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How to integrate tax-efficient options into your advising strategy

iA Financial Group, Group Benefits and Retirement Solutions explores two CRA-sanctioned solutions for wealth building

Portrait of a businessperson You can help your clients build retirement wealth with high tax efficiency (Getty Images)

There have been several tax changes in the last few years with respect to the family trust and income splitting, passive income and stock options. Organizations are currently struggling to reduce corporate taxes, transfer assets to the owners and mitigate the tax impact and retain key employees—a daily challenge in today’s tight labour market.

As a result, business owners, professionals and executives are looking for new, tax-efficient wealth building options.

To handle the changing tax landscape, the folks at iA Financial Group have placed a spotlight on two CRA-sanctioned solutions: The individual pension plan (IPP) and retirement compensation arrangement (RCA). Both can be set up on their own or in conjunction with each other and are valuable in several situations.

For starters, because most IPPs and RCAs allow for both a corporate deduction for current service as well as a larger deduction for past service—which can be quite substantial—it will allow you to maintain a small business tax rate. When the company contributes the full past-service deduction, it can often drop its tax rate to the small-business level.

Second, additional enhancements can be purchased at retirement. Through retirement pension enhancements (also referred to as terminal funding), the cost becomes tax-deductible, further drawing money out of the company; when selling, the company is more marketable.

Third, by taking advantage of the additional voluntary account—a side account holding RRSP assets that can be transferred—investment management fees can be billed and are tax-deductible to the company. Additionally, assets in the voluntary account are not considered part of the IPP for funding purposes and are fully accessible to the client.

When comparing the key features of the RRSP, IPP and RCA the differences are notable. All three allow for tax deduction of employer contribution, yet an RRSP considers it as income while both an IPP and RCA require actuarial calculations. The maximum contribution of an RRSP is 18 per cent of T4 income up to the CRA yearly limit. For an IPP, the maximum contribution is based on both age and T4 income and is higher than an RRSP, as is an RCA, which is based on T4 income. RRSPs don’t include past service if contributions were maximized since 1991, while the same is untrue for IPPs and RCAs, which both include past years of service (an RCA allows it if “reasonable”, for example paying a CEO at age 50 a pension of 50 per cent of earnings at age 60). When it comes to retirement income options, an RRSP pension can start before turning 71, while an IPP allows you to retire from age 55 before turning 71; an RCA has no restrictions when it comes to retirement income options.

Lastly, while an RRSP offers easy administration, there is so much more an IPP or RCA can provide, including flexible contributions (depending on province), tax-deferred intergenerational asset transfer, fund investment shortfalls and stronger creditor protection.

Curious to learn more and how to leverage these strategies to further build your accounting practice, deliver added value to your clients while decreasing their taxation and increasing retirement wealth? Contact your insurance or financial adviser today.