Retirement Planning 101 for the Incorporated Business Owner and Professional

Much has been discussed and written in regard to retirement strategies for incorporated professionals and business owners.

Proposed solutions include using combinations of financial instruments and strategies available through tax legislation and corporate structures.

In almost all cases advisors and consultants (which include accountants, tax specialists and financial advisors, all whom I will refer to as “Advisors”) have worked to integrate solutions that would meet the needs of retirement planning, estate planning, tax planning, and succession planning.

Our Research has concluded that the order of implementation and choice of solutions proposed by Advisors is based on: knowledge, biases and resulting Advisor compensation.

The result is that few incorporated business owners and professionals have a secure retirement plan with a predictable outcome.

The model which forms part of this article illustrates a variety of retirement strategies and instruments that are based on the risks associated with the “three dark horsemen” of retirement planning: market volatility, tax changes and shifts in legislation.

It illustrates a “paradigm shift” from current practice, where the focus has been the middle section of the pyramid.

A Brief Review of the Model

Skyscrapers have strong foundations that support great structures and future enhancements.

Similarly, an individual’s retirement plan should have a concrete foundation and flexibility to adapt to future conditions.

The base of the model includes an insurance product with a feature that provides funding to a retirement or pension fund in the event of disability.

Individual Pension Plan “IPP”

The IPP is a registered pension plan that is governed by the same pension legislation that provides the same features enjoyed by employees of government and large corporations. The IPP features of tax deduction and deferral, robust creditor protection, ability to tax-effectively react to market volatility, enhanced contributions and a defined retirement benefit make it the core instrument of the incorporated professional/business owner retirement plan. Participation begins at age 40 through to age 71 and meeting ideal T4 income levels.

The IPP was introduced in 1991 by the federal government and like the RRSP there are no anticipated changes in legislation involving these instruments.

CPP is an attribute of T4 income which is a prerequisite to contributions to IPP and RRSP.

Retirement Compensation Arrangement “RCA”

The Retirement Compensation Arrangement “RCA” meets the needs of pension planning for incomes significantly greater than 2.5 X MPE. (currently approx. $146,000). Although it caught the ire of CRA a few years ago due to inappropriate strategies it is gaining traction spurred by new and proposed tax changes.

RRSP AND TFSA

RRSP and TFSA are a higher risk since they are exposed to market volatility without recourse. The future of the TFSA is uncertain given different political mandates.

Business Retirement Savings Plan “BRSP”

Business Retirement Savings Plan (BSRP) or (Retirement and Tax planning using Private Corporations) are being challenged by tax legislation in areas including taxation of passive income, income splitting strategies, capital gains strategies and taxation of dividends and more which make it difficult, if not impossible, to plan for any predictable long-term outcome especially for retirement planning.

Insurance strategies

Insurance strategies can combine risk management with wealth accumulation. Legislation and taxation have negatively impacted this area over the years but there still remain some opportunities. Mortality and morbidity expenses make these instruments very costly and the inherent long-term obligation can be very restrictive and punitive if circumstances or objectives change. Some strategies involve leveraging in the future to reap the benefit. That may sound OK at inception but may not for the faint of heart when that day comes.

Offshore strategies

Offshore strategies are for individuals and corporations whose needs are beyond the scope of this article. However, it would be unlikely that one would head “offshore” before implementing some, if not all, of the prior strategies.

Conclusion

Our model is “Financial Planning 101” for the incorporated business owner and professional. It is not about right or wrong; one over the other. It is about prudent planning to meet the current and future long-term needs of the client using a combination of these principles and products based on the specific needs and situation of the client, absent of Advisor bias.

SEPPP is founded on the principle that the incorporated professional/business owner deserves a retirement plan with the same security and predictability that is enjoyed by those who make the rules!

The team of professionals at SEPPP has all the resources to assist self-employed individuals and their advisors in positioning and implementing all stages of the model.

Michael Byrne CEO/Founder – SEPPP Corp

michaelb@seppp.ca