Retirement Planning For Business Owners

Question 1

IPP

Answer 1

best for 45 or over because you can over-contribute based on funding obligations. assumed rate of return is 7.5%, so a return below will force additional funding (reported once every 3 years to pension company). investing conservatively can lead to lower returns and plan can be funded more aggressively.

Question 2

Terminal Funding Obligations

Answer 2

Arises when plan member retires due to the following:
1)CPP Bridge Benefits
2)Survivor Benefits - depends on survivor benefit and age difference
3)Indexing benefits (use a real rate of return)
4)Early retirement

Question 3

Costs and Options at retirement

Answer 3

costs tax deductible to business, not usually paid from plan directly but can be.

1)LIRA or LIF. will be based on maximum tax deferred amount. (roughly 12.4 times annual benefit at age 65). usually leads to cash
2)Defined Benefit - still has admin costs. no rollover provisions (would have survivor benefits though)
3)Life annuity - copycat annuity that provides same benefits but forces the insurer to take on the risk

can have up to 4 non family employees and unlimited family members beneficiaries

Question 4

IPP Benefits

Answer 4

-can have up to 4 non family employees and unlimited family members beneficiaries. plan continues as long as there’s beneficiaries (reduces estate and avoids probate)
-small business deduction - way to invest funds without contributing towards AAII passive income test. may be better than paying yourself taxable dividend to stay below threshold. funds in ipp are creditor protected if corp fails
-transfers from other pension plans aren’t generally permitted
-non resident pays 25% withholding tax
-terminal funding obligations can offset taxes on asset sales (due to recapture and other taxes)
-can use bond allocation in this account, lower returns means greater funding (7.5% is the mandated return). keep stocks in taxable accounts.
Disadvantage - if income/assets aren’t high enough to fund the ipp, it will be collapsed and transferred to a lira

Question 5

RCA features

Answer 5

-Tax deductible to the employer
-50% withholding tax on contributions and taxable gains, which is refunded when withdrawals are made
-funds must be taken out carefully to ensure that the assets aren’t depleted prior to receiving withholding tax refund
-tax deferred for employee
-no pension adjustment
-employee usually chooses investment
-insurance often used, split dollar arrangement has corp hold investment portion of policy and employee hold insurance portion

difficult to find situations that justify the use of the program. may make sense when retiring to low tax jurisdiction, can make non resident withdrawals at 25% tax rate

Question 6

RCA Applications (key factor is tax rate now vs retirement)

Answer 6

Employees with unusual retirement needs. Put severance into an RCA to recognize tax deferral instead of paying out in a year with other income
saving beyond age 71
rettiring outside of canada - investments on regular plans disposed of when you leave the country, rca wouldnt have to be