Integrating Your Personal and Business Finances
Having a 360-degree view is the key to making the best choices.
It’s no secret running a successful business takes time, energy and resources. The problem? It’s easy to get so caught up you lose sight of the big picture when it comes to your personal finances.
Because your business and personal life cross paths constantly, decisions made for one side often impact the other. Priorities can clash. That’s why taking a well-orchestrated approach to financial planning that balances your business and personal goals is so important. Fail to do so and you could jeopardize your ideal retirement, your loved ones’ financial security, or you may simply wind up paying too much tax.
Want your financial plan to be in tip-top shape, for you, your family and your business? Here are six ideas worth considering.
1. Build wealth outside your business
When you’re a success, it’s natural to first think of putting capital to work in your enterprise to earn the best investment return. That said, holding too much of your net worth there can be risky. There are always competitive and economic headwinds ready to derail your company’s ability to generate income you rely on or hurt its value. Plus, when it’s time to finally sell, you can have trouble finding a qualified buyer or walk away with less than you hoped. That’s why it’s smart to build an independent source of capital, say through tax shelters like an RRSP or TFSA.
Working with your advisor to create an investment portfolio with the right mix of stocks, bonds and cash can diversify your wealth, deliver income to sustain you and your family if your operation hits tough times, or pay for retirement. Your portfolio opens doors to growth opportunities outside your business, letting you accumulate a potential pool of savings to give you greater flexibility, including deciding how, and when, to finally step away. Don’t forget about insurance products like segregated funds and life insurance – they can provide significant tax advantages and creditor protection.
2. Look deeper at your income options
Preferential tax treatment is a good reason for an incorporated business to retain its profits. But most business owners also need to pull out at least some of those earnings to fund personal and household expenses. In your situation, is it better to draw income as salary or should you pay yourself a dividend?
Given how our tax system has evolved in recent years, from a tax perspective it often makes little difference which option smaller companies choose. It’s all about the principle of integration; the idea that as cash flows from the corporation into individual hands, the combination of personal and corporate taxes paid should be similar whether income is received as salary or dividends. That turns out to be particularly true when dealing with the first $500,000 of annual business income which qualifies for the Small Business Deduction.
But, taxes aren’t the only issue. Depending on your objectives, other factors can tip the scales one way or the other.
If building your RRSP is a priority, wages qualify as earned income for purposes of calculating RRSP contribution room; dividends do not. A salary will also allow you to claim the Canada Employment Amount.
On the other hand, receiving dividends instead excuses you from the obligation to pay into the Canada Pension Plan if you’re okay with forgoing future benefits and rather put your CPP payments to work elsewhere. What’s more, tax on dividend income doesn’t have to be withheld at source and remitted frequently.
Your advisor can help you weigh the pros and cons to determine if salary, dividends – or a combination of the two – is optimal.
3. Revisit income splitting
Whether you’re thinking about your business or your household, it’s a good bet your largest annual expense is tax. Fortunately, you have the chance to split income with members of your household, within limits, to minimize your family’s tax bill.
The federal government is proposing to rewrite the rules around income splitting by business owners, so-called ‘income sprinkling’. The proposals include ensuring salary and dividends paid to family – especially those age 18 to 24 – be ‘reasonable’ after examining factors like work performed and contribution of capital to the business. The proposed changes amount to an expansion of the ‘kiddie tax’ rules where dividends paid to minor children are generally taxed at the highest marginal rate.
Income splitting isn’t the only area under the microscope. Ottawa has targeted the conversion of business income to capital gains aimed at reducing tax, as well as passive investments (for example, stocks, bonds or real estate) shielded in a corporation. Recently, the government has announced it will allow up to $50,000 of income annually from passive investments to escape additional tax. Business owners will also see the small business tax rate fall to 10% in January 2018 from the current 10.5%, before dropping again to 9% in 2019.
The federal proposals are lengthy and detailed, so it’s crucial you’re ready for what might come next. Your BlueShore advisor can help you navigate the potential impact on both your personal and business tax situation.
4. Take a broader view on protection
No matter if you’re a business owner or employee there’s a basic level of insurance protection you should consider. First, there’s life insurance to provide income for your loved ones, offset tax liabilities triggered at death and pay off corporate debt, for example. There are also living benefits like disability and critical illness insurance which can fund your household’s living expenses and cover business costs if you become sick or injured. When you’re running a business, however, you need to take a broader view of risk.
Are there employees, managers or partners whose absence, even for a short time, would negatively affect your operations? If so, buying key-person life or disability insurance to insure those individuals can make sense. Policy proceeds can help cover the costs of hiring a replacement. Or, if necessary, they could be used to fund a buy-sell agreement, providing liquidity needed to buy out a deceased shareholder’s interest rather than turning to a bank loan or savings.
The bottom line is, when being improperly insured damages your business, there’s a good chance the consequences will spill over to your personal finances as well.
5. Foster communication between your advisors
When you operate a business, you’ll have advisors you rely on to help you make decisions, including lawyers, accountants, insurance specialists and other professionals. But if you’re having difficulty synthesizing their advice into a coherent plan, you could miss opportunities, or worse, face costly mistakes, which might affect your personal finances too.
That’s where your BlueShore Financial advisor comes in. They’re uniquely positioned to survey the entire field and play quarterback to your team of experts. They’ll leverage expertise from various disciplines to develop a coordinated game plan that takes your business as well as your personal goals into consideration, and keep everything on track.
6. Start early on succession planning
According to PwC Canada’s Global Family Business Survey Canada 2016, nearly half of all family businesses have no succession plan in place. If you fall into this group, you could be rolling the dice with your future, particularly if you’re anticipating wealth from your business to one day fund your retirement. Without a succession plan, odds are even when you’re ready to leave, your business won’t be positioned to carry on without you.
Getting started on succession planning – and doing so early – can bring multiple benefits, including:
- Maximizing value – you want plenty of opportunity to find a successor and make sure the business is operating at its best, especially when you’re looking to sell to a third-party for top dollar.
- Minimizing taxes – this might involve any number of strategies, from implementing an estate freeze and setting up an individual pension plan, to using life insurance or creating a holding company. Remember, the Lifetime Capital Gains Exemption may allow you to keep a sizeable chunk of capital gains when you sell your qualifying shares ($835,716 for 2017).
- Promoting family harmony – communicating your intentions ahead of time, especially when you choose one family member over others to succeed you, can do a lot to relieve uncertainty, conflict and regret. Think about your estate plan and how you wish to structure your legacy to create fairness all around.
Treat succession planning as a process, not a one-time event. Your plan should evolve as your business grows and keep pace with key events in your personal life like a birth or marriage. In the end, a well-thought-out succession plan gives you the best chance of leaving business ownership on your terms.
The value of advice
When you run a business, financial planning can be complicated. At BlueShore Financial, our goal is to make everything clearer.
We take a 360-degree view of your financial picture and use our expertise to create a plan that captures your personal and business goals. And, we’ll help you stay on top of that plan as your life and business move forward. Speak with your BlueShore Financial advisor to learn more.