DEEP STRATEGIC WEALTH

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    For Business Owners, Executives and Incorporated Professionals

Take Control of Your Pension with a Copycat Annuity

In Canada, we are fortunate to have some of the strongest financial institutions in the world and our financial system is extremely stable. Unfortunately, the same cannot be said of many medium to large companies that operate here. There are many reasons that might cause you to be worried about your defined benefit pension.   

We have witnessed a parade of companies with defined benefit registered pension plans (DB RPPs) run into trouble with horrific consequences for some of the plan-holders.

Economic and political shocks to many Canadian industrial sectors such as Automotive, Energy, Agriculture, Trade & Logistics, Media & Advertising, along with the Retail apocalypse, have led to disruption, weak corporate earnings performance and compromised viability.

Worried about your pension?

It is legitimate to be nervous about whether your DB Plan sponsor will be solvent, or even still exist in 25-30 years. Will they be able to fulfill your pension promise? Causes for concern:

  • Most DB RPPs are significantly underfunded. Some dangerously so.
  • New leadership, management groups and/or strategic direction may not inspire confidence.
  • US or multinational companies may orphan your Canadian corporate subsidiary, leaving the company vulnerable.
  • Very large unfunded pension liabilities weigh heavily on corporate balance sheets and the low to negative interest rate environment appears to make some already aggressive return requirements unrealistic. As a result, many DB plans may face insolvency.

If you are a plan-holder, you have paid your dues in blood, sweat & tears. You don’t want to have to worry about your pension promise, or feel the need to continually monitor funding status, returns, company earnings, issues and solvency. So, what are your options?

Take Control of your Pension

It may be possible for you to commute your pension, which would leave you with a few alternative avenues:

  1. Maintain your plan – let sleeping dogs lie;
  2. Transfer – Directly transfer the commuted value (CV) to another DB plan or Individual Pension Plan which may be in place;
  3. Cash Buyout – If your pension is in a wind-up situation, you might receive a cash buy-out offer which, if taken, would come with a massive punitive tax hit;
  4. Registered Transfer – You could transfer your CV to a locked-in RRSP or RRIF, which would also require that you pay a monstrous amount of tax, thereby reducing the capital you would be counting on to generate income for your retirement; or finally
  5. Copycat Annuity – If permitted by your plan, you may be able to transfer your CV to a life annuity with a major insurance company, to create a copycat annuity, which would not be subject to a tax penalty. 

Copycat Annuity Advantages

A copycat annuity is a very attractive option, allowing DB plan holders to avoid a staggering tax liability. This option works since all of the benefits & attributes of your original plan are replicated or copied with the copycat annuity, so the plan will remain registered, without penalty. After implementation, the same taxation applies to your retirement income stream.

The copycat annuity has a number of further advantages, beyond taxation, when compared to a buyout or transfer to locked-in RSP or RRIF:

  1. Longevity risk – copycat annuity income is guaranteed for life so you eliminate your risk of outliving your pension;
  2. Fire & forget – no need to actively manage the assets, and no market risk;
  3. Stability & peace of mind – your plan resides at a stable, well-capitalized financial institution;
  4. Protection – your copycat annuity is protected against failure under Assuris;
  5. Income splitting – you may be eligible for pension income splitting;
  6. Other rights – other plan rights can be replicated, such as the right to a survivor pension or a guarantee of payments over a specified period; and 
  7. Legacy – a separate insurance policy can be added to pass wealth to your survivors.

Opportune Time to Commute

Because of the very low interest rates, the calculated commuted values of DB RPPs are very high, compared to in the past, making it an opportune time to commute your pension. 

The first step needed to implement this strategy is to undergo a thorough analysis to determine;

  • Whether a commuted value is available
  • What options that are available to you;
  • How much can be transferred; and 
  • How much tax must be paid.

Future Proof your DB Pension

So, if you feel you are at the mercy of your plan sponsor, or are concerned about the status of your DB plan, an attractive strategy might be to commute your pension to a major financial institution using a copycat annuity.

 

E. & O. E.

Integrated Corporate & Personal Strategic Wealth Management

Financial independence, it’s everything. It’s the fruit of the business you’ve built. Your legacy and expertise. Your mark on the world.

