Small business: retirement planning

If you are a small business owner, you may want to consider the transfer of your business at retirement. Many factors such as tax will come into play when a business is transferred and it is very important that you have a plan in place to ensure that the business is transferred to whom you want in an efficient manner.

 

Corporations and Transfer of Ownership Interests

As a shareholder of a Corporation you need to consider your retirement implications. You will want to ensure that should you want to sell your interest, there will be a mechanism in place to ensure that you receive the fair market value. This is of particular interest to shareholders of small private companies where there is no ready market for the shares as there is in the public Corporation sphere. Sole owners of Corporations have various mechanisms available to them to pass on an ownership interest to family members in a tax-efficient manner where no actual outlay of cash is required. A common strategy is the use of the Section 85 Rollover.

 

Buy/Sell Agreements

For those shareholders wishing to sell their shares on retirement rather than pass them on to family members, it is a common strategy to institute a Buy/Sell agreement with the remaining shareholders. Creating a formal Buy/Sell agreement achieves several goals. First, it ensures that there is a ready market for the shares. Finding an outside buyer for private Corporation shares can be difficult. Secondly, it ensures an orderly transition for the remaining shareholders. Where the remaining shareholders have the first right of refusal or obligation to purchase the shares, they can maintain control of the Corporation on their own terms and not have to deal with the potential problems and complications of having a new ‘outside’ shareholder becoming part of the ownership structure. There are various ways to structure and provide funding for a Buy/Sell agreement upon retirement.

 

Deferred Compensations Arrangements

You will probably want to set aside funds for your retirement years in addition to selling your Corporation and there are various measures in place to create retirement savings. Many of these can be done through your Corporation. Each one of these plans has particular features and advantages. The alternatives are:

• Individual/Group Registered Retirement Savings Plans (RRSPs)
• Deferred Profit Sharing Plans (DPSPs)
• Individual Pension Plans (IPPs)
• Registered Pension Plans (RPPs)
• Retirement Compensation Arrangements (RCAs)

I can provide you with details on the aspects of these particular plans.

 

Voluntary Retirement Savings Plan (VRSP)

Both the Federal and Provincial governments have become concerned about the amount of retirement savings of Canadians, particularly those who do not have access to traditional pension plans offered by employers. The Federal government recently introduced the Pooled Registered Pension Plan (PRPP) to provide small employers with a flexible savings alternative for employees. The Province of Quebec, as part of their 2012 budget, introduced a similar vehicle for small business owners in their province titled the Voluntary Retirement Savings Plan (VRSP). This will be a mandatory program for employers with five or more permanent employees.

While initial participation for eligible employees is required, those employees may “opt out’ if it doesn’t suit their retirement plans. Employers have the option of making tax deductible contributions on behalf of their employees and any employee contributions will be a tax deduction. As registered plans, VRSPs will be subject to the usual federal restrictions on contributions (a maximum of 18% of earned income up to the statutory limits).

Questions or comments? www.yourlifeyourplan.ca

 

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