Updated: Aug 6, 2019
The Tax Smart Way to Get Money Out of Your Business, Preserve Wealth and Protect Your Retirement
Brendan Greenwood CIM, B.Comm | July 19, 2019
Upset about the new passive income tax rules? Looking for tax effective ways to get more money out of your business and additional tax sheltering? If you answered yes to either question, you should explore the potential benefits of an Individual Pension Plan (IPP) now that new hybrid solutions have emerged that provide the contribution flexibility that most small businesses require.
The Individual Pension Plan (IPP) Advantage
An IPP is similar too an RRSP, except that it is a corporately sponsored retirement plan that allows you (if you are over the age of 40) to deduct/shelter significantly more income from tax and write off more expenses to the business. Unlike an RRSP all fees and expenses related to the administration of an IPP can be deducted for tax purposes by the business.
It is a defined benefit pension plan (like the teacher’s pension plan) that you control through your company, designed to guarantee an income when you retire based upon your years of service. As the chart below highlights, for older Canadians, this translates to more annual tax-sheltered contribution room that grows each year until age 65, when it begins to gradually decrease.
Proportional IPP Contribution Advantage
As a registered pension plan, an IPP provides the highest level of creditor protection and allows you to split income as early as age 50 with your spouse. It can also provide potentially interesting estate planning opportunities for a tax free inter-generational transfer of assets if children are involved in the business.
Getting Money Out of your Business and into a Tax-sheltered IPP
The IPP contribution advantage comes from three sources:
1) Past Service Funding: You get to capture the benefit of your years of past service you worked building the company. An initial actuarially derived catch-up calculation is completed based on your age and the T4 income earned each year since 1991 that you worked for your company. Past earnings are inflation adjusted, so even low earnings in your early years can have a meaningful impact. Earnings up to $151,278 for 2019 (based upon RRSP limits) can be used.
The additional past service contribution can total hundreds of thousands of dollars, even if full advantage has been taken of RRSP deductions because of the additional contribution room available to IPPs. There is considerable flexibility on how this money flows into the IPP and the timing of the tax savings. It can be taken as a single or series of lump sum transfers or paid on a monthly basis spread over as many as 15 years.
In order to avoid the doubling up of contributions to a government sponsored tax-sheltered retirement program, CRA requires a portion of your RRSP balance to be transferred to the IPP.
2) Current Service Funding: An actuary determines the monthly contributions required to build the necessary terminal investment value to fund your pension. Every three years the required current service contributions are reviewed and adjusted by an actuary to keep the plan on track. After age 40 this means substantially more tax-sheltered contribution and growth than is available through an RRSP. 3) Terminal Funding: At retirement there is an additional terminal funding opportunity for an IPP that can provide hundreds of thousands of dollars of additional tax savings and value to your pension plan depending upon your age and earnings. This can be of real value when a business is being sold.
Money invested in an IPP is intended to fund retirement and is locked in until you declare retirement and begin to draw down the funds which can occur as early as age 50, but no later than age 71.
There are three options for accessing your retirement income.
· Maintaining the IPP and drawing your scheduled retirement income
· Wind-up the IPP and transfer a qualifying amount to a LIRA or RRSP.
· Purchase an annuity
Is an IPP Right for You?
If you are a business owner or incorporated professional over the age of 40 with over $100,000 in annual T4 earnings, you may want to explore setting up an IPP as a more disciplined and tax-efficient way to save for your retirement.
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.
For other articles authored by Brendan Greenwood on various subjects impacting business owners and investors see https://www.greenwoodwealth.co/blog.
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.