By Robert Kuling

“Black swan event” is a common term in risk management circles and it’s particularly relevant to the current COVID-19 pandemic. The term is defined as “an unpredictable or unforeseen event, typically one with extreme consequences.”

Few could have predicted the enormous impacts of COVID-19 on business, people, and governments globally. The lessons emerging from the COVID-19 crisis are relatively easy to observe: anticipate and respond swiftly to know risks because they can emerge at breakneck speed and imperil your business and people.

Risk can be viewed as a negative, but in today’s business context, it has a more complex definition. The modern approach to risk management balances avoidance and mitigation of downside risks with the growth and innovation opportunities associated with upside risks. This balancing act requires strategic coordination among key organizational players, and success will be driven by each player’s understanding of risk and their ability to leverage it.

No matter the size of your business, you have a portfolio of risks that, if managed poorly, can lead to lost opportunities that might cripple or even destroy your business model and brand. Conversely, business leaders who invest time and resources in risk management strengthen their ability to identify, assess, monitor, and manage risks that affect the entity’s strategic success – both positively and negatively.

The following are a few fundamental elements of enterprise risk management (ERM) that can deliver value for small businesses and owner-managed companies.

Start at the top

In its simplest form, risk management is an organizational conversation, like a family discussing things around the kitchen table. Who should be at the table? Executive management and the organization’s board of directors – the group that nurtures the strategic direction and culture of the organization.

The concept of ERM has been around for decades, but it has yielded mixed results – some organizations reduce it to an administrative or box-checking exercise to satisfy external stakeholders. Successful enterprises make it practical and relevant for their business context, ensuring it is aligned with their core processes.

In Canada, boards have a fiduciary obligation to be apprised of the principal risks facing their organization and of management’s plans to manage these risks. While this appears to be straightforward, the real friction begins when views on the existence of risks and the adequacy of mitigations diverge.

Take a simple example like credit risk. At what point is the level of accounts receivable within acceptable limits and at what point does it become a concern? Does the organization need to spend more money on systems, controls, or people? How do you weigh the benefits of additional costs on the company’s balance sheet?

Identify and understand risks

The best places to start the conversation on managing risk are your business plans and strategic objectives. What are the constraints and challenges to achieving your mission? They could include a range of factors – capital, people, systems, supply, etc. The graphic outlines the basic categories of risk.

Stick to two primary dimensions to analyze your risks – likelihood and impact. People naturally assess likelihood first. If you worry about a tornado, you probably think first about the chance that it will happen before you estimate potential impact in terms of damage and cost.

As your approach to risk management matures, you could add more criteria, such as risk velocity, vulnerability, and your ability to mitigate risk. For example, commodity prices can change quickly but the effects can be partially mitigated, usually in the medium term, with forward contracts, hedging, and other instruments.

You don’t have to have a long list of risk events; you could take a top 10 approach. Most organizations have three to five strategic objectives because that’s a reasonable number of directives for people to focus on. The same logic applies to risk management; you will likely spend 80% of your time mitigating the top 6–10 risks in your organization.

The simplest approach to uncover and classify key risks for your organization is talking to your business unit leaders and getting their views on risks and opportunities. The results could surprise you, especially if you tunnel down through management layers deeper into your organization. A store manager will view risks differently than the regional manager, who will see things differently from the vice president of sales, and so on.

Other techniques to assess risk include surveys, facilitated workshops, industry research, third-party reports, scenario analysis, benchmarking, and data analytics.

Less than a quarter (23%) of large organizations describe their approach to risk management as mature or robust. Only 38% of organizations have at least one individual charged with risk management in either a full- or part-time role.

Manage risks and hold people accountable

The old phrase “what gets measured gets done” applies to risk management success. Holding people accountable for keeping risks within acceptable limits can transform your ERM program into a day-to-day value driver. In addition, shared accountability for key risk management metrics will increase collaboration among your executive leaders.

For example, let’s say a business has high staff turnover, which diminishes capacity and performance to unacceptable levels. Although human resources can champion this risk, it is the collective responsibility of the management to nurture talent through effective training, compensation, coaching, and performance management programs.

Rinse and repeat

You’ve set your targets, you’ve measured performance, you’ve rewarded your leaders. Now you get to do it all over again. This is the crucial juncture that separates good organizations from great ones. Resist the temptation to “copy and paste” last year’s program as the starting point. One of the greatest lessons learned from the COVID-19 crisis is that risks can emerge with breathtaking speed. Your risk management program, however well-designed, needs consistent attention to remain effective and relevant.

Less than a quarter (23%) of large organizations describe their approach to risk management as mature or robust.  In addition, only 38% of organizations have at least one individual charged with risk management in either a full- or part-time role.

Listen to your risk, audit, and compliance professionals. Examples abound of executives dismissing the well-intentioned concerns of quality, internal audit, and security advisors only to face major breakdowns or incidents. The influence of your internal risk managers is often undervalued until a breach or crisis happens.

The value you extract from your ERM program will be driven by the quality of your commitment to its success. The more you identify strategic risks and embed risk-based decision-making in your processes, the more you can exploit risks intelligently and confidently.

The result: a growing business profile and a healthy risk appetite. You just have to start with a conversation.

First published in the June 2020 edition of The Business Advisor.

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In the past few months, businesses that have been able to remain open have had to operate differently. covid-19 has forced businesses to adapt and for some, incorporate employees working from home (WFH). Adapting and managing through this time may fundamentally change the way many businesses operate.

As we emerge from this situation, many businesses will not be returning to business as usual, but rather transitioning to their new order. This is not a new Star Wars saga; a new order suggests that businesses will adjust their business models and permanently adopt some of the strategies and work practices they undertook during the pandemic. Working from home is a new reality for many, and businesses may want to re-evaluate their position on the practice.

Making it work

For WFH to work, the first step for business owners is to determine which positions do not need to be located in a common work environment and therefore have the potential to work from home, either full time or part time. Not all positions are conducive to WFH. If part of the role is customer reception or if the work requires access to specialized equipment that’s available only at the business’s premises (like in a manufacturing facility), the worker needs to be physically at the workplace. But for many roles, WFH at least part of the time is a newly confirmed possibility. Work is accomplished, but in a different way.

