How to protect your personal wealth while building—or exiting—your business

In Part 1 of our CWB Wealth Essentials series, we looked at ways to assess and improve the value of your business. Now, in Part 2 of Wealth Essentials, Jason Kinnear, Manager, Family Office Services at CWB Wealth, shares his insights into why maximizing tax benefits, mitigating legal risk and diversifying sources of personal income are essential to protecting your wealth for the long term.

Maximize the tax benefits of being a business owner

While everyone must pay taxes, savvy business owners can significantly reduce their tax burden through strategic planning. Here are several effective tax management strategies.

• If yours is a family business, one of the most effective strategies can be income-splitting among family members who work in the business. In 2017, the federal government changed the rules on taxation of split income (TOSI) to prevent realizing a tax benefit from family shareholders who only do nominal (or no) work. But if you have family members who are legitimately employed and contributing to the business, this strategy remains viable. It's particularly effective when integrating younger generations into the company as part of succession planning as having them work full-time and learn the ropes can also bring some great tax-mitigation opportunities.

• Carefully track business-related expenses such as travel and home office use. A good routine for business owners is an annual, line by line walkthrough of the revenue and expense statements with your accountant to maximize legitimate deductions.

• Individual pension plans (IPPs) can be another tax management avenue for business owners as the contributions your incorporated business makes are tax-deductible.

Develop and implement an asset protection strategy

Is your personal wealth protected from potential legal claims from business partners, employees and suppliers? If your company becomes insolvent, can lenders lay claim to your family’s assets?

There are a number of ways that business owners, whether they are actively operating the business or have recently exited it, can limit the personal liability they might incur from legal actions. One common strategy is to set up a family trust to hold the family’s assets. When an owner sells the company and rolls the proceeds into an investment portfolio held by a family trust, it creates a layer of protection around those assets.

The rules on trusts and the mechanics of creating them can be complex, and business owners need to work closely with their legal advisors to develop a strategy that is right for them.

Because they involve transferring assets and the creation of new legal entities, trusts can also have significant implications for tax and estate planning. If you are considering wealth protection strategies, make sure you have a multidisciplinary discussion with your legal, tax and wealth advisors.

Diversify your income streams

For many owners, the business not only consumes all your time and attention, but it is also your only source of income. That, though, is a risk to your long-term financial health:

If the business suffers, so will your personal wealth. That’s why owners should think about ways to improve cash flow in the business and diversify sources of income outside the business.

The first step is to find ways to reduce the number of hours you devote to operating the business, perhaps by delegating more responsibility to staff or by hiring new employees. If you can delegate work to others on a lower-cost basis, you might be able to focus more on high-level strategy and business development that will ultimately boost cash flow.

Yet that spare time can also be put to work by looking for income streams beyond the business. Real estate investments, for example, can be a passive source of income for business owners. You can also take a more active approach—perhaps you’ve developed a unique expertise that could be shared with others in your industry or maybe there is intellectual property in the business—a unique product or process—that could be licensed out to generate a new source of revenue from royalties.

If it works out, owners could realize a triple benefit from this approach: working fewer hours, growing business revenue, and lowering the risk that inevitably comes from putting all your income-generating eggs in one basket.

Often owners are so tied up in the business that they don’t have the opportunity to think about other ways to earn money. At CWB we work with our clients to help them take a step back and see if there are ways to reduce the amount they work, while protecting—and maybe even increasing—their personal bottom line.

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