Retirement for Business Owners – Benefits, Preferences & Options
October 18, 2016 Business Terms
As a Canadian business person who is planning his retirement, you can choose to take the holistic approach. This simply means consideration of your own personal finances and that of your business finances. With both, you can now sensibly plan how to make them work together and help you achieve your goals for retirement.
First, you have to assess where your retirement income’s sources are. Pension plan payments and other government sources are starting points. This can include such items as real estate equity and those of insurance. The others would come from registered plans and non-registered investments.
Small business owners have more to consider when creating a plan for their retirement savings. It is a bit complex and they need to consider the many sources of their retirement income, the special considerations on tax, and the succession issues when creating a personal retirement plan.
Entrepreneurs presuppose that their business can fund a big part of their retirement. One strategy is to sell the business. For entrepreneurs contemplating on retirement, tax implications applicable to the disposition of small shares in business can make tax strategies essential.
You are eligible for an $800,000 exemption on capital gains on sales if your business is eligible as a business corporation classified as Canadian qualified. To help you get your sale structured as beneficially as possible, you need to use the advice of a tax practitioner.
Understandably, there are situations when selling your business is not really as practical as it looks, nor would it be a good financial choice in the best sense. At this point, there are still business owners who are hoping to have their businesses passed on to their children.
Other ways your business can turn into an income source is to continue owning your preferred shares that pay dividends. It can contribute to your business-earning income following your retirement. Your plans notwithstanding, a transition plan in business is necessary to help make sure you get your objectives for retirement.
Equity in business is an important income source for your retirement, it does not hurt to add the idea of diversification of your income sources.
The “Registered Retirement Savings Plan” (RRSP) is a vital planning tool for retirement for business owners (and non-business holders as well). You can benefit deductions of your personal tax for your contributions. You can have them accrue tax deferred earnings while you are under the plan.
“Tax-Free Savings Account” (TFSAs) had been available to Canadians since 2009. This also has an important role in the accumulation of retirement savings. Investment income earned under a TFSA is not taxed.
To add to your creation of your RRSP or TFSA, set up your portfolio for personal investment to go together with your business. A sample would be a businessman with stable and established business is contented with growth-oriented equities.
Owners of new businesses might want to offset risks (associated with business start-ups) by choosing secure investments with fixed incomes.
Business owner’s retirement plans
There are now specific planning options for retirement that is available for business owners that go beyond regular options that are traditional. For better judgment, you can ask your advisor to help you choose the best package for you.
Each one of them has its own clearly-defined pension plans. They include the “Individual Pension Plan” or the IPP, the “Insured Retirement Plan” or IRP and the “Retirement Compensation Arrangement” or RCA.
- IPP (Individual Pension Plan)
To increase your personal pension savings, you need to establish an IPP. The IPP is a plan for a benefit pension which is structured and designed for only one member-individual. As a plan for defined pension benefit, the benefit that is payable and specified during retirement and the IPP contributions are set and made accordingly.
You can always contribute but it is your company that typically makes the contributions. If you are 40 years old at least, owns a corporation and earns $100,000 plus as yearly base salary, you can have put up your IPP.
The advantages of IPP include the fact that the maximum contribution limit of IPP is higher than that of the RRSP. Moreover, the contributions are company tax-deductible. And since it is a pension plan that is registered, it brings some protection level from creditors.
On the downside of things, there is not much flexibility on splitting income during retirement. The pension benefits are locked in. They are under applicable legislated pension benefits until your retirement. By then, they are used to bring benefits as a life annuity or income fund.
- IRP (Insured Retirement Plan)
The IRP provides supplemental income that is tax-free through life insurance that is tax-exempt. You might consider this plan if you are at least 10 to 15 years away from retirement.
You can also consider this if you had already maximized your yearly RRSP contributions. Of course, you have your own disposable income and you require a life insurance.
- RCA (Retirement Compensation Arrangement)
Like the IPP, your company can use RCA in investing the retirement of its key employees. In RCA, there is an arrangement that company contributions are made for another party (the Custodian). This is in anticipation of the future benefits payable to the employees at their retirement.
When contributions are paid to TCA, 50% of it is deposited with the custodian of RCA Trust. This is invested in an account. The other 50% is deposited to Canada Revenue Agency (CRA). It becomes a refundable tax in an account that bears no interest.
Moreover, 50% of all interest income, earned capital gains under the investment account, and dividends, are all remitted to the tax account. CRA refunds $1 to the tax account every $2 paid to RCA Trust. Payments on RCA can be done as lump-sum payment or as supplementary benefits for retirement.
One benefit point for RCA is that there is no need for IPP valuation requirements. The contribution is immediately deductible to the company and it is not taxable to the employee till the receipt of benefits. On the other hand, preferential treatment on tax is lost for capital gains and Canadian dividends.
There are still other retirement accounts that self-employed persons or small-business owners can make use of. (The Canada Revenue Office has tax deductions that help saving easier.)
CPP (Canada Pension Plan)
The plan at Canada Pension is obligatory that every Canadian have to contribute. You must contribute to the CPP on behalf of your employees from age 18 to 70 and earning over $3,500 annually.
When contributing to CPP for the employees, you need to allocate 4.45% of each employee earnings. You must deduct additional 4.45% to send to CRA. (This can be done online.) Starting 2015, you need not pay CPP on earnings over $53,600.
Added to your payment to half of the CPP contributions of your employees, you also need to pay your own contributions to the CPP. Your business income has to be listed and you subtract expenses from there to produce your current year’s income. You will pay only a portion of the amount to the CPP.
RRSP (Registered Retirement Savings Plans)
You can set up RRSP yourself and register it with the CRA (Canada Review Office). You have a choice at RRSP where a plan administrator chooses bond and investment stocks does it for you. You can choose for the RRSP that is self-directed if you want control on your investments.
You contribute to the fund tax-free. Starting at 2015, the CRA lets taxpayers to contribute up to 18% of their income (the threshold is $24,270 a year), whether they are employees or business owners.
However, unpaid contributions for the year will be carried over to the next. The CRA will mail you an assessment to see how much you should contribute. (You can also check online with help from My Account.)
GRRSP (Group Registered Retirement Savings Plan)
The GRRSP is useful if you want your employees have savings for their retirements. You can set it up via a mutual fund or a qualified administrator. The employees can save by taking their RRSP deposits from their payrolls.
By matching their contributions, you can encourage savings. Both are tax deductible on your tax returns. However, there are many variables to consider. Closing their employees’ RRSP accounts when they don’t work for you anymore is one of those variables.
RRIF (Registered Retirement Income Funds)
It can rake itself as a 2nd part of RRSP. When the Canadian government wanted all RRSP holders to transfer all of their funds out of the retirement accounts when they turn 71, most account holders transferred them to their RRIF.
A Registered Retirement Income Fund (RRIF) can be described as the second part to an RRSP. The Canadian government wanted the RRSP holders to have their funds from their retirement accounts out when they turn 71, and many actually choose to transfer them to an RRIF.
Savings from stocks, cash or bonds can be transferred to the accounts. You can set up your RRIF but are required to withdraw from it immediately. The required yearly withdrawal is a percentage of the account’s total value. The younger you started, the lower the percentage is.
Even while working, the RRIF helps adding your income.
TFSA (Tax-Free Savings Accounts)
For more savings tool to help your retirement, tax-free savings account is another option to look into. As of 2015, you can contribute to your TFSA up to a maximum of $10,000 every year.
As depositor, you need not have to declare any interest that had accrued or earnings on these accounts as capital gains. In Canada, there are so many options for retirement for business owners.