Selling your business and living off the proceeds for the rest of your life is not a realistic retirement plan for most small business owners.
Even if you've built up a small business that can be sold, the sale probably won't bring in enough money to fully fund your retirement.
Having a a Registered Retirement Savings Plan can help. Another option is the Retirement Compensation Arrangement, also known as an RCA.
A Retirement Compensation Arrangement is a trust agreement involving an operating company and the retiring owners or senior executives. Madhavi Acharya and Tom Yew explain how a Retirement Compensation Arrangement works in Planning for the future now (thestar.com):
- The business pays an amount to the RCA, such as $100,000, meant to fund the retiring owner's retirement income. (The business can take a tax deduction for the money it pays into the RCA.)
- Half of the amount paid into the Retirement Compensation Arrangement, in this example, $50,000, is remitted to the Canada Revenue Agency as a refundable tax.
- The remaining 50 percent stays in the RCA trust and is invested. (Note that if the RCA earns interest, dividends or capital gains on the investment, it must pay 50 cents of every dollar gained to the Canada Revenue Agency.)
- Two or three years later, the RCA may pay the owner, who is now retired. For every dollar the RCA pays out, Canada Revenue agency will also refund a dollar to the retired owner.
- The owners then pay income tax on the entire amount, according to what tax bracket they're in -- and it's probably a lower bracket because they are now retired.
The Retirement Compensation Arrangement can be a great way to put aside money for your retirement and can be particularly useful as a succession tool, as there are no deemed disposition or estate taxes on it.
Read more details about the Retirement Compensation Arrangement in the article linked above.
More on Retirement for Small Business Owners
- How to Close a Business in Canada
- Retirement Planning
- Book Review: The Canadian Small Business Owner's Guide to Financial Independence