Retirement Planning For Business Owners

Question 1

Income splitting were TOSI doesn’t apply (goods business)

Answer 1

Joan, founder and kevin, spouse
kevin won’t be subject to TOSI (tax on split income) if he pays FMV for shares and owns 10% of votes and value or works in the business (20 plus hours a week) for example . Might have to pay if owns shares of holding company or via trust (need accountant). should own shares personally.
if joan is 65+, no restriction on income splitting. no tosi for cap gains, each can use lcge

Question 2

services business (no physical inventory)

Answer 2

joan age 65+ or kevin working there is only allowable scenario.

Question 3

reasonable amount to pay family member

Answer 3

mkt rate + 10-15% is acceptable

Question 4

creditor risks and why its important to identify

Answer 4

personal guarantees, assets pledged as collateral,

legal liabilities (professional, general liability (will very likely be covered through liability insurance ex clip and fall), personal insurance licenses).

landlords do take general security agreements.

debts to cra: ordinary tax payable (can’t come after personally, can be dealt with in bankruptcy). they can come after unremitted source withholdings such as cpp, ei, ee income tax, gst, hst, pst

employees; can come after personal assets for up to 3 months of unpaid wages

important to identify so you can use an rrsp, seg funds, ipp, holding company

Question 5

rental properties and the corporation (benefits and cons)

Answer 5

benefits - s.85 is easy to get assets into the corp, tax deferral, clearer division between business and personal, better for commercial general liability, borrowing against properties is cheaper than other business alternatives, large scale borrowing is easier, liability protection,

cons - recapture is within the corp, if you live in the home every night is a taxable benefit (unless paying mkt value rent), no lcge, passive tax rates (unless at least 5 employees), lose use of rentals for personal (due to reason above)

Question 6

Shareholder compensation

Answer 6

dividend - no cpp, wcb, ei, rrsp, reduces cnil, may have to do with multiple shareholders, can match erratic cash flows

salary - cpp, wcb, rrsp/ipp, ei is optional, personal borrowing easier, disability insurance easier, confirms that you’re an employee, more stable income

sale of shares, lcge, 50% inclusion rate, potential income splitting with children/spouse, hard to do in small business (infrequent)

employee benefits - some tax free, some taxable, can only offer benefits reasonably offered to other employee doing your job,

shareholder loan repayment - loaned money to corp, owes shareholder money (this can be recaptured tax free). lenders often restrict ability to repay shareholder loans

shareholder meetings - is it reasonable? Weekend near the companies head office, pay for rooms, food, etc.

Question 7

when op co and hold co starts to make sense

Answer 7

liability - more than i can manage personally
tax - not using all my income for expenses
structural - bringing on investors, hire employees, enter into leases

hold co
liability - separate assets from op co to protect in lawsuit
tax - not going to sell investments with corporation, estate freeze, succession plan, perm insurance,
structural - keep companies distinct

Question 8

tosi

Answer 8

doesnt apply to spouse or common law partner after age 65

Question 9

tfsa

Answer 9

small limits, no creditor protection or tax deduction, biggest advantage is estate planning and timing of income.

Question 10

CPP and Business owners

Answer 10

28-45 salary can make a lot of sense. rrsp contributions reduce net income for cpp (dividends would raise it), cpp-d, cpp survivors benefit, disability risk is higher, easier access to credit/mortgage approval.

dividends - not taking salary only marginal impact on cpp at certain age (drop out years), ccb no longer available, should already have life and disability insurance.

Question 11

ei opt in/out as business owner, when it makes sense

Answer 11

self-employed, ei is completely optional
can opt-out as shareholder if you own 40% or more of company. once you claim, you can never opt out, but you can switch to dividends.
good idea to opt in if you plan to be a parent in a 1-2 years or so
can also use for short term sickness benefits. this would provide income and allow you to keep insurance premiums down by picking longer waiting period. (until emergency fund is established to cover)

Question 12

what ei covers for business owners

Answer 12

sickness leave, compassionate care, maternity leave, parental leave, (up to 668/week or 55% of earnings)

Question 13

employee profit sharing plan

Answer 13

no real tax benefits, just like giving you money to invest in a non reg. only difference is that the employer can put significant restrictions on the money (no mandatory 2 year vesting)

Question 14

employee stock option plan

Answer 14

maybe 2 year vesting. taxable employment benefit when exercised (only half is charged and can be deferred for private company)

Question 15

employee stock purchase plan

Answer 15

usually no trading commissions, buying the shares for their worth. (counting on employer to act in your best interest if its a private company)

Question 16

IPP requirement (causes fees) and process

Answer 16

-Need an actuary, does pension paperwork (1.5k-2k annually)
-you manage the assets

Question 17

IPP Ideal Client

Answer 17

-Strong cash flow (ideally predictable)
-T4 income of 100k or more
-okay with some complexity (most of it outsourced to actuary)
-Age 39-40 and up
-As interest rates go up, the starting age increases (where it can become accretive)
-physicians and dentists
-will continue corp for long term
-long term perspective, fine with market risk, has extra money in corp

Question 18

funding model

Answer 18

-contributions all from corp
-deductible to corp
-not taxable to owner
-locked in dollars (turns to lira or lif)
-unlocking may be available
-can annuitize it
-7.5% assumed return, if less, can top up with additional dollars. if you can’t no big deal. extra deductions
-Initial funding obligation - amount to put in at the beginning from RRSP (pv of pension promise at age 45, if thats when ipp is established). taking non locked in money and locking it in.
-funding obligation rises as time to retirement nears
- terminal funding obligation

Question 19

terminal funding obligations

Answer 19

if not fully funded, pull more dollars from corp to provide inflation protection, cpp bridge, survivors benefit.
terminal funding can be used as a deduction to offset income from sale of assets. depreciation recapture is taxed as active business income.

