The pandemic is a global economic shock like no other. A bifurcated recovery is emerging from the country’s pandemic-driven economic contraction. Some workers, businesses and geographic regions show signs of coming out okay or even better. The remainder are caught in a steep decline with an uncertain future ahead.
The top financial priorities for 2021 should be: examining one’s spending habits, managing debt levels, followed by the creation of a budget and an emergency fund.
The financial fallout from the coronavirus crisis is concentrated among certain groups, like minorities, lower-income earners and women. Meanwhile, others are experiencing feeling even more financially secure than they did pre-COVID, thanks to elevated cash flows directly related to working from home.
Pandemic fatigue is also here, but many don’t know what to do about it. Should we spend to quell our pent-up feelings of isolation or save for a rainy day? The economic restrictions and social distancing measures throughout the pandemic have caused major disruptions to Canadian businesses and individuals. Those disruptions are expected to have particularly large negative effects on small-and medium-sized firms, especially those tending to be concentrated in the travel and tourism-related industries. To overcome the issues you need a process.
Everybody needs a certain amount of financial flexibility. The top financial priorities for 2021 should be: examining one’s spending habits, managing debt levels, followed by the creation of a budget and an emergency fund. In order to accomplish this, you will need to develop your financial literacy. We recommend getsmarteraboutmoney.ca by the Ontario Securities Commission and the personal finance section on morningstar.ca, which provides tips, tools and calculators for managing your finances.
For business owners, the pandemic has created numerous economic dislocations, but it has also brought forward a multitude of productivity-enhancing innovations and cost efficiencies for businesses, especially in the online world. For example Shopify assisted small-to medium-size businesses to reach customers in this non-face-to-face world by establishing an effective e-commerce platform for them. Food delivery platforms like DoorDash and SkipTheDishes have helped save some restaurants from going under by adapting to consumers who prefer or need to stay at home.
Update Financial Blueprints
The process for successfully navigating this new paradigm starts with updating your financial blueprints for both short- mid- and long-term goals. If you are a sole proprietor, is it time to incorporate? In the past, the answer was fairly straightforward with more tax, and other related benefits, accruing to incorporated businesses.
Unfortunately, the federal government has eliminated most of the financial advantages that were an incentive to incorporation. Between the tax on passive income over $50,000 and the cancellation of dividends to non-working family members that own shares of the corp, it seems that long-term strategies must be drastically altered for business owners.
Indeed, the first step should be to use an accountant that specializes in small- to medium- size businesses as well as a lawyer to effectively delineate the shareholder structure. This applies to new business owners as well as single proprietors contemplating a corporate reorganization. We know that many business owners are struggling in this environment, and while there is light at the end of the tunnel vis-à-vis vaccines, they should be talking to accountants that are well versed in all of the lifelines the government is putting out. They may not last long.
Then again we are also hearing about businesses that are booming like food delivery services and sanitation providers for masks, gloves and hand cleaners. Right now, you and your employees are probably being run off your feet, and unless you structure your business correctly, you could see a significant portion of profits going to Revenue Canada.
Take the time to map out a strategy. The BDC has a great website (bdc.ca) for people who are thinking of starting or buying a business. Their site can answer a load of questions you might have and point you in the right direction.
However, creating a blueprint and implementing strategies requires the use of other specialists. That applies for not just new businesses but for owners of long-established companies as well. For example, if your business has a load of retained earnings attracting high tax rates, owners should look at various strategies that can offset the bite.
Two in particular are worth mentioning. The first is a private health savings plan for you and employees if you are not yet offering group benefits. In effect, you can take personal medical expenses like prescriptions and dental costs through the use of a trust, convert them to a corporate expense.
In addition, business owners can look at creating an executive pension plan, which can provide significant tax deferrals beyond RRSP’s. Other strategies to consider include Corporate Class mutual funds and the use of corporately held life insurance.
There is no question the current healthcare crisis has caused unprecedented disruptions for business owners in general and more so for Victoria-based businesses dependent upon tourism and services. This makes it even more critical to seek out qualified professionals to help you navigate the climate we now face.
With 2021 unfolding, touch base with your accountant, and then seek out a certified financial planner that specializes in helping business owners map out strategies for the future.