Thinking of using RRSPs to finance your business? Think again.

Posted on May 02, 2012

Back
by Susan Milburn

Entrepreneurs are always looking for money to start their companies and traditionally have financed by using their credit cards, mortgaging their houses and putting private company shares in their RRSP plans.

The rules around accessing RRSP money to fund your start-up company have always been complicated, but with recent changes, it has become virtually impossible.

As it stands now, if you own 10 per cent or more of a company, do not deal with the company at arm’s length, or own debt obligations of the company (and almost all of these are certainties if you are the entrepreneur starting the company) you are locked out of using this pool of money.

One problem has always been arriving at a value for the company shares. The cost for the company to have their shares valued is prohibitive, and administrators of RRSP plans are caught between the strict regulation of CRA and the vagaries of valuing a start-up. At one point, Canadian regulators and politicians looked for ways to drive the innovation agenda and saw small business as a way to accomplish that end. We weren’t quite as worried about having a pension when we retired, about CPP being available, and about unfunded pension plans. We seemed more willing to trade retirement money for the chance at creating a great business. As these worries surface, concerns over pension money trumps the desire to fund start-up business.

__________________________________________________________________

Financing continues to be an issue, and the closing of this opportunity creates one more challenge for entrepreneurs to address. ___________________________________________________________________

Holding shares of small business in your RRSP will now cost you money through penalties and taxes—although some transition rules, if you address the issue before July of this year, might lessen these costs.

For those who have actually been successful in growing their small business and have seen the value of their shares increase, now have to come up with more money to purchase the shares from their RRSP. Money that could be better used to advance their business plans, is now required to simply acquire the shares from their RRSP. The rule change could cause liquidity and cash flow issues for successful entrepreneurs—which is, of course, contrary to the original intention.

Financing continues to be an issue, and the closing of this opportunity creates one more challenge for entrepreneurs to address. Innovation connects to productivity, which connects to growth in our economy and gives us a competitive edge. We want entrepreneurs to access financing from sources other than government; if they are willing to risk their own money in a good idea, they should be able to so.

Susan Milburn
is Vice President and Branch Manager for Raymond James Ltd. and a member of Ag-West Bio's board of directors.