A Strategic Approach to Retirement and Estate Planning for Family-Owned Enterprises

I’ve encountered numerous instances where financial advisors provide oversimplified advice that might sound beneficial in the short term but prove costly in the long run. A common piece of advice is to “keep your RRSP/RIF as long as you can and instead, wind down your corporation if you need the cash flow.” While this may generate more fees for advisors managing these assets, it can lead to significantly higher taxes over the long run and upon passing. In Alberta, for instance, the remaining balance in an RRSP/RIF could be taxed at the marginal rate of 48%, while strategically managed corporate assets might be taxed at the much lower capital gains rate.

At Shajani CPA, we understand that effective retirement and estate planning for owners of family enterprises is not a one-size-fits-all approach. It requires a nuanced understanding of various income streams and their implications on your financial health. Here’s how we guide our clients to optimize their asset extraction in a tax-efficient manner:

1. Optimizing RRSP/RIF Withdrawals

The decision on when to start withdrawing from your RRSP or converting it to a RIF should be based on more than just your current tax bracket. It should consider your projected income in the coming years and the tax impact on your estate. Balancing RRSP/RIF withdrawals with other income sources can minimize the tax burden, rather than deferring withdrawals to a point where they could be taxed at the highest marginal rate.

2. Understanding Government Benefits

Canada Pension Plan (CPP) and Old Age Security (OAS) benefits are pivotal in retirement planning. Eligibility and optimal timing for these benefits should be analyzed in conjunction with other income sources. If you qualify for OAS, careful income management is crucial to avoid the clawback threshold.

3. Leveraging Corporate Structure for Income

Dividends from your investment company or holding company can serve as a significant income stream. The tax treatment of eligible versus non-eligible dividends and the impact on your personal tax situation must be considered. Moreover, if your company holds marketable securities or rental properties, the timing and type of dividends can impact your overall tax liability.

4. Estate Planning and Tax on Death

Estate planning cannot be overstated, especially for business owners. Utilizing each spouse’s Lifetime Capital Gains Exemption (LCGE) for operating companies and understanding the implications of different types of income (regular income, eligible dividends, non-eligible dividends, and capital gains) on your estate are crucial. Strategic planning can reduce the double taxation on the death of a shareholder and ensure a smoother transfer of your business to the next generation.

5. Customized Calculations for Retirement and Estate Plans

At Shajani CPA, we provide customized calculations to optimize your retirement and estate plans. Our approach considers all facets of your financial landscape to minimize the overall tax impact and ensure that your wealth is preserved according to your ambitions.

Conclusion

Financial advice that focuses solely on deferring taxes or simplifying asset management can lead to missed opportunities and higher costs in the long term. With our expert understanding of tax systems and strategic planning, we help our clients navigate the complexities of extracting assets in retirement while minimizing their tax burden and ensuring a robust plan for their estates.

Tell us your ambitions, and let Shajani CPA guide you there, with tailored advice that respects your life’s work and helps you pass on your legacy in the most efficient way possible.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.