Ask a small business owner what their business plans are for the next two to five years and they will be able to articulate their projected growth in sales, and new markets they are hoping to expand into, etc. The response is often different if you ask about their retirement plans.
One of the best ways to start a retirement plan is to make regular RRSP contributions that allow your retirement savings to grow in a tax-sheltered environment.
Many small business owners choose to receive their remuneration in the form of dividends because of the lower tax rate on dividends, but we caution that you shouldn't forego a salary in favour of dividends just for the tax savings; instead, determine the optimal salary/dividend mix that will minimize both corporate and personal income tax, and maximize RRSP and CPP/QPP contributions.
An Individual Pension Plan (IPP) is an attractive alternative to an RRSP for owner-managers 40 years of age or older. An IPP is a defined benefit pension plan for owner-managers and their spouses. The corporation makes tax-deductible contributions to the IPP based on actuarial valuations and, in return, the member receives a guaranteed lifetime pension at retirement.
An IPP is not inexpensive to set up and maintain; however, it allows a small business owner to make larger contributions than through an RRSP and thus increase retirement assets. As well, the assets within the IPP are creditor proof. While it's not unusual to expect income from the future sale of a business, small business owners must consider the potential for fluctuations in value over time. What is considered a growth industry today might not be so in 20 years.
You've worked too hard to leave your financial future to chance. Make your retirement plan a top priority. Talk to us about developing your plan!
An IPP may allow a small business owner, owner-manager or senior executive to benefit from the retirement savings and tax deferral advantages of a registered pension plan. A typical IPP provides what is called a defined benefit; the amount of pension is determined at retirement by reference to a formula. This is different from an RRSP or a defined contribution pension plan, where only the account balance itself is available to provide benefits at retirement. Pension plans registered under the Income Tax Act permit the deferral of taxation on employee compensation. Employer contributions are tax deductible, and are not subject to employee withholding taxes. Employee contributions are also tax deductible. Investment earnings on these contributions grow tax-free until they are used to pay benefits under the plan. While flexible in terms of its settlement options, the basic purpose of an IPP is to provide a retirement pension to the plan participant. In the right circumstances, an IPP permits much larger tax deductible contributions than an RRSP. An IPP also usually offers the plan member a greater degree of creditor protection than an RRSP. With an IPP, a member will no longer be able to contribute to an RRSP in future years.