Sleeping cash flow of entrepreneurs

The entrepreneur can store value to manage the working capital of the business, but he must dispose of the excess amounts by investing them in a project or in an investment product. (Image: 123RF)

GUEST BLOG. Once upon a time there was a businessman who got lost in the woods, or rather in his personal finances. Due to lack of time, he no longer knew what to do with his assets so he neglected the management of his assets. So he decided to adopt the status quo, i.e., don’t make his money.

The cost of inaction is particularly high, especially when it comes to money. Let’s take a look at the options that entrepreneurs have for managing their money.

The money sleeps in the bank account

The entrepreneur can store value to manage the working capital of the business, but he must dispose of the excess amounts by investing them in a project or in an investment product.

He can decide to transfer these amounts to a company through an advance or a tax-free interco dividend. This will help clear the operating business so that the shares qualify for capital gain exemption to QBs (Qualifying Small Business Actions). Since certain criteria must be met to qualify, get advice from a tax specialist or an accountant.

The shareholder may also invest excess money in shares of private or public companies, in bonds, in exchange-traded funds or in mutual funds.

Investing company money has several advantages. First, the shareholder is obliged to properly manage his working capital, as he has no surplus in his bank account. The businessman tightening his belt will always make more mature decisions!

Second, management can generate returns in the form of interest, dividends or capital gains that are taxed on the company, but also personally when you choose to pay yourself a compensation (dividend or salary). Use tax deferral as much as you can, this is a significant advantage of the company.

When your investments generate capital gain, half of it can be returned to the owner without tax effect. The same approach can be used when the entrepreneur sells real estate or furniture for more than the price paid. In tax jargon, this technique is called capital gain crystallization.

On the other hand, you should be careful about properly managing passive income (interest, dividends, capital gains, rent), to avoid deducting the small business on the first $ 500,000 in revenue from your business. Ideally, you must generate less than $ 50,000 of passive income to qualify for the deduction, otherwise the deduction will be deducted from $ 50,000 to $ 150,000 and deducted from more than $ 150,000 of passive income.

Shareholder development

Shareholder promotions are often not used or understood by entrepreneurs. On the one hand, the debit advance, which appears on the company’s assets on the balance sheet, can be used to finance some of the trader’s personal assets in the short term. In fact, the trader can withdraw amounts from the company, but must pay the advance so that it does not appear on the two balance sheets.

For example, if you advance to your financial year that ends on December 31, 2021, you must pay it off before December 31, 2022. The strategy is not beneficial for all traders, please consult a specialist in tax. The company’s debt will be subject to a fixed rate (currently 1%), so surely the entrepreneur will have to impose himself on the amount equal to the debt multiplied by the fixed rate.

On the other hand, credit advances, which come out of the company’s liabilities, can be returned to the entrepreneur. Once the company is self -sufficient, the amount that the shareholder first injects in the form of a loan to the company can be returned to him.

So he will benefit from a shelter or a tax deferral by contributing to his RRSP, RESP, TFSA, CELIAPP or by simply using the amounts to finance another project.

Other Strategies for Money Management

There is another alternative to withdraw funds from your business without tax impact. This is the withdrawal of paid-up capital. Paid-up capital is the amount injected to purchase a class of shares of the company. The shareholder holding the shares may withdraw the paid -up capital from the class of shares at any time.

On another note, if you borrow money from your bank to invest in a business, the interest on the loan contracted will be deducted. The entrepreneur should always make sure that his interest is reduced either by saving money or by lending it for investment purposes. Converting non-deductible interest to deductible interest can save tens of thousands of dollars in taxes. It is important to tell your accountant that you made an investment loan, as he or she must ensure proper tax treatment on this transaction.

To be an entrepreneur in Quebec, you need to be prepared for certain risks. If a trader is hungry for risk, he can afford to take a calculated by investing his excess money in an investment product.

To (re) read: The dormant cash flow of taxpayers

The shareholder can maximize his advances to personally enrich himself. Even if the shareholder technically owns the company, he is not safe from bankruptcy, loss of a large customer, etc. The fact of taking money from the company through salary and/or a dividend to contribute to a tax-exempt scheme proves that it properly manages its risk.

On the eve of retirement, entrepreneurs often make the mistake of keeping all their marbles in business. When the company is financially sufficient, the entrepreneur should take the opportunity to accumulate good nest eggs through RRSP, TFSA and RESP of the grandchildren. There is no shortage of strategies for managing the cash flow of entrepreneurs, all you need is a good financial advisor, accountant and tax specialist to help you.


Leave a Comment