Employees have their employers to help them save for retirement. But what about small business owners? While they plan for the future of their business, they should also plan and save for their retirement and their employees’ retirement. Retirement planning is always a work in progress, even after you retire. First, you plan to build a retirement pool, and after you retire, you intend to make the pool last throughout your retirement. Depending solely on your business to fund your retirement may not be a wise option, given the ups and downs in business. However, your business can help you build a diversified and tax-efficient retirement pool.

Things Small Business Owners Should Consider When Planning Retirement

There are many ways your business can fund your retirement.

• You could retire from the business but continue to hold preference shares that pay dividends.
• Another option is selling your business to your family members (children), partners, employees, or a third party.
• You can even build passive income within your business by investing the net profit in mutual funds, stocks, and ETFs.
• You can set up a holding company or family trust and transfer assets like the operating company’s shares, buildings, or property to the holding company or trust. This business structure can help you defer taxes.
• You can give yourself and your spouse a salary and build your retirement savings like other employees. 

You could adopt any or most of the above options to build a diversified retirement pool, depending on your financial situation and the future of your business. As a business owner, your retirement planning is tied to succession planning, estate planning, and business planning.

Ways Small Business Owners Can Save For Retirement

Retirement doesn’t mean leaving your business. You could hand over the operations to employees or your heir and be involved in major decisions. Whatever you seek from your business, you must plan your retirement accordingly.

Estate Freeze

Suppose your business is running successfully and has grown; you could transfer the ownership to employees or heirs by converting your equity shares into preference shares. Preference shares can freeze the value of your shares and earn you a payout. New equity shares can be issued to your heir, and that value will fluctuate. If you are sure about your business’s ability to give payouts, an estate freeze is a good retirement option.

The Sale of Business

If you plan to sell your business for a profit and use that money to fund retirement, ensure you avail of the long-term capital gain exemption (LCGE). LCGE exempts Canadian incorporated businesses from tax on capital gains up to $1,016,836 in 2024. However, your business has to meet several requirements to qualify, one of them being more than 50% of business assets used in an active business in Canada for 24 months before the sale. If you have been using the business profits to invest in stocks and mutual funds to generate passive income, you might have to invest or withdraw that in the business.

Investing Through Business 

If you have no plans to sell your business, you can use the business profits for investments. Since corporate tax is less (9%) than individual tax (15%), investing through business allows you to invest more. You could invest more in the business, but these investments would be vulnerable to businesses’ credit risks. Hence, talking to a finance consultant before investing via business is better.   

Holding Company/ Family Trust

To reduce the risk of losing your investments to business cycles, you could transfer your shares to a trust or holding company and pay them tax-efficient dividends. You could use the dividends transferred to buy more assets or investments in the trust and build wealth. For instance, instead of purchasing mutual funds under the business name, you could transfer some of the profit as dividends to the trust and buy mutual funds through the trust. The trust and the trust will own the mutual fund and pass on the income to the beneficiary, you.  

Retirement Planning as Salaried Employee

You are a business owner, but you can earn a salary from the business, hire your spouse or children, and pay them a salary. Any salaried person, even if that person is a business owner, has to deduct a Canada Pension Plan (CPP) contribution. When you turn 65, you can start taking CPP payout alongside Old Age Security (OAS).

RRSPs and TFSAs

Depending on business alone to pay for retirement is like putting all your eggs in one basket. Never give all the savings to the business. Set aside some amount and invest individually in a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). These registered accounts allow your investments to grow tax-free. RRSP withdrawals are taxable, while TFSA withdrawals are tax-free. Hence, you could consider building an emergency fund in TFSA and a passive income pool in the RRSP.

Contact Glenn Graydon Wright LLP in Oakville to Help You Plan Your Retirement  

These are a few options to consider. However, allocating the funds and making the optimum use of each option depends on your taxation and financial structure. A skilled accountant can help you plan your estate and save taxes by routing your investments to grow tax-efficiently. To learn more about how Glenn Graydon Wright LLP can provide you with the best estate planning expertise, call today at 905-845-6633, or connect with us online, to schedule an initial consultation.