The second step is having the required infrastructure. Employees will need laptops and mobile devices, and internet and data plans that support the required connectivity and productivity. Business owners will need to determine whether they will pay for the required equipment and technology or whether employees will be responsible for providing the tools and connections. A further consideration is ensuring that the required IT security measures are in place for any employees WFH. For most businesses, WFH is not a right, it is a privilege. While many employees may ask to work from home, the ultimate decision lies with the business owner and it needs to make sense for the business.

Changes to HR strategies and management models

Now may be a good time to revisit job profiles or descriptions. Does anything need to be revised? Just because an employee is WFH doesn’t necessarily mean the role has changed. But if processes have been adjusted or if certain tasks are no longer required, it may make sense to revise the job profile accordingly.

The WFH conversation also needs to address flexibility and core hours. Core hours are times when all employees, even those WFH, must be present in the office. Some businesses may require employees to collaborate on projects and may want to establish core hours. These times may be a few hours per week spread over certain days – for example, Tuesday, Wednesday, and Thursday mornings from 9:00 to 12:00 – or they may be concentrated in one day each week. However they are structured, core hours facilitate in-person meetings and collaboration across teams.

Business owners and employees will also need to spend some time defining expectations around availability. Employees may require uninterrupted time to complete work, and they need to inform their supervisors and teams of the times they are not readily available by email, chat, or phone.

Many businesses have not previously encouraged or supported WFH because they fear the loss of employee productivity. Managing people who work from home is not easy – it requires skill. Managers who lean toward micro-managing will need to adjust. Without being able to observe tasks being completed, the focus needs to shift to outcomes. This can be very liberating for employees. Set the goals, be available to support or coach as required, and let employees be responsible for their work and own their results. WFH is much more fluid than working in the office and managers need to trust that their employees will do their best to get their work done.

The best way to maintain expected productivity levels is to ensure managers continue to manage their teams. Effective managers can manage employees whether they are in the office or halfway around the world. They need to communicate expectations clearly, be available when needed to help and guide employees, and allow workers to take responsibility for their tasks and their output. For some employees, WFH allows them to produce their best work.

Many business owners equate hours in the office with productivity, but not all hours in the office are productive. A better way is to manage to results, rather than time spent working. If employee productivity is your goal, ensure employees know what is expected of them and when, and then let them choose how and when to accomplish it. WFH allows more flexibility. Some employees may accomplish the most first thing in the morning; others may find that they work best at night, after the kids are in bed. Let employees structure their schedule to accommodate work and family needs.

A shift in communication methods

Business owners also need to establish a regular cadence for communication – when organizational updates are to be provided, when team meetings happen, and when one-on-one meetings will occur. Leaders need to be visible and accessible to employees WFH. Managers need to let employees know when they are available and the best way to contact them. Encourage texting, calling, and quickly jumping on a virtual call to get an issue sorted out. Less formal scheduled contact and more immediate responses can help employees to remain productive. Managers also need to check in on employees WFH, not just on their work goals and progress, but to connect on a human level with how they are doing and to offer any assistance required.

Many people dislike meetings. Some see them as an interruption to their work or a necessary evil. When employees are not in the same location, however, meetings are a great way to ensure the lines of communication remain open. Think of them as opportunities to connect and communicate.

In the absence of communication, employees will start to create their own story. Your role as a manager is to keep your employees informed on business and team goals and progress toward those goals. Employees need to feel connected and to know their work is important to achieving team and organizational objectives.

Managers also need to encourage dialogue and contributions from everyone in virtual meetings. Ensure everyone has a chance to participate. Some people are very comfortable speaking in a group, whether in a meeting room or in a virtual meeting. Others are not. Encourage those who have not spoken  to contribute.

Business owners should encourage peer-to-peer interaction. Just as when we’re working in the same location, organic communication happens when employees meet up in the coffee room or pop into someone’s office for a quick chat. Encourage this type of interaction via online channels to allow employees to connect and talk about things other than work, which helps to build camaraderie and trust among co-workers, even while working remotely. Your company culture is maintained through both formal and informal connections.

Remote work has been around for a long time. With the technology tools available, many employees are not only working from home, but are continuing to be productive and contributing to achieving business results.

First published in the June 2020 edition of The Business Advisor.

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By Brent Banda

When the anniversary of COVID-19’s arrival in Saskatchewan comes in March 2021, , will you be able to call the previous year a success? You might look favourably on having strengthened customer relationships. Or perhaps you launched a new product. Good things and bad things will happen to every business this year. It won’t be too hard to pick out a few positive highlights.

To call the first year with COVID-19 a success, we need to start out with clear goals. They are the milestones we pass along the way to accomplishing something spectacular. But they are more than this. Goals motivate and drive us down a certain path, keeping us from going astray and ensuring we focus our attention and action on something worth achieving.

Rather than just hanging on and adapting to the conditions of the day, consider what success could look like in March 2021. The harsh reality is that we are facing a prolonged period of economic uncertainty. We must learn how to do business in this COVID-19 economy.

Look around and you will see examples every day of entrepreneurs with creative minds and a desire to survive – and even thrive – during chaos.

The current operating environment

Businesses will have to contend with the current economic crisis for at least a year – until a vaccine is developed for COVID-19 and social restrictions are eliminated. That is the consensus of scientists, health practitioners, politicians, and economists. This is not going away soon.

Business owners were in crisis mode for about three weeks in March. People figured out how to operate safely and dealt with the realities of their unique situations. Some had to drastically scale back expenses; many had to adjust operations to accommodate social distancing. Others, unfortunately, were forced to cease operations.

We are well past that frantic crisis now, but the operating environment is still changing. New waves of infection could materialize, forcing tighter social controls and economic restrictions. Some competitors, customers, and suppliers might go out of business while others might announce significant expansions.

Companies have operated in this COVID-19 economy for only a few months. Some are doing well while others are not, but everyone has some new reality they have come to terms with.

We must do more than react to what comes our way. Now is the time to define what we want our future to be like and prepare accordingly.

Clear goals make decisions easier

Set clear goals to guide your actions, identify your options, get the facts on the table, form your opinion on what may unfold, and then make tough decisions. This is the simple but effective foundation for my strategic planning work with clients.

Most business owners intuitively follow this process. But everyone – and I mean every business owner, some with extremely large operations – will likely stall on at least one of these steps. For example, in a panic to make a decision, a company may neglect the important step of getting facts on the table. Or maybe the leadership has not clearly identified their options and find it impossible to decide on a course of action.

