Three key financial moves when selling your business

1. Buy a principal residence to maximize tax benefits

One of the first financial moves to consider when selling a business is purchasing a principal residence. When you purchase a principal residence immediately after selling your business, the goal is to capture long-term value growth. There’s no limit to the amount of tax-free growth associated with your principal residence, which makes it a smart tax shelter despite potentially high property tax and maintenance costs. 

Many wealthy Canadians leverage this strategy by investing in large homes to capitalize on the tax-free capital growth potential. If planned carefully, purchasing a principal residence can be one of the most efficient ways to build wealth following the sale of your business.

2. Top off retirement accounts and TFSA for tax-efficient growth

One of the most effective ways to secure your financial future is to top off your retirement and tax-free accounts. Canada offers several tax-advantaged accounts that allow you to grow your wealth while deferring or minimizing taxes. 

The Registered Retirement Savings Plan (RRSP) is one of Canada’s most valuable retirement tools, offering tax-deferred growth on contributions. Contributions to an RRSP reduce taxable income, effectively offering a double benefit by lowering your current tax burden and enabling your investments to grow tax-free until retirement. For high-income earners, this is an efficient way to reduce taxes following a significant capital increase like the sale of a business.

A TFSA is another excellent account for Canadians to consider. Unlike an RRSP, contributions to a TFSA are made with after-tax dollars, but all gains and withdrawals are tax-free. This is particularly useful for entrepreneurs who wish to maintain liquidity while benefiting from tax-free growth on their investments. It also provides flexibility, as funds can be withdrawn at any time without tax implications. Just remember that any withdrawals made from your TFSA cannot be re-contributed until your contribution limit increases at the start of the next year. 

If you have children, consider front-loading a Registered Education Savings Plan (RESP) for additional tax sheltering. The RESP not only allows for tax-deferred growth but also attracts government contributions through the Canada Education Savings Grant or the BC Training & Education Savings Grant, making it a powerful tool for tax-efficient education savings.

3. Consider a permanent insurance policy in a holding company

After selling a business, creating a holding company to manage your investments and assets can offer significant tax and financial benefits. Within this structure, a permanent insurance policy can serve as a powerful wealth preservation and estate planning tool.

A holding company is a separate entity that holds assets such as investments and real estate. It can be especially useful when you’re managing a large amount of capital following a business sale. With a holding company, any investments made within the company are taxed at corporate tax rates rather than personal rates, which are typically lower. This structure also provides more control over how and when you access funds.

Permanent life insurance policies, such as whole life or universal life insurance, accumulate cash value over time, providing a source of tax-sheltered growth. When held within a holding company, the cash value of a permanent insurance policy grows on a tax-deferred basis, which means you can grow wealth within the policy without accumulating taxes annually. Additionally, the benefit is paid out tax-free to beneficiaries, which can help mitigate estate taxes and preserve wealth for the next generation.

Permanent insurance policies within a holding company also offer access to the policy’s cash value through loans or withdrawals. This access can provide liquidity for further investments, helping to avoid withdrawals from other taxable investments, which could push you into a higher tax bracket. Furthermore, upon passing, the death benefit can flow tax-free to beneficiaries, giving your heirs a significant tax advantage and preserving more of your wealth.

Key takeaway 

After a successful exit, most founders diversify to protect their gains while focusing on the next venture. For seasoned entrepreneurs, the network and reputation they’ve built further increase the likelihood of success as they move forward. But this doesn’t mean betting everything on the next project. They work closely with an advisory team, including a financial advisor, accountant, lawyer, and more, to confidently make the right decisions and maximize opportunities.

If you’re still building your network of professionals, reach out to SaaS Wealth for a no-obligation consultation. We specialize in the software industry and work with some of Canada’s most successful founders and leaders, guiding them through strategies like purchasing a principal residence, maximizing tax-free accounts, and utilizing permanent insurance within a holding company. Making these informed financial moves can help you transition smoothly from business owner to wealth manager, securing your future and that of your legacy.

Don’t miss out on what’s happening in your backyard. Subscribe to Vancouver Tech Journal now: