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Managing wealth 11 min read

Top business owner mistakes when managing wealth

Business owners are the engines of Canada’s economy. Yet everyone – including even the most successful entrepreneurs – can have blind spots when it comes to their financial lives outside of their businesses.

Both with CWB Wealth, Jen Schmid, Private Wealth Advisor and Robert Bradburn, General Manager, CWB Insurance Solutions, each have deep experience helping business owners develop long-term, successful wealth management plans. In this Q&A, they reveal seven common mistakes they see business owners make when it comes to financial planning – and how to avoid them.


Our experts: Schmid and Bradburn

Jen Schmid: As a financial planner, I don’t sell products. And I’m not a broker so I don’t handle stock transactions. Instead, I’m a big-picture person. I look at all the parts of a client’s financial life – net worth, tax, estate planning, insurance, retirement planning and goals – and I help bring them all together. I’m like a financial quarterback for the client. I try to see how everything fits together and look for where there might be holes.

Robert Bradburn: I’m general manager of CWB Insurance Solutions, but I am a financial planner, too, and my role is in some way similar to Jen’s. Maybe it doesn’t seem obvious that insurance has a whole lot to do with financial planning, but it does with the way we approach insurance. To have a productive insurance conversation with clients, you first have to understand the financial planning scenarios, have a good idea of who the client is and understand how they run their operations. So there really is no way we get to insurance without having the financial planning conversation.


Managing wealth: 7 business owner mistakes

1. Not planning far enough ahead.

Jen: The number one issue, from my perspective, is that many business owners don’t put enough forethought and thinking into how their business fits into their bigger financial picture. They are often too ‘in the weeds,’ thinking about where the next contract is coming from or day-to-day cash flow, and not thinking about the business as a wealth asset that can fit into their retirement plan. Do they want the business to grow and then sell it? Do they want to pass it along to family – and do they have a succession plan? What are their personal goals and how does the business as an asset fit into that? Many owners are not thinking about retirement or what they are going to do after they're done running their businesses.

They need to think about the future. What are your goals? What do you want to see coming from this business? Of course, everybody wants to be successful, but that might mean different things to different people. For instance, if you want to establish a family business, you need a succession plan, which is not a one-day task – it evolves over many years. Sometimes there are issues of control – some owners don’t want to let go. And if you are planning to retire, how do you get your money out of the business in the most effective and efficient way? All of these issues take time to plan and prepare for, so the earlier you start, the better.


2. Not knowing how much cash you need to live your life.

Robert: To reiterate Jen’s point, it’s important to view the business as a wealth asset that can fund their lifestyle. Not knowing how much you need to live on, and how much to take out of the company, is a big mistake I see.

To avoid that mistake, we help business owners view the business as an investment that can generate cash flow. To properly plan for the use of their business’ cash flow – and what that cash will be used for – we need to know how much cash is required from the business.

We can factor requirements for personal savings, like RRSPs and TFSAs into the cash flow plan, but when purely looking at the business asset, we need to know the answer to the question: what is the cash flow required to live their lifestyle? It sounds simple, but a lot of people don’t know this, and it can be a hard question to answer.

Understanding what you should be paying yourself is important, because you shouldn’t be taking out more than you really need. If you do, you are, among other things, going to pay more tax than you really need to.


3. Not knowing what to do with surplus cash

Jen: After you’ve started looking at the business as a wealth asset and decided how much you need to withdraw from it to live, the question then becomes: What happens when you start accumulating extra cash in the business? Another mistake I see is that business owners often don’t know what to do with that cash.

I had one client with an incorporated business that had half a million dollars in pure cash just sitting there. If you don’t need it for operations, excess cash that’s doing nothing is not an advantage for you. It’s not even keeping up with inflation. It’s like putting money under your mattress.

The simple act of investing that money within the corporation makes so much sense in terms of building the retirement net worth you're looking for. Yes, the tax rules on passive income are an element to navigate, and there are traps and pitfalls, but there are ways to deal with that and put your company’s money to work. It could be through an investment portfolio, or permanent insurance, or an individual pension plan. The point is, there are uses for that cash that can make sense for you and your situation.


4. Not considering insurance as an investment option.

Robert: In some instances, certain insurance-based products can be viewed as an investment. You put deposits into it and you can expect a certain amount out of it which can be calculated as a return. The investments within a permanent life insurance policy grow tax free, and therefore they can provide attractive rates of return on an after-tax basis. Further, in the case of whole life insurance, policy dividends vest immediately, which create a very stable investment that can’t decline in value. Business owners can access the cash values of the policies to finance organizational growth and personal retirement needs.

Jen: This is especially true when you don’t need the assets within the company to retire on. When you invest excess cash with a permanent life insurance policy, you’re effectively reclassifying the asset from something taxable to something almost tax free. Saving tax – I don’t know why someone would not want to consider that.


