Looming tax changes may negatively affect high net worth business owners owning significant passive investments earmarked for their future. This may leave some looking at other methods to maximize savings and investments in a tax effective fashion going forward. One avenue that has been available for a long time is a company sponsored Personal Pension Plan. Think of this as a “supersized” RRSP with superior characteristics and benefits.
If you own a private incorporated business (or you are an incorporated professional), and are planning for your future retirement – this article is a must read for you!
What is a Personal Pension Plan?
In general, a personal pension plan is a corporate sponsored retirement investment account for the business owner or incorporated professional. It is designed to provide a reliable source of personal retirement income. The pension plan can also include key personnel and family members who work in the business. It also acts as a great estate planning tool, not just for yourself, but especially for your children if they will be taking over the business someday.
Considering that the pension plan is funded by the business, it is a tax deductible expense against business income. Also, since it falls within the parameters of Canadian pension laws, it’s also one of the most “bullet proof” creditor protected assets available.
Is it just like an RRSP?
While personal pension plans have many similarities to traditional RRSP’s, there are several key differences that make this a more superior method to plan for retirement. For one, the contribution limits are greater, thus allowing for a larger pool of money over an RRSP. Here are some major highlights that differentiate it from a traditional RRSP:
|Maximum contribution limit||up to $43,532*||$26,230|
|Flexibility to choose contribution options (defined benefit/contribution)||yes||no|
|Tax deductible admin and investment management fees||yes||no|
|HST 33% credit refund||yes||no|
|Deduction on interest of borrowing||yes||no|
*enhanced contribution amounts are dependent on age.
“Business owners have a tendency to focus on taxes, profit margins, employees
or other business related matters. Don’t forget to take care of YOU too”
Income Splitting — Tax crackdowns are putting the squeeze on business income splitting among spouses. While a pension plan doesn’t solve that problem right now – it can in the future. Once you retire and start drawing an income from your pension, that money is defined as pension income under the tax act. This will not only qualify for the pension credit, but this income can be split with a spouse.
Estate Planning — The pension plan can be passed to a spouse on a tax deferred basis upon death. However, for a family business, the pension can be passed taxed deferred to the adult children who are plan members and have taken over the business. In this case, the pension can continue to grow and receive contributions to eventually fund their retirement. Unlike a public pension plan, which ceases payments upon last-to-die, any named beneficiary can inherit the remaining assets in the pension after death. Just be aware, that pension laws dictate spousal rights upon death or marriage breakdown unless he or she waives them.
Existing RRSP’s — What should you do with your existing RRSP? A popular option is to roll it under the pension umbrella using a “sub account” called an “additional voluntary contribution (AVC)”. Once merged, it retains the same RRSP characteristics, however, an added benefit is that you’ll now be allowed to deduct expenses associated with the RRSP such as commissions, admin, or investment management fees. Moreover, it will also enjoy the same creditor protection as the pension.
Succession Planning — Whether you plan on selling your business or passing it down to the next generation, a pension plan can offer some additional flexibility and security. There can be many pitfalls when exiting a business, one of which might be the sale price of your business. After all, YOU might be the one providing a lot of the business value, and without you, the business may not be worth as much. The strategy of exiting using a family succession plan can be rewarding or filled with unforeseen conflict. The Canadian Federation of Independent Business says many businesses have an increased failure rate when passing to the next generation. That failure rate increases further after the third generational transfer. Considering these future unknowns, a pension plan not only offers great creditor protection against future business hurdles, it also protects YOU as it relates to your income needs during retirement. Upon retirement, one option could be to “port” the commuted value of your pension, and enjoy the next phase of your life.
Early Retirement & Perks — If you decide to retire early, an extra tax deductible contribution can be made known as “terminal funding”. This bridges the gap between what you would have received at age 65. Also, an additional top-up can be made to purchase “indexing”, an inflation protection feature.
A professionally managed personal pension plan could be the right solution for you to ensure your financial future, while tax efficiently removing money from your corporation over time. It can also form an important part of your strategy for succession planning. To find out more information and to determine if this is right for you, please contact me directly. Alternatively, you can ask your accountant to contact me with any questions.
Susan Mallin, CIM, CFP
Vice-President Financial Planning, Associate Portfolio Manager
Toronto Office – 416-485-0303
36 Toronto Street, Suite 850
Toronto, Ontario M5C 2C5
The information provided in this article is general in nature and does not constitute personalized financial, legal, accounting, tax, estate, or investment advice. More information is available. Please consult your accountant and/or legal advisor regarding your particular circumstances where applicable. Lorne Steinberg Wealth Management and Susan Mallin do not guarantee the timeliness, reliability, or accuracy of any information provided here, and are not liable for any omission or errors that result in loss or damage suffered by the reader or any other person, who may for whatever reason, embark on financial strategies without due consultation.