From business person to investor

December 8, 2014
Category :  Articles

Throughout your life in active business, you have worked for success, thoroughly planning all your company’s finances, taxation and legal matters. Although your needs will change when the business is sold, retirement still calls for the same rigorous planning.

You will need to preserve your wealth and make sure to have enough income to maintain the lifestyle you want for the rest of your life.
You need to determine where your income will come from once you have stopped working and running your business. There are various sources of retirement income and it is up to you to establish yours. Do you have a management company that can pay you dividends or from which you could gradually redeem shares? Do you have RRSPs? Do you have other savings or private revenue-generating property? Tax consequences can vary widely, depending on the income source. Accordingly, taxation is always an important consideration in planning your own retirement.

Is it advisable to start by drawing funds from your RRSP or receiving dividends from your management company?

Since dividend income is taxed more favourably than RRSP withdrawals, which are treated as regular income, it is usually better to start by drawing cash from your management company. “As a rule, it is advisable to liquidate investments held in your company first: revenue generated in your RRSP is tax sheltered, whereas income generated by the company is taxed at 23% for capital gains, 33% for dividends and 47% for interest income,” explains Robin Tétreault, CPA Auditor, CA, DESS in Taxation, FBL Partner.

Should you begin receiving your Quebec Pension Plan (QPP) payments?

You can begin drawing your pension at age 60. However, it is a good idea to delay applying for it because pension payments are higher for those who take their pension between the ages of 65 and 70. In fact, those who do so before age 65 are penalized. There are various considerations that come into play when contemplating the ideal age at which to draw your pension, including your health and life expectancy.

To minimize the amount of income tax owing, in some circumstances, pension income can be split between spouses.

Can you use income splitting?

In some cases, you may split your eligible pension income with your spouse. Splitting can help to lower a couple’s income tax, however, only certain pension and annuity income is eligible for this strategy.

And if you were already reaping the benefits of a discretionary family trust, selling your business does not necessarily mean that will end. You may continue to use it to split income with family members who have reached the age of majority as long as you have the appropriate structure in place.

Do you still need life insurance?

Now that you have retired, it is a good time to reassess your need for life insurance. Do you still need it to protect your loved ones and to ensure that their standard of living is maintained after you die? Should you lower your coverage? Remember that life insurance can also be a good investment tool and help to maximize retirement income by sheltering some of it from tax.

Do you still need a complex business structure?

Now that your needs are different, the business structure put in place when you were running your company may no longer be necessary or profitable. It may be a good time to reassess your situation and to keep only the essential parts.

Can you reduce your estate liabilities?

At death, every taxpayer is deemed to have disposed of their property. Accordingly, income tax is payable on the appreciated value of property held by the taxpayer at the time. Alain Turcotte, CPA, Auditor, CA, Masters in Taxation and Partner at FBL, offers the following advice: “The shares you hold in a management company are taxable at death and the amount of income tax payable can be significant. As a result, it is important to reduce liabilities in your estate through share redemption, for example, thereby minimizing the tax impact at death.”

Does your will reflect your new status?

Ensure that your will is up to date and still reflects your wishes given your current situation. It must be harmonized with reorganizations that occur when your business is sold and aligned with your current assets. A Mandate in Case of Incapacity (power of attorney) that sets out in advance who will attend to your personal care (health) and manage your assets (finances) in the event of incapacity can also be an important component in your planning process.

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