Goals are often the overlooked step in this process. That’s because of human nature. People like forming opinions and making decisions. But we don’t naturally step back and think about what we are trying to achieve before making those important decisions.

Being clear about what you are trying to achieve makes it easier to tackle tough decisions. This is true in any operating environment. Goals help ensure limited resources (budget, time) are spent on items that matter. They also help employees focus on a common desired outcome.

If you had goals in place before the pandemic, consider whether they are out of date. Previous goals were established based on the set of facts of the day and your opinions on what may unfold from those facts. Reality has changed. For most businesses, old goals are no longer relevant.

Instead of just ignoring out-of-date goals, form new ones. Consider your options, review a current set of facts, and form opinions on what may develop. Then start the process of making tough strategic decisions. That clarity will be helpful as you formulate a plan on what you will try to achieve.

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The actions you take will stem directly from how you define your goals for the coming year. The Saskatoon Club, a private members’ club with extensive food service operations, provides an interesting example. Forced to close temporarily by the public health order banning restaurant operations, the club’s management was pressed to generate new sources of revenue and maintain strong relationships with its members. The club decided to provide grocery pick-up service and ‘Two-Meter Takeout’ with a variety of exceptional meal choices prepared by their award-winning chefs, all while adhering to social distancing rules in place to control the pandemic.

Some businesses are focused on growth. These businesses see ambiguity and turmoil as signs of opportunity. Companies will seek out new suppliers as their traditional supply chain becomes less reliable because of production disruptions caused by labour shortages or inability to access raw materials. Consumer preferences have radically shifted in many product categories, creating situations where demand is much greater than supply. Some companies are going out of business, creating gaps in the competitive landscape.

If your business is interested in pursuing new opportunities, be intentional in what you pursue and clearly define what you would like to achieve. The goal may be growth. Minhas Sask is now manufacturing hand sanitizer, a somewhat common product for distilleries and breweries to produce during this pandemic. Minhas, however, is rare in its high aspirations for the product, having secured distribution through a major grocery chain. Periods of change such as this one can provide a foothold in a new market with potential to establish a permanent line of business over the longer term.

Look around and you will see examples every day of entrepreneurs with creative minds and a desire to survive – and even thrive – during chaos. Establish goals that are right for your individual situation. With clear goals in mind, you can shape your company’s actions into a strategy with a high likelihood of success.

First published in the June 2020 edition of The Business Advisor.

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Retaining corporate business income creates a powerful tax deferral, but can it lead to other problems?

By Sean Rheubottom

Many readers will know that carrying on business through a corporation allows access to a lower rate of taxation on active business income (ABI). In 2020 in Saskatchewan, the first $500,000 of ABI gets the most preferential tax rate, 11% (that’s federal and provincial tax combined). ABI between $500,000 and $600,000 is taxed at 17%, and above $600,000, the rate is 27%.

Let’s focus on ABI taxed at 11%. If you paid the after-tax amount to yourself as a taxable dividend, you would pay tax at the “non-eligible” dividend rate of up to 40.37%. At that point, you and your corporation have together paid a combined or “integrated” tax rate that is very close to the tax you would have paid had you not incorporated, or had you paid all the profit to yourself as a salary. Salary is taxed at a maximum of 47.5%.

The big win is the tax deferral made possible by the 11% corporate rate. If you can leave the after-tax ABI in the corporation and invest it while it’s not required for lifestyle expenses, putting off the personal tax until later, that tax deferral quickly turns into absolute tax savings.

The power of a tax deferral

Alice’s corporation, ACo, earns $300,000 of ABI. She decides to pay the entire amount to herself as a salary and bonus. She pays 47.5% in tax, leaving her with about $157,500. If she extracted the money as an after-corporate-tax dividend she would have $159,212 to invest. So let’s split the difference and say she has $158,000 to invest. She invests it for 10 years in a well-managed balanced portfolio with a 6% return consisting of 1% interest, 1% dividends, 1% realized gains, and 3% deferred growth. After 10 years the $158,000 has grown to $254,791. She liquidates the investment, paying tax on some realized gains, and is left with $240,936.

Brad’s corporation, BCo, also earns $300,000 of ABI, but he invests the after-tax cash, $267,000, inside BCo, with the same plan to liquidate the investment after 10 years. After a decade at the same 6% growth rate, the $267,000 has grown to $434,914. Brad liquidates the investment, creating a capital gain, which is taxed inside BCo. The cash in the corporation is then paid to Brad as dividends, most of which are fully taxable, but he makes use of eligible dividend tax rates, refundable tax from investment income, and the tax-free capital dividend account from realizing capital gains. At the end of the day, Brad has $297,143 in his pocket. The deferral has become an absolute saving.

Similarly, a deferral is achieved if ABI taxed at the 17% or 27% corporate rate is retained and invested, because the 17% and 27% ABI rates are lower than the 47%-plus rate on income paid straight to the shareholder. The deferral takes longer to turn into absolute savings because the difference in corporate and personal tax rates is not as stark.

But don’t forget about good old RRSPs and TFSAs. An optimal mix of salary and dividends allows investment in these tax-deferred plans as well, with good long-term results.

More money, more problems?

So retaining after-tax business income can defer tax and create absolute savings. But an accumulation of non-business investments in your operating company (opco) leads to other problems that need to be addressed.

Purify to secure your capital gains exemption (CGE)

Canadian tax rules provide that each individual shareholder can shelter up to a lifetime limit of $883,384 (in 2020; indexed for inflation until it reaches the maximum $1 million) from the sale or deemed disposition at death of “qualified small business corporation” (QSBC) shares. Each individual’s lifetime limit is reduced by the amount of any kind of CGE they have ever used (including the CGE for qualified farm property and the general $100,000 exemption that was repealed in 1994). The lifetime CGE may also be reduced by other factors not discussed here.

For your shares to be QSBC shares, you must keep track of how much of the corporation’s assets are “active” business assets and how much are “passive,” such as excess cash and investments. The rules are complex, but one main requirement is that, at the time shares are sold, the corporation must meet a 90% active business asset test. Excess cash and investments don’t qualify. There’s also a 50% active asset test that must be met for a period of, usually, two years before a sale.

Fortunately there’s a solution: you can stash corporate dollars by setting up a separate corporation (holdco) that can receive the after-tax business income from your opco as tax-free dividends. Your opco’s 90% “purity” is maintained. We call this “purification” of your opco. The powerful tax deferral is preserved. Another benefit is that your savings account is protected from potential creditors of your opco.

Purify to avoid corporate attribution

Maintaining 90% purity also helps avert a “corporate attribution” problem that can arise if you have a structure that includes your spouse as a shareholder. The new tax on split income (TOSI) rules make income splitting more difficult in any event, but you still need to consider corporate attribution because it can have a negative effect even if you’re not actually paying dividends to your spouse.

Passive investment income may reduce the small business limit

Your holdco’s investments will generate investment income such as interest, portfolio dividends, and taxable capital gains (passive income), and the powerful tax deferral will work as described.

But since 2019 there’s a new problem to contend with: a new tax rule that may reduce your opco’s access to the $500,000 small business limit that gets the 11% tax rate. The small business limit will be reduced by $5 for every $1 of passive income over $50,000, until your holdco’s passive income reaches $150,000 and the small business limit is reduced to zero.

If you think of a well-managed balanced portfolio that produces 3% passive income (with 3% deferred as capital growth), you’ll realize that it takes a fairly large investment account to start grinding your small business limit. If you might be nearing that level of passive income, it could be time to consider strategies such as investing outside your corporate structure, an Individual Pension Plan, or tax-deferred insurance based investment options.

First published in the June 2020 edition of The Business Advisor.

The information in this article is for general information only. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the prospectus and consult your Assante advisor before investing.

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By Keith Moen

Businesses are often opened and closed, fortunes won and lost, on the rising and falling tides of market forces such as supply and demand. These forces – which can be simultaneously powerful and fleeting – are the fundamental drivers of free markets. Entrepreneurs and executives need to respond to them to seize opportunity and mitigate downturns.

Supply and demand are not the only forces at work in our economy. Many other factors influence where companies can find opportunity, and these forces are not always obvious. And unlike supply and demand, some other factors can intentionally aim to direct the economy in specific ways.

One of these factors is government policy, which often aims to play the role of Adam Smith’s infamous “invisible hand.” In Smith’s writing, the invisible hand is a serendipitous economic force that directs otherwise free market activity to achieve the most societally beneficial conclusion. Government policy is enacted to subtly – and sometimes not so subtly – influence the market economy to achieve a result that is beneficial for society as a whole, such as by enacting regulations to promote safety in the workplace. Sometimes policies have positive effects on economic growth – and sometimes they do not.

There is no time more appropriate to discuss the effect of government policy on the economy than in the lead-up to an election. During elections, candidates and parties propose many different policies, some of which may not even seem to have an effect on the economy, and voters are tasked with choosing among them. Nonetheless, it is important to understand the full effects each policy will have on the economy because the effects can often be larger than one thinks. The upcoming provincial election in Saskatchewan is no different.

It is important to understand the full effect of policies before they are enacted.

The best of intentions

To understand why it is important to think about the broader consequences of a policy, we can use the Saskatchewan government’s decision to apply provincial sales tax (PST) to construction labour in 2017 as a case study.

In 2017 the Province of Saskatchewan was facing a deficit of over $1 billion due to resource revenues being far less than expected (to make the budget, the provincial government estimates how much it will earn in royalties on the extraction of various natural resources in addition to its other revenue sources). As a result, the government looked for ways to diversify its revenue streams away from the ups and downs of resource industries.

Alongside the rest of the budget, two particular measures were passed: first, to raise the PST to 6% and second, to eliminate the PST exemption that had previously applied to construction labour. These measures meant that 6% PST would now be applied to construction projects in the province that had, until the 2017 budget, not had any PST applied at all.

The intended societal benefit of these policies is clear. By raising approximately $250 million through the increase in PST and over $400 million through eliminating the PST exemption for construction labour annually, the government would stabilize its revenues and be in a position to avoid cutting jobs, salaries, and general spending every time commodity prices went bust. At the time, this was a sensible move that organizations such as the NSBA recognized as necessary, and the changes did ultimately help the province achieve the goal of budget stability.

There were, however, unintended economic consequences that show us why it is important to understand the full effect of policies before they are enacted.

Unforeseen consequences

Almost immediately upon implementation of PST on construction labour, the industry began to feel the effects. For example, the extra 6% cost on the sale of a newly built home meant that a family purchasing a home that would have sold for $350,000 without PST would be paying an extra $21,000, which can easily be the difference between qualifying for a mortgage or not. The combination of this increase in the cost of a new home and the federal government’s 2017 adjustment to the stress test – which reduced the value of mortgages that people could qualify for – devastated sales of new homes: the Saskatoon and Region Home Builders’ Association noted that the number and value of residential construction permits – two key metrics for measuring the strength of the industry – steadily declined by an average of 20% year-over-year from 2017 to 2019.

Further, contractors in the industry were reporting that they were being underbid on jobs by companies operating in the cash economy, illegally avoiding collecting and remitting GST and PST on their services. This created pressure on both ends of the spectrum; on one hand there was less work because of the slowing market and on the other hand the work that was there was becoming harder to get.

Ultimately, the end goal of the government policy was not met as planned. While jobs and livelihoods may have been saved in the public service, jobs were lost in the construction sector. The slowdown in the homebuilding industry did not just affect general contractors or homebuilders; all the trades and suppliers that perform work on houses and supply fixtures for them also felt the pinch.

Correcting course

To its credit – it takes strong political leadership to recognize when a policy is not perfect and requires amendment – the government has responded, introducing a policy to mitigate these unintended consequences and achieve the desired result. In the 2020/21 provincial estimates the government introduced a PST rebate on new-home construction of up to 42% for construction values up to $450,000. While it is early days for this policy, the hope is that this measure will re-motivate the residential construction industry. But it is never too early to ask what the full effects of a policy change will be.

As the Saskatchewan provincial election approaches and the electorate is presented with various policy choices, it is important to fully examine how each policy will affect the economy of the province and the jobs and livelihoods of its residents. In the example discussed here, hindsight proved to be 20/20, and while it can be hard to fully understand the ramifications of a policy before it is implemented, we should strive for 20/20 foresight as well.

First published in the June 2020 edition of The Business Advisor.

