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Build Wealth Outside Your Business

Making sound investments outside of your business


December 2, 2013
By Jim Sanderson

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In my previous article, I wrote about the importance of building wealth inside your business.

In my previous article, I wrote about the importance of building wealth inside your business. In this, the second of a two-part series, I will describe ways to build wealth outside your business.

Many business owners rely on their business to generate 100 per cent of their wealth, and are therefore invested in only one asset. A lot can go wrong with this strategy, although it is often the most comfortable for many owners.

Think of building wealth outside your business not as a defensive strategy but as one that can give you financial security for the rest of your life and let you share your legacy with the next generation.

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Aside from diversifying your assets, creating wealth outside your business gives you control. You now have the option of maintaining ownership of your business and selling it when and if you wish. Here are five ways to build wealth inside your business.


Find a wealth advisor who is right for you

Article appeared May/June 2011

I like this phrase: money does not come with instructions. You can work hard and earn lots of money but if you don’t manage it properly, you could easily outlive it. Perhaps the greatest value an advisor can provide is the ability to see things objectively and to keep them on track. 

Here are five questions to consider when selecting an advisor:

  1. How long has the advisor been in the business
  2. Is he/she fully qualified with a good understanding of your business and personal circumstances? He/she should have a sound practical knowledge of wealth management and all its associated activities, such as tax, accounting, succession and insurance-related issues, and have access to a team of experts in those fields.
  3. Does the advisor fully understand you and your goals?
  4. Is the advisor willing to clearly explain all fees and performance benchmarks early in the conversation in a transparent manner?
  5. Will the advisor provide you with a clearly written Investment Policy Statement as part of your overall Wealth Plan?


Create an investment plan with a qualified wealth advisor

Article appeared November/December 2012

An investment plan will help ensure that you have enough money to enjoy a long retirement, to leave a legacy to your loved ones or to make a difference to your favourite charities.

Your investment portfolio is the foundation on which your investment plan rests.

After determining your financial goals and investment horizon, your advisor will create an investment philosophy that will support either active or asset-class investing. Choose the approach that will produce the returns you need and the peace of mind that you are seeking.

It’s important to note that fees have a huge impact on your current and future wealth.


Establish a well-diversified investment portfolio

Article appeared September/October 2011

Diversifying between stocks and bonds in an investment portfolio is widely accepted as a proven way to help manage risk. As the values of stocks and bonds don’t usually move in lockstep, the value of one asset class may increase while the other falls. It’s the same when investing in different countries and other asset classes: chances are they will not rise and fall together but will change with the markets. If you are diversified across a range of asset classes, science confirms you will fare better in the long term than if you put all your money into just one or two asset classes or geographical regions.


Set up a holding company

Article appeared May/June 2012

A holding company (holdco) can add complexity to your life while creating many benefits, such as helping you reach your estate planning goals and reducing your tax bill, to name a few.

A holdco owns shares in another company. When the holdco owns the majority of shares of another company, it is also referred to as the parent company. It generally does not produce goods or services itself; business owners usually create holdcos to own shares in another company. You may create holdcos to operate for a short period of time or as part of a long-term plan.

Holding companies offer several bene-fits including:

  • They may protect your interests by reducing exposure to risk and by sheltering the company from creditors while you enjoy the benefits of the operating company’s goodwill.
  • They offer the potential to transfer cash from their operating company to their holdco tax-free.
  • They allow you to use the operating company to take risks rather than exposing the holding company to uncertainty. For example, if a holdco lends money to the operating company, the borrowing company can become a secure creditor of the holding company. This means that the holding company is at the front of the line when debt repayment is required or scheduled.
  • They may render the dividends paid to the holding company tax-free, based on the number of outstanding shares the holding company controls in the operating company.
  • They allow shareholders to defer a portion of tax on dividends from taxable Canadian companies until dividends are paid by the holding company to the shareholders.

You may also be able to transfer shares in an operating company to your children through a holding company using an estate freeze. Income splitting by paying income to your partner and younger children each year may mean some of the earnings are taxed in their hands, not yours.

The downside of setting up a holdco includes potentially high set-up costs and possible tax problems that may arise because any losses realized in a corporation are available only to offset other income earned by the corporation. And, as the $750,000 capital gains deduction does not apply to holdcos, you will need to find tax-efficient ways to distribute assets from a holdco to shareholders to avoid a negative tax event, which can take time and money.

You would be wise to consult with your tax professional should you consider creating your own holdco.


Put life insurance to work for you – today

Article appeared January/February 2011

Simply stated, the proceeds of a life insurance policy can be used to help cover the taxes payable resulting from the years of growth of your business. A life insurance policy can also ensure that each heir receives their fair share of your estate and possibly increase the amount of money you leave behind.

  1. You can use insurance to cover your tax bill in two ways:
  2. You may take out a personally owned life insurance policy. 

Naming the corporation as the owner and beneficiary of the life insurance policy may reduce taxes upon your passing

Your financial advisor will inform you of other ways insurance can protect your wealth.

So, there are my top five strategies for building wealth outside your business.

The time you spend speaking with your advisor to fully understand each strategy can pay off handsomely.


Jim Sanderson is a senior wealth advisor with more than 25 years’ experience in the investment services industry. The Jim Sanderson Group at Scotia McLeod specializes in creating and distributing wealth for successful individuals and corporations in the aggregate and road building industries across Canada. He helps his clients supported by a team of experts in insurance, merchant banking and trust and estate planning. Jim can be reached at jim.sanderson@scotiamcleod.com and his website is www.jimsandersongroup.com .


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