Question 20

ipp issues

Answer 20

-subject to maximum tax deferred transfer value when moved into lira
-not good if business is sold early or income is uncertain, has to be solid to support ipp
-

Question 21

ipp options at retirement

Answer 21

payout intended benefit (db)
transfer to lira/lif (unlocking may be available and maximum tax deferred transfer will come into play)
purchase annuity

Question 22

Family advantages and other

Answer 22

up to 3 beneficiaries
unlimited if everyone is family
can pass on to children or family when parents die (no disposition, probate, etc)
-can overfund (more than rrsp at some point)

Question 23

RCA

Answer 23

-tax deductible to employer
-no tax to employee (no employee contributions permitted)
-tax deferred, sort of
-50% withholding tax on contributions and taxable earnings within plan
-no limits
-withholding tax refunded in retirement
-need an actuary
-not a registered plan
-cost to setup (trust documents and actuary, costly to originally setup, ongoing costs not bad)

Question 24

RCA in retirement

Answer 24

-Money taken from RCA is refunded into RCA trust from withholding account in the following year
-Investment income continues to be taxed in the trust in retirement
-Actuary will determine how much to take out so you don’t die with money in the RCA withholding account.
-Spousal rollover available if it was setup that way (it should be, if done properly). otherwise, taxed as income at death and given to estate.
-50% of taxable amount (included in deemed dispositon) taken from rca trust

Question 25

Why use the RCA

Answer 25

-No growth on withholding account and 50% tax, so why
-A high earner will be getting taxed at a rate higher than 50%. and you never get that tax back
-offshore retirement. default 25% tax rate (non-resident withdrawal)
-big bonus/severance. 250k earner + 200k bonus. may be better to put it in RCA than take as income.
-asset sale, use deduction to offset depreciation recapture

Question 26

Employee stock options

Answer 26

fmv at time of exercise - acb (where you can purchase shares at). must hold for 2 years. taxed as employment income then claim a securities option deduction = 50% of employment income.
if you exercise more than 200k of options in a year, you don’t get 50% deduction on amount over 200k.
if private company - no taxable benefit until the shares are disposed of. (don’t have a valuation readily available)

Question 27

hold co as a retirement planning tool

Answer 27

use it to hold passive investments and pay combination of eligible and ineligible dividends.

prior to op co sale, extract cda, take back shareholder loans, recover rdtoh, prior to sale (whether asset sale or share sale, accountant should make every effort to do this)

Question 28

hold co issue and solutions

Answer 28

Jeff owns 100% of hold co shares after sale. 1m acb. investments in hold co have an acb of 2m and a fmv of 3m. If Jeff dies today, his hold co will have to pay capital gains (1m) and he will also have a capital gain equal to the fmv - his personal acb. 2m capital gain. the hold co will then need to pay out ineligible dividends, leading to further taxation. (this assumes they wind up corp)

use a t100 policy. no investment portion so csv is nominal or 0. value doesn’t make up portion of corp assets for valuing shares. pay for a 3 million dollar policy and receive 3m credit to cda, which can be taken out free of tax

Question 29

donate securities

Answer 29

donate securities with a gain (0% inclusion rate). result is a 100% cda credit (on private corps can do). 110k acb and 200 fmv =90k gain = 90k cda credit)

Question 30

selling to spouse prior to sale to multiply lcge

Answer 30

cant do it because spouse would need to have option to sell to whomever they wanted. if a deal had already been made, this condition isnt satisfied. (violates undefeatable ownership rule)

Question 31

section 86 swap then section 85 rollover to hold co

Answer 31

can have hold co and op co both owned personally but unlikelu

Question 32

personal services business

Answer 32

contracting instead of being an employee. you’ll be seen as an employee if
-you have to show up at a given place at a given time
-can’t subcontract the work
-somebody else owns tools
-only work for one employer
-bear no risk base don performance

Question 33

resulting tax rate

Answer 33

42% (no sbd or general corp tax rate)
only deduction available is for salary

Question 34

income splitting (spouse and kids)

Answer 34

spouse needs to work at business 20+ hours per week, buys 10% of votes and value for fmv, owner is 65+. (if this is a services business option 3 isn’t available, or prof corp in many cases)
minor kids - kiddie tax at top marginal bracket
adult kids up to 25 - pay fmv and can earn dividends on that investment based on prescribed rate (5%) 100k of shares means can take 5k taxed properly in her hands and any amount above is taxed at top marginal tax rate
25 and over - see spousal rules

Question 35

passive income splitting

Answer 35

no tosi (most likely). dividends on passive income (even for kids 18-24). can still use to multiply lcge (income split capital gains). tosi rules are based on active income. dividends kids receive should still be commensurate to their risk based on ownership. result could be owner receiving taxable shareholder benefit that accounts for tax originally saved.

Question 36

personal guarantee after paid off

Answer 36

you will need the lender to remove it

Question 37

IPP shortfall and past service

Answer 37

initial funding obligation depends on if plan recognizes past service. any shortfall is a liability to the corp. in most provinces, this is a liability with no consequences