it.

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Growth & Profitability Phase

This is when the company starts making money... and with profit comes taxes. Depending upon the year, profits can be significant. You’ll want to leave money in the company to increase retained earnings and you’ll likely want to start taking some money out of the business.

If you bonus or dividend out the money to an owner, you’ll likely be paying the highest marginal personal income tax rates. If you leave passive income in the business and invest it, you’ll be paying the highest corporate tax rates.

Below are some ways that business owners can grow their wealth during the "good years" that don't involve salaries or dividends.

The challenge for many business owners is that they either haven’t contributed enough to one’s RRSP, or they’ve maxed out their RRSP contributions for the year. Although there is a lot of financial advice out there surrounding RRSPs, there are other options for business owners that could be even more useful as a retirement vehicle.

The Personal Pension Plan (PPP) may represent an opportunity to increase your contribution room, have your pension sponsored, guaranteed and funded by your business. Another tremendous benefit for business owners is the ability to creditor protect these assets. Many business owners are unaware, RRSPs in Ontario are not necessarily creditor protected and may be fair game for creditors to go after in a legal suit or bankruptcy proceeding. Also, you have the ability to roll existing RRSPs into your PPP. Any fees, commissions, administrative costs that have been incurred to date in your RRSP can be written off as an expense to your business.

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While life insurance is most often looked upon as a vehicle to protect one’s family or business, the question that springs to mind is why individuals with wealth would need life insurance? The most common factor connecting people of wealth is that they have a substantial amount of deferred income tax that must be paid upon death. Also, they often have a strong desire to make a substantial donation to a favourite charity or educational institution.

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Much like employee pensions, business owner pension plans are a business expense. This means that you can fund your retirement in a tax-deductible way, leaving more money in your pocket. There are many advantages to pension plans that translate into more wealth: you can claim past service when you start up your pension, maximizing your contribution room. Your business can also guarantee your rate of return, ensuring a predictable retirement. Finally, in the event of business failure, creditors cannot go after pensions.

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Segregated funds are an investment product sold by life insurance companies. They are individual insurance contracts that invest in one or more underlying assets, such as a mutual fund or ETFs. Unlike mutual funds, segregated funds provide a guarantee to protect all or part of the money you invest (75% to 100%).

If you find yourself in one of the following circumstances, then you may want to explore segregated funds:

The business owner who wants to creditor protect investment assets within the company
Not eligible or able to qualify for life insurance
Want to have assets bypass probate
Designate a beneficiary and protect their privacy
Difficulty with market volatility but want to take advantage of the upside of the market
Lock-in gains on fund and portfolio performance
Protect your principal investment

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Succession Planning & Exit Strategy Phase

A succession plan is a definitive plan to start transferring capital to your personal assets and ownership of your business to a successor. Doing so strategically and proactively can minimize your taxes payable and enable you to utilize your Small Business Capital Gains Exemption, which is very important.

Plenty of time is required to do this properly and to ensure you are suitably rewarded for your efforts. Ensuring that you conform to the passive income requirements is critical to the Small Business Capital Gains Exemption in particular..

Also, having a strong plan in place early on will increase your company's value in the long run and maximize your sale price: potential buyers like stability and good planning.

As a business owner, you may be aware that when you dispose of shares in your business, you could receive an exemption on all or a portion of the capital gains that ordinarily would be taxable. This is due to the Lifetime Capital Gains Exemption which says that, for 2020, up to $883,384 of capital gains is exempt from taxation.

There are several rules and stipulations for how the Lifetime Capital Gains Exemption applies. The Finish Line Group works with business owners to help navigate these waters, which are unique for each organization.

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When planning for the succession of the business, an important objective is to reduce income tax on the disposition (sale or inheritance). One of the methods is to implement an estate freeze which transfers the future taxable growth to the next generation. The corporate and trust structure utilized in this strategy may also create multiple Small Business Gains Exemptions which can reduce or eliminate the income tax on capital gains.

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Succession planning can be very, very difficult. Often, there isn’t an absolute succession plan in place, not enough time exists between planning an exit strategy and executing upon it, or part of the owner's retirement strategy entails selling their business in some way, shape or form.

There are several best practices for creating an executing a succession plan. Working with a professional to think ahead as far as possible and envisioning worst-case scenarios and best-case scenarios is the first step. It is also important to align your succession plan with your business strategy, to ensure that your choices make sense for the business and will support its continued success.

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Legacy Phase

At this stage, you’ve stepped back from the business. You’re not taking a salary but likely only dividends. You’re living comfortably, and thinking about the financial and social legacy you’d like to leave. There are many ways to ensure that the wealth you have accumulated is distributed according to your wishes, instead of going to the government.

Your pension should have a “Terminal Funding” element. Your TFSA should be maxed out. You could consider setting aside an annuity to pay for your monthly expenses. You should estimate how much capital gains you have left on your assets and what the taxes payable will be upon death. You can also allocate funds for your favourite charities through a permanent insurance policy. You can also set up legacy accounts for your children and grandchildren.

The Finish Line Group can help ensure that your taxes are minimized, your retirement is comfortable, and the wealth you have worked hard for is sustained across generations.

When you are selling your business, or significant portions of it, you may have to pay Capital Gains Tax on the money you make from the sale. The easiest way to reduce your tax exposure is by having a solid plan in place ahead of time.

Knowing how much tax you are likely to pay (and when) will help you minimize the amount of tax you have to pay. Perhaps the sale or transfer of ownership can take place across several years, reducing your tax burden each year. Perhaps there are other ways to transfer ownership of important assets, such as through insurance or a will.

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Probate is a legal procedure that validates a deceased’s will and confirms the executor’s authority to carry out the testator’s wishes. This can be a time-consuming and expensive process that can sometimes cause significant inconveniences for those involved.

It is becoming popular to have two wills – one for those assets that are probatable and one for those that are not. For example, someone who owns private company shares may wish to use a second will to transfer those assets as private company shares are not subject to probate. If assets are held in another province with lower probate fees there may be an advantage to have a separate will dealing with those assets.

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Over the last few decades, the prices of cottages and other investment properties have skyrocketed. The supply has certainly languished behind the demand, especially within a three-hour radius of Toronto. This poses some interesting challenges to those families that want to hand-down the cottage in order to keep it in the family.

Regardless of situation, Capital Gains tax will have to be paid on the sale or transfer of the property. This should be estimated and accounted for ahead of time, preventing any unnecessary and costly surprises. Additionally, how the property is actually transferred to the next generation (or sold) is a major consideration, as things like cottages can be gifted in wills, or while you are still alive.

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