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Attention business owners and incorporated professionals: 3 reasons to setup a personal pension

Attention business owners and incorporated professionals: If any one of these 3 factors apply to you a personal pension could help!

Brendan Greenwood, CFP, CIM, B.Comm | May 23, 2023

Are you a professional with your own corporation setup and have been running a business for several years? You likely sacrificed a lot in the early years of starting your business to get to where you are now.

If you’re hitting your stride and starting to have some good years, it is worth thinking about how you can get some of your hard-earned money out of the business in the most effective way possible for retirement. There is a solution that the Canadian income tax act allows for that will let you setup a personal pension owned by your corporation for your benefit. The structure of this pension also allows for your business to get some immediate and ongoing tax relief.

Any one of these three factors could be a reason to consider setting up a personal pension for yourself:

1) Availability of large past service contribution

If you’ve been saving most of your money in your corporation and have been working for several years, you could qualify for a large past service contribution. This means you may be eligible to transfer a large lump sum from your corporation to a personal pension. At age 45 that amount could be as high as $600,000. This is called a qualifying transfer. If you have an RRSP with savings in it some of this qualifying amount would be transferred from your RRSP with the remaining amount coming from your corporation. The amount coming from your corporation would be an allowable corporate deduction against corporate income. In a good business year this could provide substantial tax savings for your business.

2) Corporate investments above $500,000

If you have substantial investments sitting inside your corporation, above $500,000 for example, you may want to start thinking about shifting some of that money into another tax-sheltered pool to provide tax relief to your corporation. This is because as soon as your passive investment income reaches $50,000, the tax bill on your active business income starts to climb until the benefit of the small business tax rate is lost. A personal pension provides a tax-sheltered pool that corporate funds can flow into reducing the impact of the passive income rules on your corporate tax liability.

3) A spouse that is in a lower income tax bracket

If you’re thinking of retiring early and have a spouse that earns substantially less than you, a personal pension plan can provide you with substantially more retirement income to spend. Personal pension plans allow for income splitting as early as age 50 effectively lowering your overall annual income taxes as a couple in retirement.

A personal pension also allows up to 60% greater tax-deferred compounding over its life than an RRSP. The tax-sheltering umbrella helps you efficiently build up retirement income and get the maximum pension that Canadian tax law allows. Feel free to reach out to me to see if a personal pension plan makes sense for you and how much your initial qualifying transfer might be.

Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. specializing in tax advantaged personal pension strategies and low volatility investing for professionals, incorporated individuals, business owners, retirees and their families.

For other articles written by Brendan Greenwood visit his Blog | GreenwoodWealth

To book a discovery meeting with Brendan to see if we can help visit Contact | Ontario | Greenwood Wealth

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This material has been prepared for informational purposes only and should not be considered personal investment advice or solicitation to buy or sell any securities. As well, it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It may include information concerning financial markets as at particular point in time and is subject to change without notice. Every effort has been made to compile it from reliable sources, however, no warranty can be made as to its accuracy or completeness. Investors should seek appropriate professional advice before acting on any of the information here. The views expressed here are those of the authors and writers only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. There may also be projections or other "forward-looking statements." There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances. Worldsource Securities Inc., is the sponsoring investment dealer and the member of Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. Insurance strategies and solutions are provided by Brendan Greenwood as part of comprehensive financial planning through Pelorus Transition Planning.

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