These days, retirement doesn’t necessarily mean spending hours on a golf course or trekking around the world. People want to do other things with their new-found free time and, for many, that includes starting a business. According to a Global Entrepreneurship Monitor report, 18% of people who are involved in early-stage entrepreneurship are older than 55 and 7.9% are older than 65.
While business ownership has a lot of benefits for golden-aged clients — income can still come in, it offers new challenges, it keeps people busy — it also gives retirees some new tax and investment planning options. The big one? Tax write-offs.
Sole proprietors can deduct personal income owed by claiming a number of work-related tax deductions. For instance, any equipment or items purchased for ongoing business use, such as computers, office supplies and furniture, can be claimed. The amount of some of these items can’t be deducted in the year they are bought — the purchase price on computers, for instance, is spread out over several years.
Vehicle expenses are another big one. An entrepreneur can deduct fuel, oil, insurance, repairs, roadside service fees and more. However, if they use their vehicle for business and personal travel, it’s important for them to keep track of what they’re spending, as they can claim only work-related expenses.
If your retired clients can combine travel and work, then they should consider doing that. In most cases, entrepreneurs can claim travel expenses, including flight and hotel. Work meals and entertainment can also be claimed, but in most cases only 50% of the bill will count toward the deduction, according to the CRA.
Business owners can claim a lot more, including advertising expenses, interest on borrowed funds and property taxes. The CRA website has a full list.
Investments and income
One advantage of starting a business later in life is that your client may already have enough money from RRSPs or RRIFs to get him or her through the days. If that’s the case, then it’s a good idea for the person to incorporate and then leave as much money as possible inside the business, says Peter Bowen, vice-president of tax research and solutions at Fidelity Investments.
Incorporated companies are taxed at a much lower rate than individuals — about 15.5% compared to around 46% for a high-income earner. The owner will be taxed on the funds when they are eventually pulled out of the company, but until that happens, there will be more money at the owner’s disposal.
Some business owners may want to invest those favourably taxed funds in the stock market. While they can buy anything, Bowen suggests using corporate class funds, which allow investors to move from one fund to another without triggering a capital gains event. These also don’t pay out income or foreign dividends, so owners won’t have to pay tax on those monies either. Canadian dividends, though, do get paid out and can then be doled out to shareholders at an attractive dividend tax rate.
When it comes to capital gains, incorporated business owners can take advantage of something that individuals can’t: a capital dividend account (CDA). Whether a person is a business owner or not, only half of a capital gain is taxed. Incorporated entrepreneurs, though, can put the other half of the gain into a CDA and then distribute those dollar to shareholders via a tax-free capital dividend.
While there are a lot of nuances when it comes to corporate taxes and investments, running a business in retirement can be beneficial to your client’s bottom line. “There are significant tax deferrals,” says Bowen. “So leave all of it in the business and invest.”