It’s the cornerstone of your freedom, peace of mind for your family. It’s your identity… it’s you.

Threatscape

Over the years your business has evolved, more than you would ever have anticipate. At the same time, threats to your business and financial independence have also evolved, including existential threats. And the more you have become successful, the more you have become exposed.

You face a complex, ever-changing business environment, bringing with it risk. 

  • From competition
  • legal/regulatory
  • business continuity
  • political
  • technological
  • market and financial shocks

In the past, these threats have seemed a mere annoyance…
More recently, however, they have escalated, to a critical level previously unimaginable, and can no longer be ignored.

On top of all the business risk you face, is the mother of all threats to your financial freedom and independence. That of Confiscatory Taxation, targeting business owners, executives and incorporated professionals, which seems to be on the rise in Canada.

Now, it is more important than ever to manage and protect your hard-earned wealth.

It’s about strategically implementing solutions, connecting them together and structuring them with intelligence & insight.

This demands a modern, strategic approach to wealth management. One that is balanced. comprehensive. intelligent. and proactive. An approach that integrates both your personal and corporate wealth Using structured planning strategies and solutions to reduce your tax burden and preserve your wealth & financial freedom.

It’s not just about short term, tactical financial maneuvers, and quick fixes.

It’s about strategically implementing solutions, connecting them together and structuring them with intelligence & insight.

Today, it is critical that your wealth adviser is able to partner with top experts in areas of

  • Tax, Trust & Estate
  • Asset Management
  • Legal
  • Insurance
  • Valuations
  • Pension & Actuarial
  • Succession & Legacy Planning, and
  • Investment Banking

to provide integrated strategic wealth management planning & solutions to protect your assets and financial independence.

 

The Plight of Business Owners & Incorporated Professionals Adrift Without a Pension

Adrift Without a Pension

As a business owner or incorporated professional, you face several stark realities in planning for your retirement. You are operating in a hostile environment with an aggressive tax regime which is geared toward wealth expropriation. This has created challenges for wealth creation, management and preservation.

Fortunately, there are planning strategies and corporate structures that you can deploy, to address these challenges, reduce your tax burden, and build and preserve your hard-earned wealth.

Most business owners and incorporated professionals do not have defined benefit pensions plans, leaving them to fight on their own, to build up equity in their corporations/practices, and hope to one day sell or monetize the business to fund their retirement.

Lawyers, for example, are often reluctant to admit that they do not have pensions. For many, “the inability to even consider retirement is very real these days as the profession gets squeezed by a number of competing forces generally acting negatively on their financial statements,” says Jennifer Brown in “Retirement: Dare to Dream,” Canadian Lawyer.

The same goes for many highly-skilled professionals who choose consulting/contracting as their preferred work engagement. Incorporated professionals who are consultants may feel adrift or left out, compared to their peers with defined benefit pensions in the public service.

“Even if you’re now in your 60s, it’s not too late to get the kind of gold-plated, bullet-proof pension – albeit a scaled-down version commensurate with the reduced years of contributions – that most of the public sector enjoy,” – Jonathan Chevreau, The Globe & Mail.

Complex Adverse Tax Changes

To complicate matters, the barrage of complex adverse tax changes directly impacts you like a wealth reduction plan, with potential tripwires, landmines and compliance concerns.

Increased Cost-Burden

If you are a Canadian physician or dentist, due to your skills and training, you likely entered your practice at 30+ years, with significant debt from education and equipment costs, and have some unique retirement planning challenges. (CMA Brief, Small Business Perspectives of Physician Medical Practices in Canada). See Tax Rx for Incorporated Medical/Dental Professionals

Succession Planning or Exit Strategy

A good chunk of your life’s work, wealth and sweat equity may be locked up in you company. You may already have an exit strategy or path to liquidity.
Things to consider:

  • Is there a market for your business and how will you assess the value of the transaction?
  • Have you identified a succession candidate?
  • Will the sale of your business be to a strategic or a financial buyer?
  • Will the transaction be pursuant to an asset sale or a share sale?
  • Is there a management group that would want to buy you out (management buyout/MBO)
  • Is a family buyout planned?
  • Are there non-strategic, non-operating, investment or life insurance assets in the corporation that will need to be addressed, to purify the corporation prior to sale?
  • How will you strategically optimize the tax consequences of such decisions?
Creditor Protection & Risk Management

Unforeseen liability can throw a monkey wrench into your retirement plans. In the event of litigation, is the lion’s share of your wealth safely beyond the reach of your creditors?

