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Reduce Tax: A New More Flexible Hybrid Pension Strategy

Updated: Aug 6, 2019

Brendan Greenwood CIM, B.Comm | February 28, 2019

Are you an incorporated professional or business owner?

Recent income tax changes have made it more challenging for you. If you have talked to your accountant recently, you’re probably aware that it costs you more to get money out of your business.

The new dividend tax rates, passive income rules and TOSI income restrictions combined with the rise in the top marginal income tax rate have made it more challenging for business owners to build wealth. High income earners are facing top marginal tax rates of over 50%. When passive investment income earned by your business exceeds $50,000 the tax bill on your active business income starts to climb until the benefit of the small business tax rate is lost.

New thinking is required.

To keep more of what you’ve earned it’s becoming increasingly important to take advantage of available tax sheltering opportunities.

Individual Pension Plans (IPPs), combine creditor protection with more tax-advantaged savings opportunity than RRSPs. They are potentially a very useful tool for many business owners seeking to save for retirement. However, the lack of funding flexibility has been a major drawback. If a business had a couple years of poor earnings and was not able to fully fund the plan during that time, the plan could become non-compliant and be exposed to deregistration by the Financial Services Commission of Ontario. This would have serious tax consequences.

Innovative pension plan development has responded to the challenge with a new hybrid pension solution for business owners who would benefit from a traditional IPP, but are concerned about the lack of funding flexibility.

The new Personal Pension Plan ™ (PPP) allows corporate contributions to be reduced to as little as 1% of earned income when times are tough without making any changes to the plan. This allows a business owner to keep the plan in place; avoid the risk of plan deregistration; and maximize contributions when cash flow is available preserving access to the IPP/PPP™ advantage.

A Personal Pension Plan ™ (PPP) allows up to 60% greater tax-deferred compounding over it’s life than an RRSP, if all of the potential benefits of the PPP™ are utilized. The chart above highlights the IPP/PPP™ Advantage over an RRSP and is based upon a plan I recently worked on for a husband and wife.

If you’re a business owner looking for a way to enhance your retirement income and obtain larger tax deductions, you should explore the benefits of the new hybrid pension solution that is now available and the added flexibility it offers.

Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals and business owners.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Neither Brendan Greenwood nor Worldsource Securities Inc or its affiliates provide tax, legal or accounting advice. This material is based on the perspectives and opinions of the writer only and does not necessarily reflect views of Worldsource Securities Inc. The opinions or analyses expressed herein are general, and do not take into account an individual’s or entity’s specific circumstances. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Investments are provided through Worldsource Securities Inc., sponsoring investment dealer and Member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada.

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