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Canadian entrepreneurs building up wealth

Canadian entrepreneurs are starting and building businesses and amassing a lot of cash and wealth in the process, recent data and studies show.

Canadian entrepreneurs are starting and building businesses and amassing a lot of cash and wealth in the process, recent data and studies show.

A study by Shopify reveals that some 68 per cent of Canadians want to be their own boss. Currently, three in ten Canadians have started their own businesses and more than half believe that entrepreneurship is a possibility for them in the future even though they lack the resources to pursue it now.

The Shopify survey found that Canadians perceive entrepreneurs as key contributors to the country’s economy, citing the strongest impact in creating new jobs, innovating through new products or services, adding to the national income and creating social change.

Canada’s entrepreneurs have built up a lot of cash over the years and many now are looking at ways to distribute that hard-earned wealth to themselves, their families and key employees in the most tax efficient way possible.

Statistics Canada has said that private, non-financial corporations increased their cash holdings to $630 billion in the first quarter of 2014, up from $621 billion at the end of 2013. Most often, this money is sitting in cash or low-interest financial vehicles.

With all this money sitting around, the question for many entrepreneurs then becomes what to do with it?

Many small businesses may be keeping cash on hand to fund future operations, expansion or simply as an emergency/ rainy day fund. However, many don’t require the excess for the business and need to a plan to help them manage that money and take it out of the business as tax efficiently as possible.

“Roughly 70 to 80 per cent of Canadian small business owners have indicated they want to sell their businesses in the next10 years,” says Bill Black senior wealth adviser with IPC Securities Corp. in Owen Sound. “Small business owners often find it very difficult to separate the family from the business and one of the hardest things for them is to get off the treadmill and develop a plan on how to use their excess cash in the most tax efficient way possible.”

Business owners have a couple of ways to provide retirement pension plans for themselves and their key employees through an Individual Pension Plan (IPP) and what is known as Retirement Compensation Arrangement (RCA).

Like the name suggests, an IPP is a defined benefit pension plan for one member such as owners of companies or executives of incorporated businesses who do not participate in an employer-sponsored pension plan and how have annual earnings of more than $120,000.

Under an RCA money can be contributed on behalf of the owner and/or key employees. The contributions are 100 per cent tax deductible by the employer and are a non-taxable benefit in the hands of the employee. Taxes do not apply until the money is withdrawn during retirement.

Contributions should not exceed the generally accepted guidelines for pensions which normally amount to about 70 per cent of pre-retirement income for an employee with 35 years of service. An RCA can be funded using various investments including securities, mutual funds, and life insurance.

There are other avenues for small businesses to distribute their excess funds through income splitting with family members and paying out money in the form of dividends.

The impetus to do something with that excess money may be becoming more urgent since the federal government announced in its last budget that it plans to do a review of small businesses which use tax strategies such as distributing income among family members through dividends and capital gains and holding a passive investment portfolio inside a private corporation.

Small business is the backbone of the Canadian economy and Black believes the government, in looking for tax dollars, could actually harm the economy and stifle job creation.

“Their businesses often represent their life-long work,” Black says. “Many owners are seeking advice about which programs and options are best for them. A lot of what they end up doing will depend on what is happening with them personally as owners and with their families.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2017 Talbot Boggs