Your Corporation Can Do More Than Pay Your Bills!!
If you own an incorporated business in Canada, you may already be familiar with the basics of corporate tax planning. If not, then this article is definitely for you.
You earned revenue through your corporation, paid business expenses, filed your T2 corporate income tax return, annual return and decided how much money to withdraw personally and how much to retain in the company.
But here is an important question:
Were you using your corporation simply to run your business, or were you also using it strategically to build your personal wealth?
For many incorporated professionals, consultants, healthcare practitioners, contractors, and small business owners, the corporation can play a much larger role in their financial future.
Depending on the circumstances, it may help fund retirement, pay for eligible healthcare expenses, provide employee benefits, and support business succession and estate planning.
Four strategies that are worth understanding:
Individual Pension Plans (IPPs)
Health Spending Accounts (HSAs)
Group Health and Dental Benefits
Corporate-Owned Permanent Life Insurance
A fifth consideration could be whether borrowing against a life insurance policy or using a policy as collateral can support a broader investment strategy.
However, these strategies are not interchangeable, and none is automatically suitable for every corporation.
Let’s explore how they work, their potential advantages, and the questions business owners should ask before implementing them.
1. Individual Pension Plans: Building a More Structured Retirement Strategy
What is an Individual Pension Plan?
An Individual Pension Plan, commonly known as an IPP, is a type of registered defined-benefit pension arrangement designed for an eligible individual, often an incorporated business owner or senior executive.
Unlike a Registered Retirement Savings Plan (RRSP), where your annual contribution room is generally determined by earned income and statutory limits, an IPP is designed around a pension benefit formula.
An actuary determines the required contributions based on factors such as the member’s age, pensionable earnings, credited service, and the plan’s assumptions.
For some established business owners, this can provide an opportunity to accumulate retirement benefits through their corporation.
How does it work?
Consider a simplified example.
Suppose you own a successful incorporated consulting business. Your company generates consistent profits, and you have been paying yourself employment income for many years.
You are now in your early 50s and want to strengthen your retirement plan.
You have already accumulated investments in an RRSP, but you are looking for another structured retirement funding option.
An IPP may be worth investigating.
The corporation establishes an eligible registered pension plan, and employer contributions are determined according to the applicable pension rules and actuarial requirements.
Where contributions qualify for deduction, the corporation may deduct them in computing its income, subject to the applicable rules.
The money inside the registered pension arrangement can grow on a tax-deferred basis, with pension benefits generally taxable when paid to the recipient.
Why might an IPP be attractive to business owners?
Potential advantage 1: Retirement funding through the corporation
Instead of relying entirely on personal RRSP contributions, an eligible owner-manager may be able to fund a defined-benefit pension through the corporation.
Potential advantage 2: Potentially higher pension funding at certain ages
For some older, higher-income business owners, an IPP can permit greater pension funding than an RRSP contribution strategy would provide in a particular year.
However, this is not a universal rule. The comparison depends on age, earnings, pensionable service, existing retirement benefits, and the applicable limits.
Potential advantage 3: Tax-deferred investment growth
Investment income earned inside a registered pension plan is generally not taxed annually within the plan. Taxation generally occurs when pension benefits are paid.
Potential advantage 4: A more formal retirement framework
An IPP can help business owners establish a defined retirement benefit instead of relying solely on the value of their investment portfolio at retirement.
Important considerations before establishing an IPP
An IPP is not simply an RRSP with a different name.
It comes with additional requirements, which can include:
Actuarial calculations and valuations.
Plan establishment, administration, and ongoing compliance costs.
Appropriate employment income and pensionable service.
Restrictions governing contributions and pension benefits.
Rules relating to pension adjustments, transfers, and retirement benefits.
An IPP may be more attractive to an established owner-manager with stable earnings than to someone operating a young business with unpredictable profits.
Note: An IPP deserves consideration when retirement funding is a major priority and the corporation has the financial capacity to support a registered pension arrangement.
It should be evaluated against an RRSP, TFSA, corporate investments, and other retirement planning options rather than adopted solely because it offers a potential corporate deduction.
