The Value of Planning in Times of Change

My first blog in the spring was about change- there, I discussed the constant nature of change, and that we are often uncomfortable with it. The Federal government’s recent proposal to change the tax structure for corporations related to dividends, capital gains and retained earnings is a good opportunity to review the effect of change again.

Leaving aside political opinions on the changes, once the proposals are in effect, they may have a significant impact on your personal situation, both on a yearly basis and a cumulative effect over time.  The effect will depend on where you are in your business and saving stage, family circumstances and level of wealth accumulation.

Haven’t Incorporated Yet, but were thinking about it? 

This is often a difficult one to decide, and is situation dependent.  The proposed tax changes will make a difference in the potential tax savings year-to-year.

Intending to fund Children’s education costs through dividends from the corporation?

Under the proposed changes, the taxes payable by the student will increase significantly, meaning more money will need to be withdrawn to meet the expense need.

Have accumulated investments in your corporation? 

These are where the ‘passive income’ discussed in the proposal is coming from.  Money that is earned from your main day-to-day activities is active business income, and has always had a lower tax rate than passive income.  The recent proposals indicate a desire to ratchet up tax on the money earned on investments ie interest from bonds, dividends or capital gains from stocks.

Planning to sell your business to family? 

Proposed changes will significantly increase taxes payable from a sale to a family member, versus a sale to a non-related party. 

The proposed changes are an interesting trigger to review your goals and get a plan, including options and specific recommendations, to help guide your decisions.  A recent RBC Wealth Management paper indicates that only 39% of business owners have a wealth transfer plan in place.  Only half of business owners have a will.  The RBC paper looked at future events, attitudes towards investment, and the importance of financial education for children.   Other studies indicate that roughly 70% of us don’t feel comfortable with our financial knowledge or ability to meet our long-term financial goals.  Neither study asked about planning for immediate cash needs, or yearly income changes.

All of the above scenarios and related planning are impacted by more than tax considerations.  An effective plan is based on your personal goals and values.  Putting tax in first place when making a decision is not guaranteed to help you meet your goals; in fact, it can often get you to a place that you didn’t intend.  However, this is a good time to review your personal plan and goals.  Ask your advisors for specific recommendations that will help you meet your goals.

Proposed Changes

Jack Mintz: Morneau's tax changes won’t just hurt the ‘rich,’ they will hurt growth

You can contact Sara by  e-mail [email protected] or 519-569-7526