Business owners are different. They’re unlike salaried workers: their primary goals are to grow their business and make it successful. And they’ll happily do whatever it takes to achieve that; self-employed Canadians work considerably longer hours than the average Canadian, putting in around 54 hours per week.
And they love what they do; so much so, that Canadian business owners typically retire several years later than private and public sector employees.
Given these differences, it’s no surprise then that estate planning for business owners is considerably more complex than for employed Canadians. Simply drawing up a will certainly won’t cut it. In fact, for most people a will is just one aspect of estate planning; for business owners, it’s the tip of the iceberg.
In this deep dive into estate planning for business owners, we look at five estate planning priorities that all business owners should consider.
Deciding on what will happen to your business after you’re gone
This is often the key concern for many business owners as they approach retirement. While succession planning should be a priority for entrepreneurs approaching retirement, only 9% of Canadian business owners have a written succession plan. Yet it’s so important to get this right: after all, you’ve invested years into making a success of your business: most entrepreneurs want to make sure that the person who takes over is able to continue that success.
The decision of which person will take over your business will play a large part in how your succession plan is written. For example, if you’re planning on passing the business to one or more of your adult children (and they’re willing and able to run it) the process should be considerably simpler than other options, such as selling it to the highest bidder so you can maximize your retirement income. Take a more in-depth look at succession planning here.
Minimizing your final tax bill
There are several ways you can minimize your estate’s tax bill so that you can maximize what your beneficiaries receive. A proper estate plan for business owners will take into consideration key strategies around:
- Income tax
- Capital gains tax
- Probate fees
For example, one key aspect of estate planning for business owners is the potential use of the lifetime capital gains exemption for incorporated businesses. The exemption for 2024 is over $1 million, which could mean that you would pay much less or even zero taxes on the profits from the sale of your business. Find out more about the tax benefits for incorporated businesses.
Other strategies include offsetting taxes with charitable donations and using trusts and insurance to minimize and offset your estate’s tax burden.
Setting up the most beneficial business structure
If your business is set up as a corporation, and the business owner is not the only shareholder, several legal documents can help when it comes to estate planning for business owners.
These include shareholders’ agreements, which can often include details of how ownership should be transferred, what happens on the death of the owner and how to deal with shareholder disputes. However, it’s important, to revisit these documents and ensure that they still fit in with your estate planning goals.
Naming the right decision-makers to act on your behalf
While setting up powers of attorney should be a priority for everyone, it’s even more important when estate planning for business owners. It ensures that your wishes are carried out (by the people you’ve chosen) in the event that you’re unable to run the business (either temporarily or permanently).
The people you name in your powers of attorney can not only make business decisions on your behalf (according to your instructions) but also make financial decisions for you and pass on instructions to health care professionals (in which case this is sometimes called a representative). Many business owners name a power of attorney to run their business and make financial decisions, and another to make health and personal care decisions on their behalf.
Find out more about powers of attorney here.
Structuring your will in the most efficient way
Some business owners choose to have two wills: one that contains assets that need to go through the probate process and another containing assets that remain outside of the probate process. In most provinces, assets that go through a probated will are subject to a probate fee.
There are several assets that don’t need to go through the probate process. These include:
- Shares held in private corporations
- Proceeds from life insurance
- Tax-Free Savings Accounts (TFSAs)
- Registered Retirement Savings Plans (RRSPs)
In the case of these last three, assets don’t go through the probate process if a direct beneficiary was designated. Having multiple wills can play a key role in estate planning for business owners in certain provinces.