In life and business, failure teaches us some incredible lessons. Many of the ideas that I talk to business owners about today come from the mistakes that I made in my first business. In one breath, I wish that I could have started my current business 20 years ago, however, if I had not experienced the challenges and hardships experienced during my first business, I wouldn’t have had the conviction or motivation to start The Finish Line Group.
I love the business I’m in. I get to help business owners protect their wealth, increase their wealth, create an exit plan for their business, devise employee attraction and retention strategies that work and show them how to save on their corporate and personal taxes.
In my opinion, one of the best wealth strategies that are available to business owners is something called an Individual Pension Plan (IPP).
What is an Individual Pension Plan?
It is a Canadian tax-savings solution for business owners and incorporated professionals looking for a better way of saving for their retirement. As compared to an RRSP, the pension solution allows up to 60% greater tax-deferred compounding until the individual retires.
The 14 Things I Love About the Individual Pension Plan
- Allows incorporated business owners and professionals the ability to fund a company-sponsored pension plan for themselves, shareholders and key executives.
- Allows up to more than 60% more contribution room than RRSPs
- Utilizing the Defined Benefit component of the IPP, the corporation can guarantee a 7.5% rate of return.
- Creditor Protection: because it falls under the Canadian Pension Laws, it is completely creditor protected.
- Allows for tax-free transfers of RRSP assets into the Pension Plan and subject to the same creditor protection
- Flexibility: because of the three components of the IPP (Defined Benefit, Defined Contribution and Additional Voluntary Contribution), you can contribute the maximum eligible amount in great business years and as little as 1% of your T4 income in leaner years. Unused portions will get forwarded to the subsequent year’s contribution.
- IPP is funded as a corporate expense, thus can significantly reduce your corporate tax obligation in any given year.
- All fees (management, administrative, actuarial and commissions) to manage the Personal Pension Plan are a deductible business expense. Any RRSPs transferred into an IPP, any past fees for RRSP are now subject to a tax credit to the corporation.
- HST Tax Credit available only to pension plans
- Additional top-up payments available when assets return less than 7.5% (further increases contribution room)
- Terminal Funding: When a business owner is selling the business, or about to retire, transferring assets can trigger tax consequences. Individual Pension Plans (IPPs) do offer a retiring plan member with a one-time opportunity to upgrade the basic pension promised under the plan with additional benefits. The most common ancillary benefits include • Early unreduced pension benefits • CPP bridge payments • Indexing to Consumer Price Index.
- Past Service Funding: Allows a plan member, with the consent of the employer, to create a pension entitlement for prior years. Such a member might have missed out on years of contributions when the plan was not yet established and can now purchase past service under the newly set up pension plan. These extra contributions are added to the plan and are tax-deductible to the corporation.
- Cleansing Your Business: When business owners are trying to sell their business and leverage the Lifetime Capital Gains Exemption, they must meet certain criteria to be eligible to qualify for LCGE. The IPP will help the business owner to attain these financial criteria and qualify for the LCGE.
Comparing a 45-year-old business owner who uses a Personal Pension Plan versus RRSP
Let us take a 45-year old owner/operator drawing $140,000 per annum in salary and contributing the maximum under either an RRSP or Individual Pension Plan. This individual decides to retire at age 65. Throughout the accumulation phase of 20 years, assets return 7.5% (and earnings are tax-exempt while in the registered accounts).
Every day that this person does not upgrade to an IPP translates into a loss of $136. This does not factor in additional tax savings (and higher tax refunds) relating to the IPP features such as:
• Deductibility of Fees
• HST 33% Refund
• Terminal Funding
• Corporate Deduction for Purchase of Past Service
• Tax Deductibility of Special Payments
If you’d like to see what a Personal Pension Plan might do for you and your business, I’d be happy to provide a customized illustration to conform to your personal situation.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.