Questions to ask business-owner clients

By Wilmot George | November 5, 2024 | Last updated on November 5, 2024
3 min read
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Small and medium-sized businesses are the backbone of the Canadian economy, and wealth management plays an important role in their success.

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

  • 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 business income versus passive or investment income);
  • recommend investment solutions tailored to the business and owner’s unique circumstances;
  • be aware of options for extracting cash flow from a corporation;
  • understand concepts for succession planning for both retirement and at death (e.g., lifetime capital gains exemption, asset versus share sales, post-mortem planning to avoid double taxation at death); and
  • ask thought-provoking questions to pique interest and promote planning conversations.

By asking thought-provoking questions, financial advisors can inspire business owners to think deeply about the financial planning aspects of their businesses. Through this process, business owners tend to share more as they look to improve their planning and wealth. This creates the opportunity for advisors to further demonstrate their value, deepen client relationships and grow their businesses.

The following questions are designed to pique interest and promote dialogue around tax, retirement and estate planning for business owners. By asking these questions, tax, legal and financial advisors can work with business-owner clients to identify planning opportunities and address points or concerns.

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 or at death via the lifetime capital gains exemption if the business qualifies.

Do you know the difference between active and passive income for tax purposes?

Different tax rates apply to active business income 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 affect the tax rate that applies to business income.

Have you thought about how changes to the taxation of capital gains might affect your business?

Capital gains tax rates have increased for certain taxpayers, including corporations. This might affect investment and retirement planning strategies for business owners who rely on their businesses to fund their retirements. It might also affect shorter-term events, particularly when investments will 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 payment 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 affect 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.

The above questions (which are not exhaustive) do not need to be asked in order, nor do all questions need to be asked. Advisors should focus on those questions that speak to their strengths and are of the greatest interest to their clients.

Small business statistics from BDC

Small and medium-sized businesses make up 55% of Canada’s gross domestic product;
98% of businesses that employ staff have less than 100 employees;
64% of private sector jobs are at small or medium-sized enterprises;
small and medium-sized businesses are important throughout Canada, with 16% located in B.C. and the Territories, 20% in the Prairies, 37% in Ontario, 21% in Quebec and 6% in Atlantic Canada.

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Wilmot George

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.