A little-known retirement plan for mature entrepreneurs

It’s not the money that keeps Kevin Watson from dwelling too hard on retirement.

Watson and his wife, Cathy, own and operate a vineyard in Niagara-on-the-Lake. It’s from their grapes that big Ontario brands such as Inniskillin and Jackson-Triggs make their tasty offerings of Merlot, Cabernet Franc and Pinot Gris.

The couple, both in their mid-40s, has worked hard over the past 15 years to build the small business to where it is today. They’re enjoying much success, but are still a long, long way from wanting to cash it all in.

“This is what we like to do. I don’t think of it as a job,” Watson said.

It’s a sentiment that rings true for a lot of small-business owners, most of whom are too busy running the day-to-day operations to give much thought to the future.

For many, the sole retirement strategy rests on income generated from the sale of the business when the owner is good and ready to give it up.

Great for those sitting on a business that’s in demand, but far from a safe bet.

A roadmap for the everyday entrepreneur

There are other options out there that a mature entrepreneur might want to consider as a means to better feather the nest in old age.

A holding company, for example, may be just the ticket.

“A holding company can be used as a tax-deferral investment vehicle during the working years, and an income source during retirement years,” says Paul Shelestowsky, senior wealth advisor with Meridian, Ontario’s largest credit union.

Indeed, for individuals, often in their 40s or 50s, who’ve grown their business beyond the infancy stage and have retained earnings in excess of $50,000, Shelestowsky says a holding company is a better option than investing in RSPs.

Among the benefits, Shelestowsky said a holding company gives business owners more control over the flow of income in retirement – a bonus for individuals who want to keep working past 65 years, as well as, those who want to dispose of their main operating company and tap into their savings.

While RSPs are taxed at the owner’s marginal tax rate, a holding company can allow individuals to take taxable dividends, which are more tax efficient or capital dividends, which are tax free.

Victor Godinho, a financial advisor with VTAG Financial Group in Toronto, says he recommends certain clients set up a holding company right off the bat “if they think they’ve got a homerun of a business.”

Yes, a holding company can be far more efficient than RSPs in retirement. In addition, Godinho notes, it can also allow for easier estate planning. If the business owner dies, for instance, investments in a holding company are taxed as capital gains. If the funds were in an RSP, they could be taxed as ordinary income.

Holding companies aren’t for everyone

“For many business owners, it is something that is out of their comfort zone. It takes time and work. It is a commitment,” says Shelestowsky.

But, he says, for the right people, “the pros so far outweigh the cons.”

For Kevin and Cathy Watson, the idea of setting up a holding company only recently made sense, both from an immediate and long-term perspective.

After talking with their accountant, the couple began to actively pursue the option as a compliment to their existing RSPs.

As a businessman, Kevin Watson agreed it’s not always easy to stay focused on complex financial matters, especially if they relate to retirement.

He’s got his eye on more land he’d like to buy as he continues to grow the business, and he’s nowhere near finished.

“It’s a lot more fun to make money than invest it,” he says.

That said, Watson doesn’t deny that the holding company has opened up a whole realm of possibilities for the company and family, now and in the future.

“The more familiar I get with it, I just see so many more opportunities. It makes it better and better,” he said.