Ian: Welcome to the Business Coach Podcast, an advice-oriented series for Canadian entrepreneurs. I’m Ian Portsmouth, Editor of PROFIT Magazine and I’ll be your host as we tackle the hot issues and opportunities facing Canada’s small businesses.
We’ve developed this Podcast in cooperation with BMO Bank of Montreal. Over the course of this series, I’ll be drawing on experts from a number of fields including some BMO experts in order to provide the credible information and prescriptions you need to run your small business better.
In this episode of the Business Coach, we’ll talk taxes or more specifically, how you can pay less tax. We’ll also talk about how entrepreneurs can build a bigger retirement nest egg faster. And here to provide his expertise on the subject of tax and retirement planning for entrepreneurs is Peter Merrick, President of RRSPUpgrade.com in Toronto. Peter is not only a Certified Financial Planner and Financial Management Advisor but also a recipient of the Fellowship of the Canadian Securities Institute which is Canada’s highest honor in the financial services industry. He is also a professor at Ryerson University, a frequent media commentator on Wealth Management for business owners and the author of The Essential Individual Pension Plan Handbook. Peter, welcome to the Business Coach.
Peter: Thank you very much Ian.
Ian: We’ve recently heard the recent federal mini-budget. Can you point to any items of specific interest to entrepreneurs in the recent federal mini-budget?
Peter: Well, it’s pretty exciting. For one, corporate income tax rates are going down for small businesses, it’s proposed by 2012, the rates are going to go down to 15% which is phenomenal because they were in the high of 22%. Starting in 2008, January 2008, corporate business rates are going down to 19.5% in Ontario which is fantastic, it’s a percent [inaudible] of what the government had scheduled. So that’s one real benefit for business owners. Number two if you have, the personal exemption is actually going up by $500 as well, that was not expected. And one other thing, Ian, that was really great about the last budget back in March, is entrepreneurs are going to now have a lifetime capital gains exemption of $750,000, and that’s an increase of $250,000 which is used to be $500,000 lifetime capital gains exemption. So those are the things I am excited about and I know business owners across the country are excited as well.
Ian: And that last item, the capital gains exemption is very important these days because so many business owners have indicated that they want to exit their businesses up in the next five to ten years.
Peter: There’s been studies that show that 15% of business owners are with anywhere from five to 10 ten years of retiring or wanting to retire. So you’re exactly right.
Ian: That’s terrific advice. So tax planning is supposed to be a year round activity and for those of us who aren’t so good at eating our vegetables so to speak, can you name a couple of things that an entrepreneur can and maybe should pay special attention to at the end of the year?
Peter: Well, again, you hit the nail on the head. Planning begins basically when you file the last tax return. In essence, it should also be going, not just looking at today, next year, but also what is your exit strategy. And when an entrepreneur sits down with their accountant or plans, they should be addressing three questions for themselves, and so should their accountant to be asking them. One should be whatever they are doing is it for their consumption needs today, is what they are doing for their retirement needs or for estate planning because depending on what the entrepreneur’s answer is, different solutions make sense for them.
Ian: And what is your favorite tax minimization strategy for business owners?
Peter: My favorite for business owners happens to be the Health and Welfare Trust.
Ian: And what is involved in creating such a trust?
Peter: Well, they have to contact an expert who specializes in benefits, but really it’s very simple. A corporation decides it’s going to create a Health and Welfare Trust, an expert comes in and sets up the trust and it’s on deposit. It’s more like a debit account. You put money into the account and when expenses occur, it’s charged to the account and the money is released. Very very simple, and if you have a proper trustee who’s handling the trust, the entrepreneur does not have to worry about filing, tax returns or anything. It’s going to be very simple for them. But again, it’s something that is in the Income Tax Act, very few business owners use it, don’t know about it, but they should have it.
Ian: Now can you point to some other low hanging fruits in terms of tax savings opportunities for business owners?
Peter: Well, certain things that exist as well [inaudible] choose to be compensated. For example, they might look at what’s called an Employee Profit Sharing Plan and what that is, is money is paid out to the business owner or their family based on profits. When you are a self-employed person anything you pay yourself is profits. The great thing about it is money that you pay out is exempt from CPP contributions and there is something called a reasonability test for income. So for example, if my wife does filing the government might say me paying her $200,000 a year is unreasonable. However, if I am paying her $200,000 from an Employee Profit Sharing Plan, there is no reasonability test, I can pay her that kind of money. So that’s something that most entrepreneurs aren’t aware of but it’s available to them in the Income Tax Act.
Another thing that is becoming very popular, Ian, is something called the Individual Pension Plan. And what that is, it’s a Defined Benefit Plan and what a Defined Benefit Plan does is it promises you a certain amount of money when you retire. If entrepreneurs create an IPP for themselves, if they’re 50 or older, they’ll be able to put hundreds and hundreds of thousands of dollars more into the IPP then if they just had an RRSP. And this is available for every entrepreneur and it is something that they should look at, but again I would caution, I would say if you are going to look at an IPP, you should sit down with an expert who can help you evaluate whether or not it’s best for you.
Ian: Thanks Peter. Now earlier on, we talked about the big tax planning mistake of entrepreneurs being simply waiting to the last minute. Can you share a couple of other tax planning mistakes that entrepreneurs commonly make in the couple of minutes that we have left?
Peter: Well, I’ll share with one more I actually get invited and quite often. It’s very important to understand the nature of the professionals that you are working with and what their roles are because a lot of times, entrepreneurs will look at their accounting professionals for example and they’ll think that they are their financial planners. And the accountant might look at their role as just the dividend, bonus and salaries income [dividend?] put more money into the client’s hands today. And that might not be what the client needs or wants. So in essence, you have to know the professionals you’re dealing with and what their expertise is and you actually have to have that outlined.
One thing that I would recommend which is really important is actually to spend time putting together both a business plan and a financial plan. And ask yourself what the end game is because at that point, once we know what we want to achieve, then we’re able to look at the options that we have. And we are able to determine once we’ve identified our goals and what are resources to attain those goals, whether and IPP works for us, whether a Leverage Life Insurance works for us, whether RCA works for us, or Health and Welfare Trust and an Employee Profit Sharing Plan.
So it’s really important to do the planning and a lot of people, what happens is that they’re so busy working in their businesses, they forget that they have to take care of themselves to the one point they’re not going to be working in their businesses and the question is, if they have not planned, a lot of their choices are going to be taken away from them because if you plan early enough, you can basically have huge advantages and change your circumstances quite substantially.
Ian: Peter thanks for joining the Business Coach.
Peter: Well thank you very much Ian for your time and inviting me to speak.
Ian: Peter Merrick is President of RRSPUpgrade.com in Toronto.
Thanks for listening to this episode of the Business Coach Podcast. I hope you’ve discovered a few insights that will help you grow your business and that you’ll download other episodes from BMO.com, profitguide.com or iTunes. I’d also appreciate any suggestions you have for future topics or how we can make this Podcast better so please drop us a line at firstname.lastname@example.org.
Until next time, I am Ian Portsmouth, Editor at the PROFIT Magazine, wishing you continued success.