Retiring From A Business May Be Complicated
Business owners have more complexity in retirement planning. There are considerations like succession planning, multiple streams of income, and special tax rules that come into play. As a business owner you may be entitled to government and other pension plan payments. You also need to take into consideration other potential sources of retirement income to support your desired lifestyle. These may include insurance, real estate equity, business equity, Registered Retirement Savings Plans (RRSPs) and non-registered investments.
Your business may now be carrying some expenses such as vehicles, travel and entertainment that will become personal, non-deductible expenses once the business is sold. This issue should not be overlooked when planning for retirement as it may have a significant impact on your net income at retirement. To compensate for such an eventuality you can begin investing a portion of your income in a retirement portfolio. The farther you are from retirement, the easier it is to accomplish. Your Integral advisor can help you determine how much to put away and can link you with specialists to assist you in the valuation and disposition of your business.
Business Equity
The disposition of your business may have special benefits. If it is a qualifying Canadian small business corporation, you may be eligible for a $500,000 capital gains exemption on the sale. We recommend you seek professional advice of a tax specialist to properly structure the sale of your business.
You will want to know:
- What is the value of the business?
- What will the estimated value be at retirement?
- Is it even a salable business?
- Are you overestimating the value of your business?
- Will this be your only source of revenue for retirement?
If so, you might consider getting advice about making investments outside of your business to protect your retirement in the event of unexpected problems in the business.
Other than an outright sale there are other options that you may consider to generate additional income after you retire. You may choose to own dividend-paying preferred shares that contribute to your retirement income based on the business's earnings. Selling your business may not be a consideration at all – you might be thinking of passing the businesses on to your children.
In either case, a succession plan should be prepared for your business years in advance of your planned retirement date. Depending on the type business you operate and your specific goals, it may include a will and power of attorney, a shareholders' agreement, a partnership agreement, buy-sell insurance and trust agreements.
It will serve as a valuable reference documenting the investment, retirement, and estate planning elements of your succession plan, not only for you, but also for your Integral advisor. The succession plan may require the services of a lawyer, accountant, and tax specialist. Our advisors can help you build an advisory team and assist you with investment, retirement and estate planning.
Registered Retirement Savings Plans
Although the equity in your business may be an important source of retirement income, it is prudent to make conservative assumptions as to the portion of retirement income you anticipate from the business and continue to diversify your income sources. An RRSP is an important retirement planning tool for business owners too. It provides ongoing personal tax deductions for your contributions while the earnings accumulate tax-deferred.
This year’s RRSP limit is based on the salary you drew in the previous year. The maximum RRSP contribution limit for 2009 is $21,000. However, if you did not use all of your RRSP contribution limit for the years 1991-2006, you can carry forward the unused amount to 2009. Therefore, your RRSP contribution limit for 2009 may be more than $21,000.
The maximum RRSP contribution limit for subsequent years is as follows:
- 2007 maximum RRSP contribution limit: $19,000
- 2008 maximum RRSP contribution limit: $20,000
- 2009 maximum RRSP contribution limit: $21,000
- 2010 maximum RRSP contribution limit: $22,000
The most effective way to improve performance and reduce volatility is through diversification. This applies whether you're investing inside or outside a registered plan. Consider diversifying across the three main asset classes of cash, fixed income, and equities and also globally now that the foreign content restriction no longer applies.
If yours is a family-run business, you may be paying your spouse and children a salary for their contribution to the business. Their earned income is normally a tax-deduction for the business and may generate contribution room for their own RRSPs. Even if your children are adolescents and don't yet have an RRSP, the accumulated contribution room can be carried forward into their adult years and used to reduce their future taxes.
Non-Registered Investments
Every entrepreneur should consider a personal investment portfolio that complements the business and RRSP investments. The current stage of your business may influence your investment strategy. If your business is in the early stages you may choose to take a more conservative approach and invest in secure, fixed-income investments to offset the risk associated with a new business venture. On the other hand if it is a well-established business you may be comfortable with a higher weighting of growth-oriented equities.
|