5. Not understanding that how you pay yourself impacts your taxes.

Robert: Beyond not knowing the difference between salary and dividends when people pay themselves, some may not even realize their options. Dividends and salary (or, as we call it, T4 income, which includes bonuses) both put money into your hands, but they do it in different ways and the choice you make can affect taxes on both a personal and a corporate level. And there are downstream effects. Having a salary will allow you to pay into the Canada Pension Plan, as well as create RRSP contribution room, whereas dividends don’t allow you to do that.

But the goal isn’t always tax minimization, because you can cut off your nose to spite your face. If you just focus on tax minimization, you can miss out. Say you pay less tax by paying yourself completely in dividends: that means you’re not contributing to the CPP – which is a fantastic investment for anybody, including a business owner.

Making the right choice depends on your overall wealth level, your personal savings and how successful your business is. But there are strategies to strike a healthy balance between salary and dividends.

6. Not considering how to involve your family in the corporation

Jen: There are more advantages than just succession planning or keeping the business in the family, and the most important one is income splitting. A few years ago, the Canada Revenue Agency tightened up the rules on tax on split income (TOSI), but it is still the case that if your family members are involved in the business to any extent, you can pay them from the corporation, whether in salary or dividends (if they have shares in the corporation). Getting several family members involved can multiply income splitting, which can help minimize the tax on the corporation. If you hire your kid to be a janitor or stuff the shelves, they will be in a much lower tax bracket than you are. Yes, they have to do the work to justify getting paid, but getting them involved can enhance the process of getting money out of the company and could help you towards your goals for the business as a whole.

Yes, the regulations are very confusing, and a lot of people just don’t want to bother. It’s definitely not as advantageous as it used to be, but in many cases it is still an important strategy. And one thing many business owners miss is that once they turn 65, they can split income with their spouse regardless of whether they’re involved in the corporation at all. That’s a huge retirement opportunity that some people thought was taken away, but it wasn’t.

Robert: On the other side, some owners have no idea about the new income splitting rules. Like, ‘What do you mean I can’t pay my kid $50K in dividends?’ I think there’s a huge lack of awareness around the issues involved.


7. Getting caught up in a high-salary mentality.

Robert: This mistake is more psychological than it is technical. They want to achieve a big amount on their tax returns, so they can brag that they’re bringing in a certain income and show that their business is so successful. We had a client who was paying themselves a million dollars in T4 income, and the reason turned out to be what I would consider to be an ego thing. This goes back to my first point: How much cash do you need to live your life? If you are taking anything more out of the business, it is just inefficiency – you are probably paying tax for no reason.

I would also say that if you’re paying out lots of cash to yourself for no good reason, it can create complications for the business down the road. It might create challenges when it comes to cash reserves or even meeting lending requirements – bankers don’t tend to like surprises and large irregular withdrawals such as bonuses may have lending implications.

Jen: Taking too much out also undermines the value of the business as a wealth asset. It could be because of an ego thing, but it could also happen because owners don’t realize what their options are. The key is planning, forethought, knowing the difference between salary and dividends and knowing that you probably don’t need to create an income figure for the sake of appearance.


Next steps: bringing it all together

Jen: If you’re a business owner and you realize you’re making one (or several) of these mistakes, it’s important to take some steps to address it. You need to create a long-term plan – and sooner rather than later – so that you can put the right strategies in place before retirement. The best time to start this process is when you start the company, but there’s never a bad time to begin. Talking to a financial planner who has expertise with business owners is important, because ownership is an extra layer of complication in an already complicated area. You have to start thinking about all the pieces and how they fit together. That’s where we can really help. We put together a roadmap so you can see the path ahead and you know how to get there.

Robert: One of the things that sets CWB Wealth apart is that our clients know they are going to get an unbiased open book. Yes, we want to earn your business, but mostly we want to make sure you get the right advice. When business owners work with us, our goal is for them to able to look back years from now and know that their success is due in part to the advice they got from people like Jen.

Jen: It’s all about giving the right advice for your situation. It is customized for every single person who comes into our office.

Already a CWB client? Speak with your Relationship Manager about a referral to CWB Wealth or contact the team directly. 


This article is for informational purposes only. It is not intended to endorse the purchase of insurance or investment products or services, or provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon as advice. Please contact your lawyer, accountant or other advisor for relevant advice. CWB Insurance is a subsidiary of CWB Wealth Management Ltd (“CWB Wealth”). CWB Wealth is a wholly owned subsidiary of Canadian Western Bank and a member of the CWB Financial Group. Neither CWB Wealth nor any of its affiliates shall accept no liability whatsoever of any nature arising from reliance on any statement contained in this article.