The Enlightened Entrepreneur: Using Your Corporation to Fund Your Goals
“Money is not the goal. Money has no value. The value comes from the dreams money helps achieve.” – Robert T. Kiyosaki
If you’re a business owner or entrepreneur, you’re no stranger to hard work and high risks. But, you also know how easy it can be to lose perspective of the bigger picture. Being able to determine what is important to you and those you love is essential to both keeping you motivated while burning the midnight oil, as well as allowing you to make strategic decisions that will help you sell your business.
In my previous blog post of this series, I discussed the benefits of investing through your corporation, as a way of complementing your other investments to help fund your dream retirement or achieve your other goals. In doing so, you not only increase your return potential by lowering your overall tax bill, but you also allow for greater flexibility on withdrawals.
So, now that you have have incorporated and are taking full advantage of the benefits your corporation can provide, you can start to look ahead towards the eventual sale of your business.
There are a few things to consider when it comes to the sale of your business – one of the most important being how capital gains taxes can impact your net profits. When you make a profit on the sale of any investment in Canada, it is subject to capital gains tax (which in 2021 is 50% of the profit).
The amount of additional tax you actually pay will vary depending on how much you’re making and what other sources of income you have. For example, let’s say you earned a salary of $75,000 and sold your business for a profit of $600,000 in 2021. At 50% of the total profit of your business, $300,000 would then be added to your income this year, making your income total $375,000. If you were living in Ontario in 2021, this could theoretically increase your taxes from $15,070 to $161,996.
Fortunately, in Canada, there is a way to mitigate this tax hit, but it requires some advance planning – ensuring the shares of your business are considered small business corporation (QSBC) shares. This way, the first $883,384 of profit (as of 2021) is tax-free through the life-time capital gains exemption. However, to qualify, QSBC share rules generally require that the shares have been held for at least two years. In addition, 90% or more of the business’ assets’ value must be used to carry on an active business in Canada.
Of course, businesses are often sold at a profit exceeding the life-time capital gain exemption of $883,384. The good news is that if properly utilized, holding companies and family trusts can allow family members to combine their life-time capital gain exemption – thus dramatically reducing the overall tax impact from the sale.
Given the time requirement to qualify for QSBC shares and the potential complexity of family trust structures, it’s important that you consult with your accountant and financial advisor well in advance of the actual sale date. If you have any questions about how this strategy can help you, my team and I are more than happy to discuss this with you. You can reach me at firstname.lastname@example.org.
There are a number of other benefits to incorporating your business. Stay tuned for Part Five of the series on how to use your corporation to leave a legacy for your loved ones.
This blog series is based on my recently posted white paper, The Enlightened Entrepreneur: Achieving Your Financial Goals through Your Corporation. If you would like a comprehensive guide to why and when you should incorporate your business, as well as how to take full advantage of an incorporated business, click here to receive a free copy of the full white paper.
Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Matthew Lekushoff, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.