Are there key executives that are integral to the success of the business? Perhaps key person insurance, golden handcuffs or an enhanced pension/benefits package is in order.

Over-Regulation

Franchisors are finding it increasingly difficult and costly to comply with shifting standards and regulations.

“There are discussions about whether the franchise model is still worth pursuing because of the increasing burden of regulation and the growing complexity of disclosure,” Jennifer Dolman, a partner at Osler, underlines. “There’s a lot of rethinking going on.”(Jennifer Dolman, “The Future of Franchising in Canada” – L’Expert.)

Staying Focused

You are the key person and expert, so you need to remain focused on building and operating your business rather than scrambling to coordinate your various legal and financial advisors.

Strategic Wealth Management Solutions

Fortunately there are planning strategies and corporate structures that you can deploy, to address many of these challenges, reduce your tax burden, and build and preserve your hard-earned wealth.

An experienced advisor can coordinate with other professionals to help facilitate tax, trust & estate planning solutions so you can retire well.

IPPs: The Way of the Future

The Way of the Future: IPPs for Business Owners and Incorporated Professionals Today

In a recent blog post, Mike Vanderburgh at Newport Private Wealth highlighted the importance of Individual Pension Plans (IPPs) as a possible retirement savings solution for business owners and incorporated professionals.

Here are some of the main points that were made:

  • IPPs have been garnering more attention lately, linked with changes to passive income rules for holding companies and professional corporations;
  • IPPS can be effective for certain individuals to save for their future, “shifting tax-deductible funds from the corporation to a pension, where they can be invested on a tax-deferred basis until retirement. This differs from an RRSP, where the individual can contribute funds and receive a tax deduction personally.”-Vanderburgh;
  • In most cases, more funds can be contributed to an IPP than can be contributed to an RRSP

Besides generating more tax-deferred income leading to more assets in the IPP when the professional retires, some other benefits are:

  • improved creditor protection; and
  • the significant benefit of being able to pass the IPP’s assets to surviving children employed at the company.

Call us today to learn more about IPPs and your future.

 

E. & O. E.

The 800 lb. Gorilla of Retirement Plans for Business Owners

As a Canadian business owner or key employee planning for retirement, you are likely wrestling with the question of how to carve-out and protect your hard earned equity from your company without getting eviscerated by taxes.

You are painfully aware of the current low interest rates and high tax rates we face. Central banks are now flirting with zero or even negative interest rates. In Ontario, we face a marginal tax rate of 53.53% beyond $220,000 of income, and eligible dividends are taxed at a punitive 45.30%. With these high marginal tax rates, it makes little sense to pay yourself more than you need to live. The old mantra of “pay yourself first” no longer applies.

Furthermore, limits imposed on HoldCo.’s have restricted their effectiveness as a corporate tax strategy. And IRP’s or “Insured Retirement Plan” strategies have become a lightning-rod for CRA, and have, in many instances, blown up.

So, you are left with a mix of limited, tax advantaged retirement options such as RRSPs, TSFAs, and IPPs/RPPs… all of which suffer from capped contribution and benefit limits.

Fortunately, there is another vehicle that can tip the scales back in your favor.  Retirement Compensation Arrangements (RCAs) are like super-sized corporate RRSPs which address pension shortfall concerns for high earners.

Retirement Compensation Arrangements

RCAs fell out of favour in the past due to decreasing corporate and dividend tax rates, and misuse, however they continued to grow in popularity to secure corporate supplemental pension benefits. – Pierre Ghorbanian, CFP, FLMI, manager business development for advanced markets at BMO Life Assurance Company.

Retirement Compensation Arrangements (RCAs) are like super-sized corporate RRSPs which address pension shortfall concerns for high earners.

