Retirement Planning For Business Owners Flashcards
Income splitting were TOSI doesn’t apply (goods business)
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
services business (no physical inventory)
joan age 65+ or kevin working there is only allowable scenario.
reasonable amount to pay family member
mkt rate + 10-15% is acceptable
creditor risks and why its important to identify
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
rental properties and the corporation (benefits and cons)
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)
Shareholder compensation
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.
when op co and hold co starts to make sense
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
tosi
doesnt apply to spouse or common law partner after age 65
tfsa
small limits, no creditor protection or tax deduction, biggest advantage is estate planning and timing of income.
CPP and Business owners
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.
ei opt in/out as business owner, when it makes sense
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)
what ei covers for business owners
sickness leave, compassionate care, maternity leave, parental leave, (up to 668/week or 55% of earnings)
employee profit sharing plan
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)
employee stock option plan
maybe 2 year vesting. taxable employment benefit when exercised (only half is charged and can be deferred for private company)
employee stock purchase plan
usually no trading commissions, buying the shares for their worth. (counting on employer to act in your best interest if its a private company)
IPP requirement (causes fees) and process
-Need an actuary, does pension paperwork (1.5k-2k annually)
-you manage the assets
IPP Ideal Client
-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
funding model
-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
terminal funding obligations
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.
ipp issues
-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
-
ipp options at retirement
payout intended benefit (db)
transfer to lira/lif (unlocking may be available and maximum tax deferred transfer will come into play)
purchase annuity
Family advantages and other
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)
RCA
-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)
RCA in retirement
-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
