By Sarah Chisholm
Financial Advisor, O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.
Small and medium-sized Business Owners play a crucial role in the community. They create employment, drive tourism, grow the economy, and often support local charitable organizations.
Business Owners want to grow and be profitable. Re-investing in your business might give you the best initial return – but we know that life can throw curve balls such as Covid and Recessions. When planning for retirement, Business Owners should consider the following diversification strategies:
1. Canada Pension Plan – if incorporated, have you considered drawing a portion of your income as salary and the remainder as a dividend? Pulling salary up to the yearly maximum pensionable earnings allows you to maximize your yearly CPP contributions. CPP could be used as one pillar for your retirement income.
2. Old Age Security – are you eligible? Will you be hit with the clawback?
3. Investment Accounts - Registered Retirement Savings Plans, Tax Free Savings Accounts, and other investment accounts may not be appealing if your business typically outperforms the Canadian and U.S. stock market. However, consider that these accounts could be used as a buffer for when things go wrong – short term shutdowns or a business sale not generating the proceeds expected. Spousal RRSP accounts can also provide income splitting options.
4. Critical Illness Coverage and Disability Insurance: these protection strategies can aid in your ability to generate an income while working. They can also be used to create income for later in life. For example, the return of premium option on a critical illness policy could be lined up so that you have an injection of cash right at retirement.
5. Life Insurance – should be used for risk mitigation while living, but permanent insurance should also be considered as a retirement and estate asset. The cash surrender value of a participating whole life insurance policy could be leveraged in retirement as source of income. The policy death benefit (minus any leveraged portion) could be used as an estate asset – generating cash for the corporation or estate to pay taxes, liabilities, or to create estate equalization for children not involved in the business. Consider a business that is transitioning from parent to child. How does the business redeem the parent’s shares? Do they sell active business assets or does an insurance death benefit create an influx of funds.
6. Real Estate –farmland, residential rental properties, or commercial buildings can also add diversification to your portfolio. They can create rental income for retirement or could be sold off to fund retirement living.
7. Other ventures – private equity or additional business ventures could provide additional diversification to your retirement plan.
8. Finally, as a business owner you need to take a serious look at the business(es) that you run. Can this business be sold to a third party or will it be wound down at your retirement. Are there pieces of equipment or machinery that would be sold? Do you plan on transitioning the business to a family member at a discounted value? Working with your professional team (Financial Advisor, Accountant, Lawyer, Lender, Business Valuator etc.) can help you answer some of these questions.
Diversification provides flexibility in your retirement. It allows you to grow your net worth beyond your business and creates opportunity for new ventures. Every retirement and estate strategy is unique – take the time to sit with your Financial Advisor to establish goals and strategies. Bring in your entire professional team to review all the tax and legal implications and then begin implementing your diversification strategy.
Sarah Chisholm is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at 613.258.1997 or visit ofarrellwealth.com to discuss your circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Inc.