Working with Business Owner Clients

The Importance of Small Business in Canada

The following statistics demonstrate the value of small businesses in Canada¹:

• As of 2022, there were 1.22 million employer businesses in Canada. Of these, 97.8% were small businesses, 1.9% were medium-sized businesses and 0.3% were large businesses.
• Approximately 17.2 million individuals were employed in Canada in 2022 (71.1% in the private sector and 28.9% in the public sector). In the private sector, 47% worked for small businesses, 17% worked for medium-sized businesses and 36% worked for large businesses.
• In the 20-year period between 2001 and 2020, the number of small businesses increased every year except three (2013, 2016 and 2020).
• From 2016 to 2020, the average contribution of small firms to private sector GDP was 35%; medium-sized firms contributed 13%, and large firms contributed 45%². Small- and medium-sized enterprises accounted for more than 48% of the value added to Canada’s output.
• Small businesses are important throughout Canada, with 16% located in BC and the Territories, 20% in the Prairies, 37% in Ontario, 21% in Quebec and 6% in Atlantic Canada³.

The Role of the Financial Advisor

Working with accountants and legal professionals, a financial advisor can help business owners understand key tax, retirement and estate planning concepts to maximize and protect wealth. Financial advisors with expertise in business owner planning would:

• Understand the pros and cons of different business structures (e.g., sole proprietorship, partnership, corporation)
• Be familiar with how income from a business is taxed (e.g., active vs. passive)
• Recommend investment solutions tailored to the business and the owner’s unique circumstances
• Be aware of options for extracting cash flow from a corporation
• Understand concepts for succession and estate planning (e.g., lifetime capital gains exemption, asset vs. share sales, post-mortem planning to avoid double taxation at death)
• Ask thought-provoking questions to pique interest and promote planning conversations

Questions to Promote Planning Conversations

The following questions are designed to pique interest and promote dialogue about tax, retirement and estate planning for business owners. Using these questions, tax, legal and financial advisors can work with clients to identify opportunities and address points of concern.

• Do you understand the potential value of incorporation?
  Depending on the circumstances, incorporation can provide creditor protection and create tax-deferral opportunities. It can also create tax savings upon sale where the business qualifies.
  
  
• Do you know the difference between “active” and “passive” income for tax  purposes?
  Different tax rates normally apply to active versus passive income and depend on the type of passive income earned. Also, for corporate investors, the amount of passive income earned each year can impact the tax rate that applies to active business income.
  
  
• Have you thought about how changes to the taxation of capital gains might impact your business?
  Capital gains tax rates have increased for certain taxpayers, including corporations. This might impact investment and retirement planning strategies for business owners who will rely on their businesses to fund their retirement. It might also impact shorter-term events, particularly where investments will need to be sold to fund current cash flow needs.
  
  
• Are you aware of the options for extracting cash flow from your corporation?
  Salary and dividend payments are common. There might also be capital dividend, return of capital and shareholder loan repayment options. The best option(s) will depend on the circumstances, and understanding the options can lead to the best fit.
  
  
• Do you understand the difference between a “share sale” and an “asset sale” when exiting a business?
  When exiting a business via a sale, the structure of the sale can impact the price, and tax implications often play a role. Sellers typically prefer a share sale (especially where the business qualifies for the lifetime capital gains exemption), while buyers often prefer an asset sale (to allow for choice of assets). Quite often, the eventual sale price is determined based on these factors.
  
  
• Have you thought about a succession plan for your business at death?
  Estate planning can be complex when it involves a business. Who should inherit the business? Should family members continue with the business, or should they be bought out? How will taxes be paid? What role might insurance play? A well-thought-out estate plan can minimize taxes, simplify estate settlements and reduce the potential for conflicts after death.

Source
¹ Innovation, Science and Economic Development Canada: Key Small Business Statistics, 2024.
² Non-employers contribute 7% to private sector GDP.
³ Current to 2022.

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