TaxBites – March 2015

In our first edition of 2015, we looked at the risk of workplace injuries or illnesses to employees, whether the owners of professional practices should mitigate those risks, and if so, how. In this edition we focus on a relatively new concept on the Canadian retirement savings landscape, the Personal Pension Plan (PPP).

A pension plan for practice owners

What if the following were true?

  • You’re an incorporated practice owner.
  • You use corporate dollars to fund a retirement plan for yourself. These contributions and any investment management fees are tax-deductible.
  • You can contribute more into this plan every year than to an RRSP.
  • If your investments under-perform, you can make additional tax-deductible contributions to top it up.
  • When it comes time to retire, you can use proceeds from the sale of your practice to top up the plan.

What if this option provided an extra $1 million to your retirement plan? Sound too good to be true? It’s not. It’s the Personal Pension Plan (PPP).

The PPP was developed by a former corporate and pension lawyer. It offers incorporated professionals the opportunity to have a pension arrangement comparable to public sector plans. When compared to the RRSP alternative, the PPP outperforms in virtually every respect.

Who funds it and how much?

A PPP is a one-person pension plan, funded by your Professional Corporation(PC). Your PC makes annual contributions based on your T4 income. For example, a business owner aged 45 earning more than $140,000 may contribute $24,270 to an RRSP, but can contribute $27,677 to a PPP. At age 50, that business owner may contribute $30,402 to a PPP, fully $6,100 above the RRSP limit. Depending on starting age, these additional contributions add up to $200,000 over a career; all with corporate dollars.

At plan inception, the PC may also contribute a larger lump sum related to your years of past service with the corporation.

Scenario

A 45 year old dentist, incorporated since 2003 has received T4 income from his corporation for the 12 years since 2003. He earns $100k per year and has $100k in RRSPs. If he stays invested in RRSPs, he’ll accumulate $1,736,406 at age 65. But if he invests in a PPP, largely because of the higher contribution limits, he’ll accumulate $2,965,636 by age 65. That’s a difference of $1,229,230! (assuming CRA’s current PPP prescribed target growth rate of 7.5% for both PPP and RRSP).

PPP gives options when market returns are low

Every three years there is an actuarial valuation of the plan. When markets are strong, and the growth of the plan has exceeded the target return, the PPP is fully funded and no action is required. If markets are weak, the PPP allows additional corporate contributions to “top up” the plan. This allows the balance of the pension to be restored to what it would have been if it had earned the target return. If corporate cash-flow does is not allow for these top-ups, the plan has the flexibility to make this choice.

The benefit of having the option to fully fund or not fully fund the PPP, is that if profit is low one year, cash can be directed to running the practice rather than funding the plan. When cash flow improves, catching-up on lost room can occur.

Investment options and fee deductions

Various investments are eligible to be included in a PPP; mutual funds, segregated funds, or individual stocks and bonds. The fees within the portfolio depend on what investments are used. But here is a subtle yet significant advantage of a PPP; unlike an RRSP, all PPP related fees, including investment management fees and MERs, are tax deductible to the business. This can allow for stronger growth in the portfolio, because dollars, normally used to cover fees, are now available for reinvestment within the portfolio. These amounts generate significant extra growth over time.

Creditor proofing and other advantages

The PPP offers other advantages. As a business owner, creditor protection may be a concern. A PPP is governed by pension legislation; and therefore protected from creditors. There is the option of a tax-exempt roll-over of existing RRSP assets into the PPP to help fund past contribution room. This provides further protection, as all registered assets are creditor protected under the plan. Additionally, there is the ability to roll RRSP assets into the PPP’s Additional Voluntary Contribution (AVC) subaccount to take advantage of fee deductibility. The RRSP assets that are rolled into the AVC subaccount are not locked-in and are not used to fund past contribution room.

Catches and caveats

As mentioned, you must be an employee of an incorporated business and, like RRSPs, the contribution amounts depend on earning T4 income. Those who take dividend income exclusively cannot open a PPP. Like all pensions, there are limits on the percentage of your portfolio that can be invested in one company. You cannot use a PPP like a savings account as withdrawals are not permitted until retirement. Annual fees are payable for actuarial and administrative services, although these fees are also tax-deductible.

Wrapping it up

The PPP provides an excellent alternative to RRSPs for owners of professional corporations. Working within existing pension regulations, a pension plan can be created using corporate dollars to fund the plan. Deductibility of all investment fees helps strengthen growth of the portfolio over time, as does the government determined growth rate. Combine this with higher contribution limits and flexibility of when those contributions are made, and the PPP is a powerful tool to help you build and safeguard your wealth. Give us a call if you are interested in obtaining an illustration based on your personal scenario.

Feedback, comments and questions

We hope you found this edition interesting and useful. We invite your feedback, comments and questions on any of the above.

The next edition of TAXBITES will discuss how to use your Professional Corporation to tax-effectively fund health care expenses for you and your family. Stay tuned!

Todd Roberts, B.Com.
Vice President
PROTECT Insurance Agencies Inc.
101 Duncan Mill Rd., Suite 103
Toronto, ON M3B 1Z3
Tel: 416-391-3764, ext. 233
Toll free: 1-866-919-3764
Fax: 416-391-5451
E-mail: todd.roberts@protectinsurance.ca
Website: www.protectinsurance.ca
The views expressed in this commentary are those of Protect Insurance Agencies Inc. (Protect) at the date of publication, are subject to change without notice, and are not represented to be error free. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific insurance products or investments, nor is it intended to provide tax, legal or accounting advice in general or specific to your circumstances. Buyers should review all documents relating to any insurance or investment carefully before making a decision and should ask their advisors for guidance based on their specific circumstances. Protect assumes no responsibility for how you use the information you obtain from this commentary. E. &. O.E.

 

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