We used to call it breakfast.
It describes a situation in which, in the thick of a competitive volleyball game, you are in the front row in striking position, and the opposing team makes the critical error of volleying a gentle riser just out of the reach of their teammates. The over-set ball floats gracefully above the net right on to the open hand of your big hitter, who has the gleeful advantage of a most precipitous kill shot.
It was 2001 PSB (pre-shoulder blowout) and I was teaching some young people how to play volleyball at a local youth night. One thing led to another, and my ambitious side overtook the gentle teacher. The opposing team made the big mistake, and I retorted with my best effort, while declaring: Breakfast!
I smashed the ball with all the strength a 39 year-old banker could muster, landing it directly into the left eye of a gentle-hearted 14-year-old boy who teetered backwards and momentarily went to sleep on the gym floor.
Oh dear.
I rushed to his side, certain that I had killed him. When he quickly came to, I escorted him gently to the kitchen and applied an ice pack, a chair, and a cookie (He was a teenage boy.)
Over the next couple of days I continued to beg his forgiveness, and profusely apologize to his parents.
The following Sunday, they showed up at church with the young lad's eye and part of his head bandaged in white gauze and tape.
He sat on the couch staring blankly forward, emotionless.
Oh dear.
After my double take, I stumbled towards his mother and once again begged forgiveness, wondering what the legal and medical bills might come out to over a lifetime of drooling.
At this point mom burst into a giggle, and son smiled goofily as he tore off the fake bandage and threw it at me, proclaiming: Breakfast!
As an incorporated business owner, you made a choice years ago that, rather than work on someone else's business team, you would carry the ball and be your own master. Now, instead of a pension from a career working for someone else, you have equity in your operating or holding company.
In effect, this is your pension, so far. This surplus could be in your operating company or it could be in your holding company. In either case it is still a corporate structure and the tax implications are similar.
Now what?
Whether the surplus is in cash form or locked in a series of other assets, the question of how to most efficiently employ the proceeds to your long term benefit is a crucial one. Over the next few weeks we will look closely at the key issues surrounding this situation, a very common one for business people.
Surplus cash (or equity not yet converted to cash) in a corporation: Your first reaction may be to figure out how to withdraw the funds from the corporation and pay as little income tax as possible. Other options might be more appropriate depending on your situation and your personal and business needs.
What do you need the money for most? What options are available? And what about the tax?
Here is a decision tool:
1. Is there a business need for the surplus cash?
If yes, determine the timing of the use and invest the proceeds in an appropriate (safe) investment to match that timing. If you hope to buy operating assets with the funds over the next few months, hold the funds in something very liquid and guaranteed.
If there is not a business need for the surplus cash, then:
2. Is there an immediate personal need for the funds (to pay down debt, to help fund a child's education, to buy a home, etc.)?
If yes, then determine the appropriate withdrawal strategy, such as: reimbursing the shareholder for expenses outlaid, repaying shareholder loans, salary/bonuses, taxable dividend, capital dividend, and so on.
If there is not an immediate personal need, then these funds could be your retirement or a family legacy. In this case, a strategy for long-term deployment is analyzed, considering such items as: a corporate wealth transfer, an insured retirement plan, an insured annuity, an individual pension plan, or an investment portfolio with targeted returns to match risk preferences and timing. But make no mistake - a long term holding of cash is usually a shrinking proposition.
We have just brushed over these items today, but will explore them more thoroughly in the next few weeks.
Whatever you do, know that the referee (the taxman) stands at the net, ready to do his job. Knowing the rules puts you on his side, and keeps the whistles blowing in harmony with your actions.
The content is for information purposes only and does not provide tax or legal advice. It is imperative that you obtain professional advice from a qualified tax or legal advisor before acting on it.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
