Title: The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans
1The Truths and Myths of Retirement Compensation
Arrangements and Individual Pension Plans
Presentation to ESTATE PLANNING COUNCIL OF
ABBOTSFORD October 19, 2005
2Retirement Compensation
Arrangement
3Gordon B. Lang Associates Inc. Actuaries
Consultants
- FOUNDED JUNE 1995
- PRESIDENT C.E.O. GORDON B. LANG
- FELLOW OF THE FACULTY OF ACTUARIES IN SCOTLAND
(1967) - FELLOW OF THE CANADIAN INSTITUTE OF ACTUARIES
(1967) - ASSOCIATE OF THE SOCIETY OF ACTUARIES (1976)
- FELLOW OF THE CONFERENCE OF
- CONSULTING ACTUARIES (2005)
4Gordon B. Lang Associates Inc. Actuaries
Consultants
OFFICES VANCOUVER,PRINCE GEORGE, CALGARY,
EDMONTON, LETHBRIDGE, TORONTO, OTTAWA, MONTREAL
AND HALIFAX EMPLOYEES 26
5Gordon B. Lang Associates Inc. Actuaries
Consultants
- SPECIALIZATION PRODUCTS DEVELOPED FOR
- PROFESSIONALS WITH PROFESSIONAL CORPORATIONS
- OWNERS OF PRIVATE COMPANIES
- SENIOR EXECUTIVES OF LARGER PRIVATE PUBLIC
COMPANIES
6Gordon B. Lang Associates Inc. Actuaries
Consultants
- SPECIALITY PRODUCTS
- -EMPLOYEE PROFIT SHARING PLAN (EPSP)
- -HEALTH WELFARE TRUST (HAWT)
- -INDIVIDUAL PENSION PLAN (IPP)
- -RETIREMENT COMPENSATION ARRANGEMENT (RCA)
-
7RCA Overview
- Tax deferment vehicle
- Defined in the Income Tax Act
- Provides asset protection
- For Owners and their Families, Key Employees,
Executives and Professionals with PCs - Most suitable for high income earners
8RCA - Overview
- Defined in Section 248(1) of Income Tax Act
(Canada) - Employer Employee contributions tax deductible
- Benefits taxable when received
- 50 of contribution remitted to CRA
- Refundable Tax Account (RTA)
9RCA - Overview
- Each Year 50 of Net Amount of
- Taxable investment income
- Less expenses
- Less benefit payments
- Remitted or Refunded
- Excludes Unrealized Capital Gains
- Excludes Investment Income from Qualified Life
Insurance
10RCA - Details
- Contributions
- Employer
- Employee Contributions
- - Required by the Company
- - Not Greater then Employer contribution for
calendar year - - Source contributions not subject to
withholdings - - May be made by cheque to Employer
- - May be made from Bonus - carryback
deductions to Employer. - - Included in calculation of Eligible Earnings
Base.
11RCA - Details
- Advantage of Holding Insurance Policy Assets
-
- - Split dollar Life Insurance Policy Premiums
- Benefits
- - Company owns Pure Life Insurance
- - Trust owns Savings Portion
- - On death of Insured No RTA transfer of
proceeds - - Unbalanced RCA available to Survivors
- - New Policy then purchased on Surviving
Member(s)
12RCA - Details
- Add Spouse and Adult Children
- - Increases Deductibility
- - Permits Income Splitting
- - No requirement for owner to take benefits
- - Spouse would take over benefit rights
- on death
- - Benefits may be passed down to Children (even
Grandchildren) - - No 21 year Trust Rule
13RCA Allowable Contributions
- Contributions producing Annual Retirement Income
up to 2 of Best Three Years Average Earnings per
year of Eligible Service - Actuarial Certificate required for CRA
reasonability test
14RCA Allowable Contributions
- Company Owner aged 60
- 15 years since Company Established
- Best 3 years Average Earnings 500,000
- Retirement Age 65
- Maximum 2005 RCA Contribution 3,117,900
- Additional Deductibility
- 2006 205,700
- 2007 213,400
- 2008 221,400
- 2009 229,700
- Total over 5 years 3,998,100
15RCA Closely Held Companies
- Objectives
- Defer taxes into lower rates
- Protect Assets from Creditors through trusteed
arrangements - Future Company growth funded through leveraging
16RCA - Closely Held Companies
- For Owners, Professionals Key Employees
- Employer sets Contributions
- Suitable Investments
- Universal Life Insurance Policies
- ETFs or Indexed Funds
- Equity Funds
- Canadian Foreign Blue Chip Stocks
- Buy Hold Management Style Low or No
distribution
17RCA Establishment
- Board Resolutions
- Trust Deed Plan Text
- Trustees
- 3 individuals (1 separate from Employer)
- Trust Company
- CRA Registration
18RCA Establishment
- RCA Account Number
- Annual Trustee Return
- Part XI.3 Return
- Prepared by Accountant or GBL Inc.
