Owners have just come through CEBA loan repayments, but forward looking advisors can make their next tax seasons a little easier
After the CEBA loan repayment deadline passed last week, small business owners might be forgiven for having though a little bit less about their long-term tax plans. Through a pandemic, inflation, and the rollback of key government benefits, many small business owners have gone from crisis to crisis over the past four years. While those owners rely on tax professionals and accountants to deal with past decisions and ensure appropriate filings, one tax planning expert thinks financial advisors can help their clients make key decisions that can set them up for the future.
Aurele Courcelles, AVP of tax and estate planning at IG Wealth Management, sees advisors as that proactive bridge between the small business owner and their accountants. He explained that advisors have the capacity to work more closely with future plans and key decisions than a CPA might. He highlighted the myriad ways an advisor can help build those plans for their clients, with a special focus on one of the most challenging questions any small business owner faces: incorporation.
“A business owner often starts as an individual who’s not incorporated. The more profitable their business becomes the more planning that comes around the question of whether to incorporate or not,” Courcelles says. “That’s a question that needs to start with how much income do you need to meet your personal needs? If you have what you need and you have surplus funds left over, then incorporation starts to make sense. That’s where advisors can help.”
Read more: Getting to the heart of high-net-worth wealth management | Wealth Professional
Courcelles stresses that advisors need to fully understand the tax implications of incorporation in order to use this tool to help their business owner clients. Perhaps most importantly, they need to view it as a tax deferral tool, rather than a tax savings tool.
While the first $500,000 or corporate income will be taxed at a much lower rate — generally between 9 and 12 per cent depending on the province of residence — when money is taken out of that corporation in the form of dividends, income tax still applies and the savings amount to very little. While many business owners, especially those just starting out, see incorporation as a way to insulate themselves from taxes, Courcelles notes that advisors need to emphasize the advantages are limited.
When a business owner needs more income from their business, the benefits of the corporation are less significant. Once they don’t need as much income, however, and want to see more of their money grow, incorporation can have a huge benefit. The corporation can hold a larger pool of money because of it’s lower tax rate, that money can then be invested and a larger pool can grow more. Tax will still have to be paid when that money is taken out from the corporation, but the benefits of tax deferred growth are worth emphasizing.
Courcelles believes that advisors with a deep knowledge of incorporation and its tax benefits can differentiate themselves as business owner experts. They can also act as a point of contact between the various professionals required to set up a corporation, and act as that forward-looking planner. They can then look at the corporate structure in the context of long-term plans, such as retirement and exit planning from the business. They can ensure that a client has their kids and spouse involved in the corporation in some capacity, allowing the family to benefit from the tax deferred benefits of the corporate structure.
Read more: How advisors can help clients in a heightened state of financial stress | Wealth Professional
Courcelles notes that some small business owners will often see their corporate and personal finances as essentially the same pool of money, which can sometimes lead to decisions with challenging tax implications. By establishing themselves as the educator on these issues, advisors can help draw the lines between those two financial categories and help their clients decide what needs to come out of each side to best meet their needs and goals in the most tax efficient way possible.
“As an advisor, you can proactively communicate what the plans should be for the future,” Courcelles says. “We might be five or ten years away, but advisors can talk about structuring their clients’ affairs today to get the maximum advantage from what they’ve built inside of their business. The tax accountant may be planting those seeds, but they may not be having the fulsome discussion with the client about what their goals are, what their objectives are, or how they’re involving their family. The advisor’s role is to be thought provoking, to make the business owners start envisioning what may happen in the future and prompt them to have conversations with the right professionals to make that happen.”