Today’s rock bottom interest rates and high marginal tax rates make even plain vanilla RCAs an effective tool to save for retirement. See Back to the Future for Retirement Compensation Arrangements | Advisor.ca.

Advantages

  • RCAs are creditor protected Trusts
  • funded with pre-tax corporate dollars / contributions which are tax deductible
  • no tax to the owner/employee until benefits are received from the RCA
  • based on T-4 income with no salary cap
  • no rigid schedule for contributions or withdrawals
  • carve out profit before dividending out to HoldCo.
  • perpetual trusts, not subject to the 21-year rule
  • excellent for inter-generational transfer of wealth

The 800 Pound Gorilla of Retirement Plans for Business Owners

Taking this strategy a step further, you can fund your RCA with a permanent key-man insurance policy to create an insured RCA Trust, which will give you the strongest creditor protection possible.

The RCA has an investment account (RIA) and a tax account (RTA).  When the investment account is funded using an exempt insurance policy, investment earnings are allowed to grow tax free in the exempt policy.  The resulting  insured RCA trust is the undisputed 800 Pound Gorilla of Retirement Plans for Business Owners. 

An insured RCA trust is the undisputed 800 Pound Gorilla of Retirement Plans for Business Owners.

Creditor Protection

Perhaps most importantly, if you run a medium size business in Canada, there is a possibility that you may, at some point in the future, be the target of litigation.  It is not enough to simply segregate funds for retirement in your OpCo or HoldCo, which can be attacked. An insured RCA trust can be used to create creditor protected assets, in the event of an attack or insolvency, moving your retirement assets beyond the reach of your creditors.

Business Succession Planning

A common misunderstanding is that, when it comes time to sell your business, the sale will occur pursuant to a share purchase transaction or acquisition, which would allow the favorable tax treatment of the proceeds involving the use of lifetime capital gains allowance and splitting with family members.

This is usually not the case. Most transactions of this nature are completed pursuant to an asset purchase/sale agreement, which is much more favorable from a tax perspective to the acquiring entity.

The cold hard reality is that, upon sale of your business, you will likely end up actually selling the assets, leaving you  with a shell company full of cash. While that may sound good, the sad truth is that such a transaction will result in income generated in the company, and will be taxed accordingly.  To add insult to injury, when that cash is pulled out of the company, it will be taxed at the highest marginal tax rate.

Accountants typically advise their clients to bonus out the proceeds of the sale and pay the tax. The result will be a punitive personal income tax and health care tax..

You can address this using a Retirement Compensation Arrangement, which can dramatically reduce your overall tax hit associated with the sale of the assets. When it comes time to execute the buyout, you can simply contribute most of the proceeds of the transaction to the RCA, and defer any tax.

So an insurance funded RCA can provide an excellent mechanism to facilitate a buyout or management buyout.

Popular Criticism

The traditional criticism of Retirement Compensation Arrangements has been that 50% of contributions must be remitted to Canada Revenue Agency as a refundable tax, which is held by CRA and returns 0% interest.

Retirement Compensation Arrangements (RCAs) are back with a vengeance and accountants are starting to take notice.

Because of ultra-low prevailing interest rates, and high marginal tax rates, this argument makes no sense.  It is better to pay 50% into a refundable tax account and benefit from the tax exempt accrual of investment gains, since you will receive a chunk of that refundable tax back at a later date.

Who Qualifies

Business owners and key executives of a Canadian Controlled Private Corporation (CCPC) making in excess of the small business limit will qualify.  First you’ll need an actuarial calculation of your pension entitlement, and obtain an illustration, using your own data, to see how well the strategy would work for you.  The process should include consultation with your Lawyer, CFO  Accountant and/or trusted advisor, before you proceed.

A major caveat is that “the face amount of the policy must not be excessive, so as not to trigger an advantage under CRA guidelines.” Roy Craik, founder of Retirement Compensation Funding Inc.

In this day and age, it may make sense to ruggedize your retirement strategy with an Insured RCA Trust – The 800 Pound Gorilla of Retirement Plans for Business Owners.

E. & O. E.

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