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When an owner passes away, much of the company’s value will be eliminated by taxes. A proper estate plan can reduce unnecessary taxes.

By Jerry Gedir

One of the most valuable assets business owners have is their private company shares. When an owner passes away, much of the company’s value will be eliminated by taxes. A proper estate plan can reduce unnecessary taxes.

Let’s examine a situation in which a business owner dies and the fair market value (FMV) of their shares is $5 million.

There is a deemed disposition on death of these shares at FMV. The capital gain on the shares is their current value minus their original value (the adjusted cost base). If we assume the adjusted cost base is zero, this results in a capital gain of $5 million to be reported on the deceased’s final tax return. Capital gains are taxed at roughly 25%. The business owner’s estate must come up with $1.25 million in cash for the CRA.

If the estate doesn’t have the cash, the executor of the estate could choose to wind up the company and pay a taxable dividend to the estate of $5 million (the company’s full value). Assuming dividend income is taxed at 40%, which would amount to another $2 million tax bill. That’s an example of double taxation – the value flowing to the beneficiaries of the estate has been taxed twice. In fact, this $5 million asset has paid 65% in tax! The beneficiaries of the estate will receive only $1.75 million of the original $5 million company value.

What will your legacy be?

Without proper planning, double taxation can be a huge problem. The legacy the business owner was hoping to leave may be significantly reduced. But it doesn’t have to be this way. Certain post-mortem arrangements can be completed to avoid double taxation after death.

The two most common post-mortem alternatives are pipeline planning and capital loss planning. The method used will depend on the facts of the situation. Note that the two methods can be used in combination. The key aspects of these methods are outlined below.

Pipeline planning

This arrangement involves corporate restructuring after a shareholder’s death to avoid double taxation. Pipeline planning may also reduce or eliminate a third layer of tax that can arise if the company sells assets to generate cash. This planning approach preserves the capital gains tax rate, which is lower than the tax rate on taxable dividends. The executor should work closely with the business’s professional advisors to execute this strategy.

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Capital loss planning

This approach eliminates the capital gain on death by creating a capital loss in the estate through redeeming shares or winding up the company in the first year after death. The executor can elect to carry back the loss from the estate to offset the capital gain on death. In capital loss planning, you effectively trade the capital gains tax rate for the dividend rate.

Even though the current dividend tax rate is higher than the capital gains rate, that problem is mitigated if the dividend can be a tax-free capital dividend. A capital dividend account (CDA) comes into existence when the company receives certain tax-free income, such as life insurance proceeds. The CDA enables tax-free proceeds to flow to shareholders tax-free. The following are capital loss planning alternatives:

Grandfathered Shares

Before April 27, 1995, it was possible to use a life insured corporate redemption strategy to eliminate the tax arising on deemed disposition of private company shares at death. Stop-Loss rules were put into place to reduce the amount of capital loss available to be carried back against capital gain to only 50%. The stop-loss rules do not apply if the shares were subject to a shareholders’ agreement made before April 27, 1995, or if the corporation was a beneficiary of an insurance policy on April 26, 1995. If either of these conditions apply, the deceased’s shares are grandfathered and not affected by the stop-loss rules. Grandfathering provides the best result for the estate.

But in most cases today, grandfathering doesn’t apply because most agreements or insurance are post April 1995. We are, however, left with other alternatives.

100% solution

With this approach, the full amount of the CDA is paid to the estate and the stop-loss rules apply. This results in no tax to the estate and a 50% reduction in capital gains realized in the year of death. This can be a tax-effective result for the estate but wastes 50% of the available CDA credit.

 50% solution

This approach avoids the stop-loss rules so the capital gain on death is eliminated, but there is a taxable dividend in the estate. Since dividends are taxed at a higher rate than capital gains, the 50% solution results in more tax than the 100% solution, but leaves 50% of the CDA available for future use.

The chart uses the example of private company shares with an inherent capital gain of $5 million, showing the differences between the alternatives, as well as the pipeline planning strategy with the CDA. Note that the cost of insurance has not been factored into these calculations.

The chart assumes $5 million in corporate-owned life insurance, a CDA of $5 million equal to the shares owned at death, and nominal adjusted cost base for the shares. Top tax rate assumptions in the chart are 50% for regular income and 40% for dividend income.

Each scenario in the chart can be valuable in certain circumstances.

Key take-aways

• It’s best if grandfathering applies because it provides the most tax-efficient solution, with no tax payable, but this may not be available in most situations.
• The 100% solution provides the next best tax result for the estate but effectively wastes the CDA that could have been used by the surviving shareholders. This approach might be an option if parties are not related, or where in a family situation, the beneficiaries of the estate and future shareholders are not the same people.
• If the beneficiaries of the estate and future shareholders are the same people, the 50% solution is likely more efficient because it results in the CDA being available for future use.
• Pipeline and insurance planning can be combined, resulting in the capital gains tax rate being preserved and all of the CDA being available for use by the shareholders, producing future tax savings with the CDA that are greater than the tax paid on death.

This is an important reminder that estate planning requires collaboration among all your professional advisors – legal, tax, insurance, and financial. This article is for general information purposes only. Please seek advice from your professional advisors to let them help you leave the legacy you want to leave, under your terms, not the government’s. Remember – the value of your business is probably the largest part of your legacy. Let’s do this right.

First published in the June 2020 edition of The Business Advisor.

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By Sean Moorfield

Managing a business is a stressful job, and one that only increases in complexity as the business landscape changes. Constantly thinking about how your business operates, and trying to maintain the efficiencies that led you to succeed, can keep you awake at night.

One thing I often see is that as revenue grows, margin doesn’t always grow along with it. Why is that? Rarely is one cause the sole answer; often it’s a dozen small things that add up to a large impact – and profit leak. One way to continue your business’s positive trajectory is to adopt the $100-a-minute mentality.

With this simple, pragmatic approach, you imagine that you are paying your employees $100 per minute. If you were to observe an employee or a process for an entire day, week, or year through this lens, how much of that time would you be willing to pay for? This simple process challenges you to think of how your team is operating every minute of the day. And it can lead you to uncover avoidable repetitive tasks that cost you time. Many owners struggle because they see the negative impacts of inefficiencies, but not the subtleties creating those issues. The causes may seem small at first.