- T737 Return For Contributions
19RCA - Tax Deferment into Lower Rates
- Beneficiary Can
- Move to lower-taxed province
- Defer income when tax rates are declining
- Leave Canada -benefits taxed pursuant to Tax
Treaty - USA 15 Installment Payments, 25 Lump Sum
Canadian Withholding credited against U.S.
Federal Tax. - U.S. Taxes at Marginal Tax Rates
- Ireland 15 for installment payments
- Australia and New Zealand 15 for both lump
sums and installment payments - Most others Treaties 15 on installment
payments and 25 on lump sums
20U.S./Canada Tax Treaty Implications
- Tax Treatment
- Employer Contributions
- In U.S. -are included in income of Employee and
are deductible to Company - In Canada - there is no employee income inclusion
21U.S./Canada Tax Treaty Implications
- Employee Contributions
- In U.S. - are included in income of Employee
- In Canada - are deductible by Employee
22U.S./Canada Tax Treaty Implications
- RCA Investment Income
- U.S. Unless IRS forms completed, is included in
income of Employee - Canada - no Employee income inclusion
23U.S./Canada Tax Treaty Implications
- Taxation of Benefits if Employee U.S. Resident no
longer subject to Canadian Tax - In U.S. - no tax on benefits. Canadian
Withholding Tax reduces U.S. Federal Tax - In Canada - 15 Withholding Tax on installment
payments, 25 on lump sum payments
24U.S./Canada Tax Treaty Implications
- Net Impact on RCA
- Canadian Income Tax reduced when Resident of
Canada - Reduced Tax Payable on RCA Proceeds if U.S.
Resident
25The Leveraged RCA Example
- XYZ Corporation establishes an RCA with a first
contribution of 1.1 million. - 550,000 invested by Trustees
- 550,000 in Refundable Tax account (RTA)
- Financial Institution lends 1,000,000 to
Investco. XYZ Corporation takes out insurance on
Mr. Smith for amount of the loan.
26The Leveraged RCA ExampleXYZ Corporation
- TAX SAVINGS ON RCA
- CONTRIBUTION OF (35.6) 391,600
- less RCA CONTRIBUTION FROM
- P.C. (100,000)
- less Expenses (40,000)
- NET ADDITIONAL AVAILABLE
- FUNDS FOR INVESTMENT 251,600
27RCA Lenders
- Bank of Montreal
- Royal Bank
- TD Bank
- CIBC
- National Bank
- HSBC
- Manulife Bank
- AIG Finance
28Leveraged RCA
- GBL Associates Inc. has established strategic
relationships with certain law firms to provide
comprehensive actuarial and legal documentation
to establish this Leveraged RCA structure.
29RCA Summary
- Tax Deferral Vehicle
- Greater security through Trusteed Arrangement
- For Owners, Key Employees, Executives and
Professionals
30Retirement Compensation
Arrangement
31Individual Pension Plan
- Gordon B. Lang Associates Inc.
32Outline
- Individual Pension Plan (IPP)
- Retirement Compensation Arrangement (RCA)
- Questions
33IPP Features
- Registered Pension Plan
- Limited to Participant, Spouse and
- adult children
- Same contribution limits as Defined Benefit
Registered Pension Plans - Designed to maximize contributions permitted by
CRA
34IPP Contributions
- Contributions by employer (and employee) tax
deductible - Benefits taxed when received
- Investment income tax exempt
35IPP Maximum Allowable ContributionsPost February
2005 Federal Budget
36IPP Closely Held Companies
- Greater tax deductible contributions than RRSPs
- More funding for retirement
- Creditor protection
- Multiple plans for individuals with T4 income
from several unrelated sources - Investments fairly similar to those for RRSPs
37IPP Advantages
- Greater tax deductible contributions
- Creditor protection
- Expenses tax deductible
- Plan surplus belongs to Participants
- Investment returns balanced by contributions
38IPP Advantages
- No need to wind up plan on retirement
- Spouse and adult children may be Participants
- Additional lump sum contributions available
immediately before retirement - CPP/OAS Bridging benefit to age 65
- Unreduced pension _at_ 60 with 3/yr reduction to
age 50 - Full CPI indexing
39IPP Requirements
- Trust Deed and Plan Text
- Trustees
- 3 individuals (1 separate from Company which must
be GBL and Associates) - Actuarial Valuation Report
- Directors Resolutions
- Establishing Plan
- Appointing Investment Manager
40IPP Requirements
- Investment Agreement
- Investment Objectives Document
- Registration with Province CRA
- Connected Persons Information Return
- Locking-in Agreement for RRSP Qualifying Transfer
- Past Service Pension Adjustment Certification
41Individual Pension Plan (IPP)