The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans - PowerPoint PPT Presentation

1 / 41
About This Presentation
Title:

The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans

Description:

Bank of Montreal. Royal Bank. TD Bank. CIBC. National Bank. HSBC. Manulife Bank. AIG Finance. Gordon B. Lang & Associates Inc. Leveraged RCA ... – PowerPoint PPT presentation

Number of Views:111
Avg rating:3.0/5.0
Slides: 42
Provided by: glenhe
Category:

less

Transcript and Presenter's Notes

Title: The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans


1
The Truths and Myths of Retirement Compensation
Arrangements and Individual Pension Plans
Presentation to ESTATE PLANNING COUNCIL OF
ABBOTSFORD October 19, 2005
2
Retirement Compensation
Arrangement
  • (RCA)

3
Gordon 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)

4
Gordon B. Lang Associates Inc. Actuaries
Consultants
OFFICES VANCOUVER,PRINCE GEORGE, CALGARY,
EDMONTON, LETHBRIDGE, TORONTO, OTTAWA, MONTREAL
AND HALIFAX EMPLOYEES 26
5
Gordon 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

6
Gordon 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)

7
RCA 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

8
RCA - 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)

9
RCA - 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

10
RCA - 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.

11
RCA - 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)

12
RCA - 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

13
RCA 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

14
RCA 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

15
RCA Closely Held Companies
  • Objectives
  • Defer taxes into lower rates
  • Protect Assets from Creditors through trusteed
    arrangements
  • Future Company growth funded through leveraging

16
RCA - 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

17
RCA Establishment
  • Board Resolutions
  • Trust Deed Plan Text
  • Trustees
  • 3 individuals (1 separate from Employer)
  • Trust Company
  • CRA Registration

18
RCA Establishment
  • RCA Account Number
  • Annual Trustee Return
  • Part XI.3 Return
  • Prepared by Accountant or GBL Inc.
  • T737 Return For Contributions

19
RCA - 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

20
U.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

21
U.S./Canada Tax Treaty Implications
  • Employee Contributions
  • In U.S. - are included in income of Employee
  • In Canada - are deductible by Employee

22
U.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

23
U.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

24
U.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

25
The 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.

26
The 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

27
RCA Lenders
  • Bank of Montreal
  • Royal Bank
  • TD Bank
  • CIBC
  • National Bank
  • HSBC
  • Manulife Bank
  • AIG Finance

28
Leveraged 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.

29
RCA Summary
  • Tax Deferral Vehicle
  • Greater security through Trusteed Arrangement
  • For Owners, Key Employees, Executives and
    Professionals

30
Retirement Compensation
Arrangement
  • (RCA)

31
Individual Pension Plan
  • Gordon B. Lang Associates Inc.

32
Outline
  • Individual Pension Plan (IPP)
  • Retirement Compensation Arrangement (RCA)
  • Questions

33
IPP 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

34
IPP Contributions
  • Contributions by employer (and employee) tax
    deductible
  • Benefits taxed when received
  • Investment income tax exempt

35
IPP Maximum Allowable ContributionsPost February
2005 Federal Budget
36
IPP 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

37
IPP Advantages
  • Greater tax deductible contributions
  • Creditor protection
  • Expenses tax deductible
  • Plan surplus belongs to Participants
  • Investment returns balanced by contributions

38
IPP 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

39
IPP 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

40
IPP 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

41
Individual Pension Plan (IPP)
Write a Comment
User Comments (0)
About PowerShow.com