This simple process challenges you to think of how your team is operating every minute of the day.

To get started, we’ll look at three areas through the $100-a-minute lens: planning and scheduling, inventory management, and creating expectations.

Planning and scheduling

Consider the example of a Formula 1 race team. You could have the best driver in the world and a top-tier vehicle, but that alone doesn’t guarantee success. If you and your team haven’t communicated about when you’re scheduling a pit stop, and if your crew doesn’t understand exactly what to do and when to do it, you’ll break down before the finish line.

Put simply, scheduling is king. But scheduling is also difficult for two core reasons.

The first problem is that companies struggle to match the amount of work to the amount of labour, because doing so isn’t always intuitive. This is extremely common in the construction industry – for  example, we recently worked on a hotel project observing a crew that was responsible for hanging drywall for several rooms in the hotel.

The foreman on the project scheduled two drywallers per day, however the project owner only budgeted for eight hours of labour per day. If both drywallers worked a full eight hour day, that meant twice the labour cost was going into each day than was budgeted for. This may seem intuitive, but the foreman’s efforts to increase efficiencies by adding labour resulted in unexpected costs for the owner, as there wasn’t a process in place for matching labour to workload. Multiply this example over several weeks and a dozen crews and you can see how quickly costs get out of hand without a systematic process.

The other core scheduling issue is that people don’t plan beyond the immediate future. In our example, do the drywallers know what they need to do next when they are finished a room, or do they need to find their supervisor and ask? In most cases, it’s the latter. People focus on what’s in front of them, but struggle to see what comes next. The result: workers spend time trying to find out what to do next instead of starting the next project right away. If you were paying $100 a minute, would you want to find a solution to this problem?

Inventory management and pre-staging

A second common area for improvement within manufacturing and construction is inventory management and pre-staging. We recently completed a project with an organization that specializes in maintenance for transit buses. The owners knew that technicians occasionally ran out of parts and didn’t pre-stage all their tools before starting a new job. However, the owners considered the lost productivity negligible because the parts department was located close to the shop floor.

After careful observation, we discovered that the entire department spent 55% of their time on unproductive tasks that the owners were not willing to pay for. A crew of two technicians was observed leaving their station 31 times over the course of an 8-hour day, moving to and from the parts department and looking for tools in other areas of the shop. That’s almost two trips per hour.

Using the $100-a-minute lens, it’s easy to see how small, seemingly insignificant tasks are in fact extremely significant when compounded over the course of a day, week, month, or year.

Creating expectations

How do people know when they’ve done a good job? When they’ve met or exceeded valid expectations. But many workplaces struggle to develop clear expectations for staff and do not communicate what it means to do a good job.

A simple exercise to assess the efficiency of any organization is to ask frontline employees what is required of them to succeed. More often than not, they cannot provide a clear answer. Let’s use an example from a manufacturing facility that produces glassware and dishware. When a frontline employee was asked what they needed to do to have a successful day (i.e., how many plates they had to make), they laughed and admitted they were unsure.

This is a problem for several reasons. The first is that individuals want to succeed. If we do not tell them what is needed to be successful, their behaviour will not change. They will continue down their current path regardless of whether it meets organizational objectives.

The second problem this presents is that organizations are unable to determine whether they are on track to succeed or fail. One of the most common sets of directions in the construction industry, for example, is to complete a project on time and on budget. However, those giving the direction do not always understand in detail how long a project will take and do not measure individual components of finishing the project. The lack of details makes it difficult to assess whether the project is on track midstream, and even harder to do a project post-mortem. Without standards to measure against, improvement is impossible.

With the $100-a-minute mentality, establishing clear expectations ensures that organizations are spending time doing tasks effectively and have a mechanism for improving.

Small changes can mean a big impact

If yours is a growing business, understand that these problems typically only grow larger with increased size. It’s critical to address them early because the problems become harder to manage as workflow grows and habits become more established. A situation that may be costing you $100 a minute with 3 employees isn’t going to change when you have 10 employees.

When you are finished improving processes in your business you will probably look back and think the areas that needed to change should have been more obvious than they were at the time. Making a change may seem difficult, but it is possible. Take a step back and be critical in evaluating how you’re currently operating – you will quickly see how much potential your business really has.

First published in the March 2020 edition of The Business Advisor.

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By Richard Jankowski

Industrial parks are a key component of regional economies and local opportunities. When accompanied by a road and/or rail interface, these locations become even more strategic and coveted, whether they were created through private, public, or public-private partnership investment. Three distinct examples of these new “super economies” exist in Saskatchewan: the Global Transportation Hub (GTH) and Chuka Creek Business Park in Regina and the Saskatoon Transportation Link (STL) southeast of Saskatoon.

While the term “inland port” may seem contradictory, these road-to-rail hubs provide a key opportunity to stimulate Saskatchewan’s economy through additional trading opportunities within the larger continental and global trade networks – if we invest the necessary time and resources in their development, that is. And, in the process of building them out from concept to completion, the regional economy experiences a major surge in investment spending.

The three parks are at different stages of completion. The 1,870-acre GTH has close to 50% of its developable land sold, with approximately 15% completely developed. A dozen businesses occupy 1.5 million square feet, with the anchor businesses being CP’s intermodal operation and Loblaw’s western Canadian distribution centre.

The overall impact is staggering. More than just being the right fit for Saskatchewan’s economy, these projects take advantage of global economic trends and shifting trade norms.

Located in the Rural Municipality of Blucher’s commercial power centre, the 750-acre STL is in the early stages of development but has a canola processing facility on site as well as both major railways intersecting the property. The 168-acre Chuka Creek Business Park on Regina’s eastern fringe is now operational, has world-class transload equipment in place, and has development sites ready for business.

All three parks have the potential to dramatically increase the efficiency of moving international shipments from ports to inland prairie distribution centres. This is a particularly important imperative for landlocked, trade-reliant provinces like Saskatchewan. The opposite traffic flow is even more beneficial for export-driven economies such as ours because the majority of our real GDP is export-based and our transportation relies entirely on road and rail. Many major exporters choose their rail service provider based on the ports it can access. The GTH, Chuka Creek, and STL projects promise to help address this reality, allowing Saskatchewan to capitalize on its advantageous position as a major east-west axis for highways, as well as the transcontinental railway routes.

