Starting a business in retirement

Portrait of relaxed senior manager sitting at office and leaning back.

It’s increasingly common for baby boomers to start a business in retirement as a means to fulfil a personal passion, retain or replace their work identity, or enhance their retirement savings.

Whether continuing with your previous expertise on a consulting basis, or diving into a brand new business adventure, working in retirement requires time and planning. From Vancouver to Montreal, our wealth management experts weigh in on some financial considerations that may affect if, and how, you decide to start a business in retirement.

1. What are some of the benefits or implications you should consider if you choose to work in retirement?

Lynne Triffon, Vancouver: Sometimes, people think that if they earn additional income they’ll be in a higher tax bracket. Because we pay tax in Canada at graduated rates, higher income tax rates only apply on the additional income (and may not apply if you remain under the next tax bracket threshold). Even if you do end up in a higher marginal tax bracket, you will still net additional income.

Examine your reasons for continuing to earn income in retirement. Maybe you need additional income to be able to travel more extensively. For many of my clients, it isn’t necessarily the extra dollars they are earning. Rather, it is staying engaged and stimulated and often getting enjoyment out of the work itself. Making money can simply be a by-product of doing what we enjoy most. Many of my clients continue to work on a self-employed consulting basis after their traditional retirement. These people are not looking to fully retire: they are looking to reduce the amount of time they work, have more flexibility, and sometimes more autonomy and less stress.

Harjeet Sachar, Calgary: Whether consulting or starting a new business, you need to think about whether or not you can market it. Can you sell people on your service? Figure out what it is that you bring to the competition, and position yourself in the marketplace accordingly.

Samuel Chinniah, Toronto: Because income is no longer a priority, working in retirement allows you the flexibility to grow your business or consulting practice as much or as little as you like. Consulting is a particularly attractive option because little to no capital is required, and your expenses are minimal. In addition, you’ll likely have built up a lot of experience and contacts, so the transition from your previous career to consulting will not require a great amount of effort. Supplementing your income in this way lets you be more carefree and experience life while you’re still in good health.

Jane Cheong, Montreal: Working in retirement is an excellent way to enhance your retirement income if savings are insufficient. Or, if your savings are adequate, it might be having the best of both worlds that appeals to you – you can enjoy working at your own pace without corporate stress. This also helps you retain your social, professional and intellectual networks.

2. Should having a business affect your decision of when to take CPP/QPP and OAS?

LT: The biggest factor in your decision when to take CPP/QPP and OAS has to do with your expected mortality date, but there are also some other factors. For CPP/QPP, a business has to pay both the employee and employer’s CPP/QPP contributions. You can opt out of contributing to CPP/QPP at age 65; however, you can also earn an enhanced CPP/QPP by continuing to make voluntary contributions.

With OAS, you need to consider the clawback thresholds. For 2016, you start to have a reduced OAS pension when your net exceeds $73,756 and it is completely clawed back when your net exceeds $119,615. You can defer OAS to as late as age 70 and receive an enhanced pension: 0.6% for each month deferred, to a maximum of 36% at age 70.

HS: Rather than look at CPP/QPP in isolation, you should take into consideration what your overall cash flow needs are. When starting a business, your income needs will change so you should first revisit your retirement plans with your planner, and then review that plan each year.

3. What should be considered when buying an existing business?

HS: Can you resell it? Is there equipment involved? Will the business/equipment be relevant in x number of years? Prior to purchase, make sure to do your due diligence with an accountant and/or planner to assess what the business is worth now, and what its expected worth will be at the estimated time of sale.

SC: An important consideration is whether or not you’ll be able to turn around and sell the business when you’re done with it. This might mean finding a similar business to sell it to. The same applies to a consulting practice – monetize your work! Find another business or individual who would be interested in purchasing your client list.

Prior to selling, find ways to maximize the value of your business to make it more profitable, and thus increase the sale price. Your financial planner can help you work on an exit strategy, succession plan, and tax strategies and exemptions.

4. What are some considerations when deciding whether or not to incorporate a small business?

LT: The overriding consideration here is whether you have any potential liability. If so, you should incorporate to protect your personal assets, regardless of how significant your income will be. The other factor with respect to incorporation is whether you will be spending the income or saving it. If the latter, incorporation can provide some tax deferral. Otherwise, there may be no benefit to incorporating.

Many of the deductions available to an incorporated company are available to unincorporated businesses, such as paying your spouse and/or children a salary. There are rules around the amounts that can be paid: essentially, the salaries need to be reasonable and reflect work that is actually performed.

SC: From a tax savings perspective, personal services corporations are a great way to go in that they’re taxed at a 15% lower rate (for small businesses) than non-incorporated businesses. Non-incorporated businesses have a top marginal rate of 53.4%. The key benefit to incorporating would be the tax deferral. If you’re in the top marginal tax bracket (53.4%), you’ll keep only half of what you make if you’re not incorporated. However, small businesses (making under $500,000) that are incorporated pay a lower tax rate which means they can keep that extra money in the corporation and pull it out over time. If you need all of the income from your business to live on, incorporating would not be the best way to go.

JC: You need to estimate the income that will be generated annually and compare that with all the expenses and fees for keeping the corporation.  A corporation is a separate legal entity and hence requires annual corporate tax returns, financial statements, annual reports and GST/HST/PST/QST filings as well. Incorporation costs also have to be taken into account.

5. What are some common mistakes/pitfalls to avoid?

LT: One pitfall is to not register for GST/HST when it becomes mandatory. This is based on when you achieve a threshold of cumulative income in a single quarter or over a number of quarters. Depending on the nature of your business, you may also need to set up a business account with the CRA, a payroll account, register with WCB and obtain a business license.

Another pitfall is not understanding which kinds of expenses are tax deductible, and what receipts and records need to be kept. Lastly, if you are running a business out of your home, you need to ensure that your home insurance will cover you.

HS: Many people underestimate how much time/money/resources will actually be required to execute their business idea. For example, say you wanted to start a catering business. You would need to consider many things, such as equipment costs and obtaining appropriate insurance if doing the work from your home (if something went wrong, you would need to be covered). Also, if you intend to do all the cooking yourself, this would require a great investment of time – time that could no longer be spent with loved ones.

JC: Not seeking professional advice. Since each person has a unique personal and family situation, it’s important to speak with someone who can help you identify any potential red flags.

Another common mistake is planning major and complex structures in the start-up phase before generating income. Keep it simple to start. And don’t underestimate the time it will take to deal with administrative filings and paperwork. You may find that you need to hire someone to take care of these tasks for you.

6. Are there any special considerations for U.S. citizens living in Canada who set up a business or consulting practice in retirement?

Brent Soucie, Toronto: There are, particularly if retirees choose to form a Canadian corporation in order to facilitate the consulting. Specifically, U.S. citizens are subject to special tax and disclosure requirements, both imposed by the IRS. Much of the same conventional wisdom applies with respect to corporate deductions, and even liability protection; however, special measures need to be taken to prevent double taxation.

Lucy Conte, T.E. Wealth

This article was published in T.E. Wealth’s Strategies newsletter, Nov 2016 edition. Read the full edition here.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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