Incorporating comes with both benefits and questions for professionals

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Becoming your own boss and incorporating allows for many significant freedoms beyond the flexibility that comes with being an entrepreneur.

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Professionals such as real estate agents, veterinarians and project management consultants share one important career trait: the ability to be paid corporately instead of receiving a highly taxable salary as an employee.

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Incorporation offers many benefits in terms of retirement savings and wealth accumulation, although it requires more financial planning and strategizing compared to an employee with company-sponsored pension savings.

Planning for retirement and other long-term financial goals can be intimidating, particularly for incorporated professionals who have the added responsibility (and enjoyment) of focusing on the day-to-day operations of their business.

Amidst daily work demands, many professionals may need to take more time to gain a clear understanding of how their wealth will be accumulated and distributed throughout their lifetime, and to visualize and chart the path to achieve long-term goals.

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Unfortunately, essential questions such as “How should I manage my money now to achieve my future plans?” often remain unanswered.

Particularly for young and mid-career professionals, developing a long-term strategy relieves uncertainty and fosters confidence and excitement about your journey to realizing your dreams. A wealth adviser can help you take a step outside your business operations and evaluate your overall financial situation to create a plan that aligns with your goals and aspirations. Here are three broad areas to consider.

Leveraging the incorporation

Incorporated professionals can significantly improve their long-term wealth by harnessing the benefits available to them via their corporation, particularly in terms of tax planning. For instance, those qualifying for the small business deduction (SBD) can retain up to $500,000 in annual earnings within their business, allowing them to pay a far lower tax rate on those earnings compared to their personal income tax rate.

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To put this into perspective, corporations claiming this deduction only need to pay a net federal tax rate of nine per cent, and up to 3.2 per cent in provincial tax rates. In contrast, individuals who recognize $500,000 in personal income could incur a tax rate as high as 54 per cent if they are in the top marginal tax rate and depending on the province of residence.

Investing within the corporation may yield more investment income over time compared to investing after-tax personal income, but incorporated professionals must ensure that their corporation is not generating excessive passive income that would lower their SBD.

Corporations can invest non-distributed funds to generate capital gains and investment income. Investment income is considered “passive income,” and corporations generating more than $50,000 in passive income per year will reduce their SBD with every additional dollar above $50,000 that they earn in passive income, until they reach $150,000, where the corporation loses the SBD entirely.

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Other valuable options for incorporated professionals to lower their tax bill include the lifetime capital gains exemption, which exempts net gains on the disposition of shares of their small business corporation up to a certain amount, and utilizing a capital dividend account that allows the business owner to earn tax-free capital dividends.

Starting early

It is never too late to start planning for the next chapter in life, but seeking advice early on enables incorporated professionals to fully capitalize on the benefits of the incorporated structure.

Early planning allows individuals to harness the power of compounding growth, which can profoundly impact long-term wealth accumulation. It is critical to strategically invest the funds you are accumulating in your professional corporation, and not leave them in cash.

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For example, an investment portfolio earning eight per cent a year doubles in value every nine years. Over a few decades of a career, this compounding growth could mean the difference between achieving dreams such as owning a recreational property or falling short of retirement goals.

By strategically allocating your investment portfolio to maximize assets and balancing tax considerations, they can make the most of your hard work and financial resources.

Holistic wealth management

Incorporated professionals also face more complex considerations and many valuable opportunities compared to their employed counterparts.

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Being mindful of the debt you assume, considering the right amount of insurance you need, measuring and celebrating your progress towards your retirement goals, figuring out the optimal amount and method of taking cash out of your corporation, and making decisions on the most suitable investment allocation are all among the aspects of financial planning that must be considered.

Just like how keeping your body fit and healthy requires a plan and commitment to continuous improvement over the long term, keeping your finances healthy requires you to set a plan to achieve your financial goals.

Tricia Leadbeater, CFA, is a portfolio manager and investment adviser at Richardson Wealth Ltd.

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