Wealth Planning for Ontario Business Owners

Paying Yourself: Salary, Dividends or Both

Pay decisions connect household spending with corporate cash flow. Salary generally supports earned income for RRSP purposes and can create Canada Pension Plan obligations, subject to applicable rules. Dividends represent a distribution to shareholders and do not create RRSP contribution room. Their tax treatment depends partly on the corporation's tax accounts and the type of dividend. The comparison is therefore broader than the amount deposited into the owner's bank account this month.

Build an annual compensation budget around personal expenses, instalments, debt payments and retirement saving. Then compare salary, dividends and a combination using the same corporate earnings assumptions. Payroll administration, benefits, pension participation and future borrowing applications may also matter. Salary versus dividends provides a starting framework. Review the choice regularly rather than treating last year's payment pattern as a permanent policy.

What to Do with Retained Earnings

Retained earnings are an accounting measure, not a separate cash account. A profitable company may have funds tied up in receivables, inventory or equipment. Before investing apparent surplus, prepare a cash forecast covering payroll, tax, debt service, seasonal requirements and plausible setbacks. Investment money should be distinguished from reserves that must remain available when customers pay late or revenue falls. The owner's willingness to take portfolio risk does not eliminate the company's operating obligations.

Once a genuine surplus is identified, compare reinvestment in the business, debt reduction, corporate investing and distributions for personal saving. Each route changes liquidity and exposure differently. Keeping funds inside a company may defer personal tax, but does not make the money permanently tax free. Model how and when the owner expects to withdraw it. Include the effect of investment income on corporate tax calculations and any associated corporations.

Holding Companies

A holding company is a separate corporation that can own investments or shares in another company. It may help organize ownership and distinguish investment assets from operations, but it also introduces legal, accounting and tax administration. Moving cash or shares between companies requires a properly designed transaction. Shared ownership does not mean transfers can be made casually or that every intercorporate payment has the same tax result.

Before establishing one, ask what problem it is intended to solve and compare the benefit with setup and ongoing costs. Review creditor issues, guarantees, financing covenants and the history of proposed transfers with legal counsel. No structure provides an automatic shield against every claim. Holding company investing explains the broader planning questions. An existing structure also deserves review before a sale, succession transaction or significant investment distribution.

Protecting the Business and the Family

Business protection begins by identifying the events that would disrupt operations or household income. Death, disability, litigation, loss of a key employee and a prolonged revenue decline create different needs. Document debt guarantees, signing authorities and the availability of replacement management. An emergency reserve cannot replace a succession agreement, and insurance cannot resolve unclear ownership rights. Each tool should address a defined exposure rather than serve as a general assurance that everything is covered.

Coordinate personal and corporate protection. Determine who owns each insurance contract, who pays premiums and who receives proceeds. Review exclusions, waiting periods and the affordability of continuing premiums through weaker years. Shareholder agreements should address valuation and funding where an owner dies or leaves. Keep powers of attorney and business signing arrangements accessible to the people who may need them. The household also needs a plan for expenses if business distributions stop temporarily.

Succession and Exit

Succession can mean a third party sale, a management transition, a family transfer or an orderly wind down. These outcomes have different funding, tax and governance implications. Clarify whether the owner wants liquidity, continuing income, family control or freedom from management. A transaction price is not the same as spendable proceeds after taxes, debt repayment, fees and any holdbacks. The retirement plan should use realistic net cash rather than a headline valuation.

Begin by improving records and reducing dependence on the owner. Review ownership history and potential tax conditions well before negotiating a transaction. Estate freeze planning may be relevant to certain family transitions, but a freeze is not a complete succession plan or a guarantee of tax savings. Test whether the next owners can fund the business and whether the departing owner can tolerate deferred payments or continuing exposure.

Questions for Your Accountant and Advisor

Ask the accountant to reconcile the corporate cash forecast with the proposed compensation and investment plan. Ask the advisor to show how personal accounts, corporate assets and the business value fit together without double counting. Both should understand major borrowing commitments and the owner's target retirement spending. A joint planning discussion is often more useful than separate recommendations built on different earnings or sale assumptions.

For retirement arrangements, ask whether the corporation has stable capacity to support ongoing obligations. An Individual Pension Plan introduces actuarial, administrative and retirement distribution questions as well as possible funding opportunities. Compare alternatives after costs and taxes. Record who will handle implementation, filings and future reviews. Advice should identify the circumstances under which the recommendation would change, not merely describe advantages under a favourable illustration.

How much cash should remain in the business? There is no universal percentage. The answer depends on working capital, contractual obligations, borrowing access and the severity of a realistic downturn. A reserve policy should identify what the cash protects and when invested funds may be needed. Avoid setting the reserve solely by copying another company's experience or targeting the largest possible corporate portfolio.

When should planning start? Begin before a deadline forces a transaction. Even a simple first review can organize ownership records, compensation history, insurance and personal spending. Then prioritize the gaps that create the greatest risk. General education cannot establish entitlement to a tax deduction or exemption. Bring the actual financial statements, agreements and tax records to the professionals responsible for assessing the proposed steps.

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