Based on the GTH’s sheer scale and the progress that has taken place thus far, we can use it as an example to forecast the benefits to the region of inland ports such as these. The benefits are far reaching but can be divided into four major categories:

• Labour growth and diversification
• Industrial construction
• Residential construction
• Branding

The first three categories are helping Saskatchewan reach a critical mass of value-added processing, warehousing, and distribution. Branding supports the argument that the region is undergoing
a brand refresh, becoming less of a government-driven city and instead one that enjoys centralized economic power in the province that will positively influence foreign direct investment – and also help fuel prosperity across the province (Evraz Steel, Consumers Co-operative Refinery, Brandt Industries, and AGT Food and Ingredients are a few examples).

THE GLOBAL TRANSPORTATION HUB’S ECONOMIC IMPACT

Calculation Assumptions:

• Current industrial inventory: 1.5 million square feet (MSF) using 20% of occupied land (known as site coverage ratio)

• Current people employed on site: 900

• Current occupancy ratio: 1.5 MSF / 900 people = 1,667 square feet per person

• Full-build forecast based on 20% site coverage on 1,470 net developable acres: 1,470 × 20% = 294 acres × 43,560 square feet per acre = 12.8 MSF building inventory

• Labour impact (employment on site): 12.8 MSF / 1,667 square feet per person = capacity for 7,678 jobs on site

• Residential housing impact: 7,678 jobs / 3.0 average family size = 2,559 homes

• Residential construction impact: 2,559 new homes × $310,000 = $793 million

• Industrial construction impact: 12.8 MSF × $350 per square foot = $4.48 billion

Economic benefits expand past housing. Families will spend on food, entertainment, shopping, vehicles, and more. Ongoing services for occupants grow exponentially.

To assess labour impact, we explored the GTH, which currently employs approximately 900 people on site; when the complex is fully developed, that number will jump dramatically. Based on our estimates (see sidebar), the GTH could provide jobs for close to 7,700 people, creating new employment opportunities that contribute to the overall prosperity of the region. The same assumptions can be made for Chuka Creek and the STL, thus compounding the potential beneficial outcome when all are complete.

The labour required on site will drive residential construction of various types, in turn supporting the retail, commercial, entertainment, and institutional sectors. The proximity of the GTH to important transportation corridors offers a key advantage, along with a wide range of labour requirements. One can reasonably conclude that there will be synergy with Saskatchewan’s agriculture, manufacturing, processing, and mining industries, offering significant new cost-saving and trading opportunities, along with a more diversified labour force. Using Statistics Canada’s average home size and cost, the compounding numbers are dramatic. The current labour force on site would nearly mirror the population of Saskatoon’s major suburban city – Martensville – not including service jobs for GTH-located businesses. Given the gap between Regina’s and Saskatoon’s GDPs ($17.9 billion and $22.7 billion, respectively) and populations (Regina, 257,337, and Saskatoon, 322,568, according to StatsCan’s 2018 data), a labour surge would benefit Regina as well. A reasonable new-home construction estimate supports a direct housing impact of close to
$800 million.

Industrial construction costs (roads, infrastructure, and buildings) stand to have the largest impact on growth. Based on a reasonable all-in cost of $350 per square foot for warehouse and distribution facilities, approximately $4.5 billion worth of work will be completed during the project’s lifespan on the development stage alone. Assuming a 3–5% investment in ongoing maintenance, up to an additional $224 million worth of work will be created – and the synergy that follows compounding growth will be realized. If large-scale value-added agri-food or energy processing facilities locate on the site, these estimates could increase significantly.

The overall impact is staggering. More than just being the right fit for Saskatchewan’s economy, these projects take advantage of global economic trends and shifting trade norms that make inland ports and industrial parks particularly attractive. In the post rail-consolidation era, these “sub-economy” super distribution centres are essential to our future.

With greater attention from the global business community, these projects will help Saskatchewan further capitalize on its position as one of Canada’s most business-friendly environments, moving well beyond its reputation as Canada’s breadbasket and broadening trading opportunities, increasing efficiencies, and keeping our province competitive on the national stage.

If we are to realize the long-term success of the GTH, Chuka Creek, and the STL, we need a significant commitment from federal, provincial, and regional governments, from industry associations, and from private sector leaders. These projects require time, patient capital, persistent leadership, strong management, regional collaboration, and adaptable governance. But it is clear that Saskatchewan inland ports and industrial parks provide a key economic opportunity that enables us to share our abundant resources beyond our borders and to realize maximum benefit for the people of our province.

First published in the March 2020 edition of The Business Advisor.

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By Jason Sirman

Joe is a star running back who has just signed a multi-million-dollar contract and is ready to play in his first game. While he understands that there is a risk of injury every time he steps on the field, he has also concluded that the multi-million-dollar contract is enough to justify the risk.

Joe also has a new hobby – trading investment securities using his newfound wealth. He has read that to increase the expected rate of return on his investments, he needs to increase the risk in his portfolio. He decides that to do this, he needs to trade individual stocks. Not wanting to spend a lot of time researching, he buys shares in a few companies he recognizes – two banks and an oil and gas business, all large Canadian companies that have been around since before he was born. Now, he concludes, he will experience the higher rates of return that come with increased risk.

Diversification is not defined by how many stocks or funds you own. A diversified portfolio should be structured to hold multiple asset classes that represent different market dimensions across the world.

Joe has decided to concentrate his money in three stocks. Basically, he is betting on those three and against the rest of the available stocks. What Joe has failed to understand is that although he has increased the risk of his portfolio, he has not increased the expected rate of return. The expected rate of return of each individual stock is the same as the expected rate of return on the market portfolio (not including the impact of fees or over/underweighting of different classes of stocks). Is there a chance that these stocks could outperform the market portfolio? Certainly, but research shows that it is very difficult to predict which stocks will outperform the market portfolio.

Looking at the Benefits of Diversification chart, you can see that for the global stock portfolio, 1994–2018, if you remove the top 10% of stocks (according to rate of return), the overall rate of return is reduced by almost 60%. In other words, the top 10% of stocks generated almost 60% of the total return. The point here is that you are more likely to pick a stock that will underperform than you are to pick one that outperforms the market.

Concentrating your portfolio in a few stocks rather than holding a properly diversified portfolio would be akin to Joe concluding that he can increase his compensation from his football contract (his expected rate of return) by playing football without a helmet (increasing his risk of injury). Your risk of lower performance is increased while your expected rate of return is unchanged.

