I very often see a pattern that when businesses (or people) are doing great financially, they go wild in their spending. The economy is booming, and things are just popping – new customers are flowing, the market is up-up-up. Your industry is flourishing. (Think Vancouver real estate a few years ago!)…
Then – pop – what goes up must come down. Things are tight again, there is a need to get more creative to get new business. Things, are, well just…down.
What I see too many businesses do is not save when things are up. They just assume that it will keep going up. And, so they over-spend in those boom cycles and have no reserves in the tough times.
Keeping things lean and mean and under-spending when all indicators are up makes more sense. The goal is to widen the gap between income and expenses in such a way that you save significant money to use when times are tighter.
I know of people who have literally spent what they earn, without even planning for the taxes they will have to pay on that income! Which, by the way, is why Canada Revenue Agency/IRS does not trust people to pay their taxes later – they deduct it monthly from your pay cheque.
Best Corporate Savings Plan
The best incentive to save in Canada is to make money in your company and take out the minimal you need to live. (And, no, I do not mean feeding your kids rice and water 😊).
Pay tax in your company and save the money – don’t pull it out. You get a marvelous tax deferral doing this.
For example, in British Columbia, you will pay tax at about 12% if you are a small Canadian-controlled private corporation.
You will pay tax at just 12% on net income up to $500,000.
Let’s say, you and your family can live on $100,000 per annum. You could withdraw that as a dividend, (in some cases you can split it with your spouse, if he/she is an active partner) and pay a little personal tax.
In your company, you will pay just 12% on the $500,000, or, $60,000. In this example, you would retain $440,000 in the company, pay a dividend of $100,000 and that leaves retained profit (savings) of $340,000 in the company.
If you have a holding company that owns shares in your operating company, you can pay a dividend to the Holding Company and move that money out of the operating company as a savings plan.
Once you withdraw that money from the Holding Company you will, of course, pay personal tax on it.
If you plan it right, you could withdraw amounts that do not trigger high amounts of personal tax.
Holding Company as Your Bank
Coming back to my example of good times- bad times. When times are not so great, you can use the savings in your Holding Company to loan money back to the Operating Company.
You will likely find that you are more careful with that hard-won savings account from your net profit versus a bank loan.
Spending what you earn on personal items (even a bigger house) can really create unneeded stress when the economy is not so buoyant.
One last example…many years ago I had a client whose business was thriving. They had a lovely house, well designed, and more than big enough for a couple (they had no kids). Their business was thriving and one particular product that they distributed was very popular in Canada and sales were booming.
They decided to build a cost-plus monster home, and, well, the costs just keep climbing and climbing.
Then, something happened. The Canadian government banned certain ingredients in the product they were importing. And their commissions crashed.
If they had not built the monster house, they could have still lived a very comfortable life in their smaller – yet lovely – home.
The strain of this took a severe toll on their marriage and they nearly divorced. Thankfully, (after they sold the monster house), things swung back, and they recovered both financially and in their marriage!
Thanks for reading…