As an owner of a corporation, you have several innovative strategies available to help you reduce, or defer, corporate income tax and enhance your income in retirement.
Individual Pension Plan (IPP) – An IPP is an employer-sponsored registered pension plan that enables you to make potentially higher tax-deductible contributions compared to your Registered Retirement Savings Plan (RSP). Your corporation claims the tax deductions, as opposed to an RSP, where you claim them personally. You can also make tax-deductible contributions for past service, or to top up your IPP.
IPPs are ideal for self-employed incorporated business owners or professionals aged 40 to 71 who earn at least $127,611 annually. Unlike a regular pension plan, an IPP is usually established for just one person, although a spouse employed by the same company can also be a plan member in some cases.
While offering several key advantages, there are some considerations with an IPP. First, it essentially replaces your RSP, rather than supplementing it. There are also additional administrative requirements, including an actuarial valuation every three years.
Retirement compensation arrangement (RCA) – Often referred to as the super-sized pension, an RCA is a non-registered plan set up by your company to provide benefits when you retire.
An RCA is designed to reduce the pension gap that high-income executives and business owners face due to contribution caps on regular registered retirement plans. Because of these caps, high-income earners are often unable to contribute enough to ensure they receive an adequate retirement income, considered by many financial planners to be 70 per cent of pre-retirement income.
An RCA can help you overcome this shortfall. With an RCA, your company makes 100 per cent tax-deductible contributions, and you don’t pay personal taxes until you start receiving payments from the RCA after you retire.
The RCA payments, combined with payments from your registered plans, should be reasonable – essentially what you would have received if your registered plan contributions hadn’t been capped.
Corporate Insured Retirement Plan (IRP) – A corporate IRP is a strategy that combines insurance protection with tax-deferred investment growth. As you normally would, you pay premiums for insurance coverage, which can be used, for example, to cover the loss of a key employee or to fund a buy-sell agreement between business partners. However, in addition to paying the premiums, you can also contribute additional funds, which can grow on a tax-deferred basis within the insurance policy, similar to an RSP.
After a certain number of years, you can access these funds by taking out a tax-free bank loan, using the insurance policy as collateral. The funds can be used in any way you need – to supplement your retirement income, buy out a business partner, or fund a new business venture. When the shareholder passes away, the bank loan is then repaid with the life insurance benefit, with the remainder going to the beneficiaries.
Corporate insured annuity – A corporate insured annuity can enhance your retirement income, while ensuring that you can still leave a substantial estate for your beneficiaries. It is ideal for shareholders of corporations with surplus cash held in liquid investments such as GICs.
Using the surplus cash, the corporation purchases a life annuity to supplement the shareholder’s retirement income, plus a life insurance policy on the shareholder’s life. When the shareholder passes away, the company receives a tax-free death benefit equal to the amount used to purchase the annuity, which enhances the shareholder’s estate value.
Bear in mind that this strategy, while potentially enhancing your income and estate value, does involve a long-term financial commitment.
Kirbey Lockart is an investment advisor with RBC Dominion Securities. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.
