A 14-truck plumbing company sitting on cash with no plan for it

The situation

• Incorporated plumbing and drain company, two shareholder-partners, 14 trucks and 22 employees.
• Roughly $1.4M of retained earnings held as cash in the operating account.
• Both partners drew salary set by the accountant each spring, with no dividend or income-splitting strategy.

What was actually wrong

• Passive income inside the operating company was creeping toward the threshold that grinds down the small business deduction.
• The operating company held every dollar the business had ever earned — all of it exposed to a single lawsuit or a bad job.
• The shareholders' agreement contained a buy/sell clause with no funding behind it. If either partner died, the survivor owed the estate money the company did not have in a form it could pay.
• No key-person coverage on the partner who held the master licence and every major GC relationship.

What we did

1. 1

   Move surplus out of harm's way

   Working with the company's accountant, we implemented a holding company so retained earnings not needed for operations could be moved up by intercorporate dividend, out of reach of operating-company creditors, and invested rather than left idle in cash.

2. 2

   Fund the buy/sell properly

   Corporately owned life insurance on both shareholders, structured so proceeds fund the share purchase and the capital dividend account credit reduces the tax cost of paying the estate. The lawyer updated the shareholders' agreement to match the funding mechanism instead of describing one that never existed.

3. 3

   Cover the person the business runs on

   Key-person coverage sized to eighteen months of gross profit plus recruiting cost, so the surviving partner has time to replace the relationships rather than fire-selling the company.

4. 4

   Pay the owners deliberately

   A salary/dividend mix set with the accountant to fund RRSP room and CPP where it made sense, with the balance flowing as dividends, reviewed annually rather than guessed at each spring.

Where it landed

• Surplus creditor-protected in a holdco and invested against a written policy statement instead of earning near-nothing in chequing.
• Buy/sell funded, so neither family is negotiating with the other's grieving spouse.
• Passive income managed to preserve the small business deduction on active income.
• One annual review covers the corporation, the insurance and both families' personal plans in the same meeting.