Explore the world

In addition to the risk of concentrating in too few stocks, you must be aware of the risk of concentrating in one asset class. Because we live in Canada and spend our loonies here, as investors we have a bias toward investing in Canadian securities. Many investment portfolios we see have a home bias – that is, a large percentage of the equities are Canadian. Canada represents approximately 3% of the world’s market capitalization, which means if your investments are concentrated in Canadian securities, you are literally missing a world of opportunities. Looking at the Practise Smart Diversification chart, you can see that a portfolio invested 100% in the Canadian stock market could reduce its volatility by over 2.5 percentage points simply by diversifying with US and international stocks.

Diversification is not defined by how many stocks or funds you own. A diversified portfolio should be structured to hold multiple asset classes that represent different market dimensions across the world. Perhaps brilliant Noble Laureate Merton Miller, after a distinguished career studying financial markets, said it best: “The only thing we know for certain about investing is that diversification is your buddy.”

Find a trusted coach

Thankfully for Joe, his coach is also a seasoned investor who works with a qualified financial professional. After hearing what Joe was about to do with his investments, Coach introduced him to his advisor, who educated Joe on owning a globally diversified portfolio – and always remembering to wear his helmet.

First published in the March 2020 edition of The Business Advisor.

Jason Sirman is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. The information mentioned in this article is for general information only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the prospectus and consult your Assante Advisor before investing. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.

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One of the most significant questions looming over retirement and the later years in life is, do I have enough? It’s important for each household to assess this question to determine how long they should work and what lifestyle they can really maintain in retirement.

It’s important to really dig for the answers. Take a deep dive into your financial picture, uncover all those assets and liabilities you may have forgotten about, and get a full understanding of where you stand. Ask your financial advisor to give you a full retirement projection that allows for inflation and contingencies.

Once you have a detailed projection, you can gain clarity: either you have more work to do or you are in the enviable position of having more than enough money. If you fall into the second category, you have the good fortune to be able to open your heart and mind to the exciting possibilities of what you can accomplish with your excess wealth.

As we see time and again, business owners continue to be pillars in our community, supporting local charities and giving back to the community. This generosity often extends to their years beyond the boardroom as they transition out of working life and into retirement.

Philanthropists are beginning more and more to think outside the box and find new and creative ways to benefit the causes that are important to them.

Rather than just making small, sporadic, unplanned donations, philanthropists are beginning more and more to think outside the box and find new and creative ways to benefit the causes that are important to them. They can do so in ways that are quite simple. For example, if the financial analysis shows that the household will already have more than enough set aside for retirement when the individuals begin to receive their CPP income, that money is often just deposited in the bank account and forgotten about. However, when the retirees notice they are paying up to 47.5% tax on that income, they often take notice.

The solution is really quite simple: if you don’t need your CPP income to support your lifestyle, give it away!

EXPLORE WAYS TO GIVE EXCESS INCOME

Consider an example couple and a few different options they might consider for their CPP income.

Ross and Rachel are both 65 and living comfortably in retirement. They do not require their combined CPP income of $20,000 annually to support their lifestyle. Instead, they wish to benefit some charities in their community. They have the following options:

1. Give the $20,000 of CPP income to their favourite charities annually in cash. The donations will create a tax credit to offset any tax owing on the CPP income, so the couple is essentially at net zero and the charities are ahead.

2. Use the $20,000 of CPP income to fund a life insurance policy owned by the charity or foundation of their choice. When a charity or foundation owns the insurance policy, premium payments that Ross and Rachel make on the policy are eligible for a donation tax credit. This puts the couple in the same financial position as in the first option, where the CPP income is offset by the donation for tax purposes. The difference is that in this option, the charity does not receive cash today, instead receiving a legacy gift of about $1.1 million on the death of the second spouse.
   

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Most Canadians donate to charity using cash, credit cards, or a cheque. There are more efficient ways to be philanthropic. It’s more about giving from assets rather than only from income.

This short video introduces new ways of philanthropic giving in Canada in 2020 and demonstrates five interesting examples. Watch New Philanthropy by Continuity.

Depending on the donor’s wishes – either to benefit the charity annually with smaller cash contributions or to provide a larger legacy in the future – this simple redirection of funds eases the tax burden for the couple and creates significant change in the community.

REFRAME TAXABLE EVENTS

Another way that donors are creating more opportunities for giving is by matching the timing of gifts with large “taxable events.” The largest taxable event for many business owners is selling the business. The work of a lifetime suddenly becomes monetized and there is an influx of cash, with the dreaded corresponding tax bill.

Let’s say Ross and Rachel have sold their operating business for $5 million. Because they grew the business from the ground up, after using the lifetime capital gains exemption for both of them, there will be about $775,000 in tax to pay. Most business owners let out an audible groan after hearing a number like this, but an easy way to reduce this amount is to make a charitable donation.

Such a contribution is in line with what many business owners are already doing each year – giving back to the community that has supported them over the years. For example, a gift of $500,000 will reduce the tax owing in the year of sale by just under $250,000. This reduction is due to the tax credit on charitable donations being at the highest marginal tax rate, currently 47.5%. In this scenario, instead of paying $775,000 in tax, Ross and Rachel instead make a gift of $500,000 to charity, and then pay approximately $525,000 in net tax. This is a larger total outflow of just over $1 million in cash, but the couple has redirected some of the taxes owing to causes close to their hearts, rather than sending the whole amount to the CRA.

ASSESS YOUR OPTIONS

Does the extra cash needed to make such a donation seem like too much? Here again, the clarity needed to make such a gift comes from determining whether you have enough. If you have some extra cash flow that you are confident you won’t spend in your lifetime, it could be exciting to explore the different ways in which these funds could be shared. Perhaps the funds will be spent today – you will be able to see the money that would otherwise have collected dust (and taxable interest) in your bank account deployed in exciting ways. Or perhaps the funds will be multiplied with insurance and a legacy gift, and your loved ones will have the honour of memorializing you by supporting your favourite charities for years to come.

With some forethought and planning, you can arm yourself with the financial knowledge you need to integrate tax-efficient charitable giving into your financial and retirement plans.

First published in the March 2020 edition of The Business Advisor.

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