Capital Gains Tax Inclusion Rate: Does the 2024 Federal Budget change whether your Canadian Controlled Private Corporation (CCPC) is still a viable option for retirement saving?
In a nutshell, the new tax hike will increase the share of capital gains that is taxable from 50% to 66.67% for corporations, and for individuals on gains above $250,000 effective June 25, 2024
Capital Gains Tax
Corporate Tax Changes in Canada: A Historical Context
Canadian tax authorities seem to be sending a message to private corporation owners.
The strategy of using a private corporation as if it were a pension plan or nest-egg does not seem to be favoured by tax legislators. It's as though they're 'nudging' business owners to seek other ways to save for retirement.
Private Corporation as a Pension Plan
With the new capital gains tax, is it still a viable option? Tax Scenarios explored
With current business tax laws, when you as an incorporated business owner save within your corporation, you become exposed to a range of taxes. If you aren't sensitive to these taxes you will experience what we would colloquially call a tax slippage that eats into the potential and rate at which you can accumulate savings for retirement. In other words, your wealth building is stunted! The capital gains tax inclusion rate increase from 50% to 66.67% is a major consideration.
What are the potential 'tax leakages'?
Note: it's always important to discuss with your accountant how this increase from the federal government in the capital gains tax affects you personally.
Active Business Income Tax
Passive Investment Income
Corporation Investment Income Taxed as Interest
Personal taxation when dividend declared
Departure Tax
Finally...'Deemed Disposition' upon death
If the new capital gains tax will limit how I can use my private corporation as a pension plan, then what?
Seen from the vantage point of understanding all the potential tax leakages that come with using your CCPC as a pension plan, it's understandable why you as a business owner or incorporated individual together with your financial advisor might become exasperated.
It's always been recommended that business owners use their Canadian Controlled Private Corporation (CCPC) as the primary way to accumulate a retirement nest egg. It might have worked well prior to 2018, but the trend is not encouraging with the addition of the capital gains tax inclusion rate of 2024.
Is "Corporate Investing" the only way to save for retirement?
How the Registered Pension Plan and Retirement Compensation Agreement compare with the traditional "corporate investing" strategy
Fortunately, even with the new inclusion rate of 66.67% with the new capital gains tax, tax laws do allow for business owners, medical doctors, consultants etc. who operate through a private corporation to set up registered pension plans("RPPs") and retirement compensation arrangements("RCA") if the goal is to sequester money for retirement purposes.
These laws have been codified since 1986 (RCA)and 1991 (RPP) and while not always truly understood by most, have shown their worth over decades of time and experience.
Contrasting the Corporate Savings Approach Using the Tax Slippage Examples Above
Active Business Tax - $0.00 on contributions made by the private corporation to the pension account.
Since the Income Tax Act provides your private corporation with a full expense for any dollar contributed either to the Registered Pension Plan or Retirement Compensation Agreement, the first layer of taxation (12.2% to 26.5%) does not occur. We are deferring the tax because the income is being sheltered for retirement purposes. Using a pension strategy means you start the race to retirement with 100 cents on the dollar instead of a fraction.
Passive Income Tax - $0.00 on growth within the pension account.
Because the Registered Pension Plan is usually a "pension trust" section 149(1)(o) of the Income Tax Act specifically exempts the income generated (regardless of its form as interest, dividends or capital gains) for any ongoing taxation. In this case again, it's more likely preferable to you to face 0% tax on income than a 50.17% tax rate.
Tax On Passive Income. $0.00 reductions to the $500,000 small business deduction limit.
Since the pension plan is not an asset of your private corporation and is not generating any taxable passive income in any event, the 1:5 elimination of the $500,000 small business allowance does not occur when growth occurs inside the Registered Pension Plan or Retirement Compensation Agreement. This helps your private corporation to continue to benefit from the lowest Active Business Income tax rate (12.2% in Ontario) as long as possible, leaving more for operations and other business corporate uses.
Departure Tax - $0.00 on becoming a non-resident for any pension assets
The capital assets inside of the pension plan sponsored by your private corporation are considered "exempt assets" under the Departure Tax rules, much like your personal RRSP assets are. Thus, if you as a shareholder have been able to accumulate say $1,000,000 in the Registered Pension Plan by the time you choose to leave Canada, there would be no taxable deemed disposition on those assets.
Deemed Disposition on Death - Could be $0.00. Income splitting also possible.
Since the Registered Pension Plan and Retirement Compensation Agreements do allow family members employed by the family enterprise to be paid a salary, nothing stops them from joining the pension arrangement set up by your private corporation. In that case, should you the shareholder die while in receipt of a pension, the 'pension surplus' created by your death is retained within the pension fund and isn't subjected to either provincial probate fees or the federal deemed disposition rules. Significant family wealth can remain intact in the event of your death even with the capital gains tax of 2024!
In cases where it was not possible for family members to join the plan, since taxation occurs in the hands of the beneficiary and not within the estate, having many beneficiaries does allow for some limited forms of income splitting and thus a lower tax burden on the survivors.
One Tax Instead of (up to) 5 Taxes: the Personal Pension Path.
So far, the shareholder using the pension strategy has never paid any income taxes on the top-line revenues initially earned by the private corporation that were directed to the Registered Pension Plan. All of that capital has been allowed to compound without any tax leakage and is ready to pay a pension benefit in retirement.
How it Works - Get Started with a Pension Illustration
Mathematically speaking, even with the additional capital gains tax inclusion rate, you can see that the Pension approach (if everything else is held constant) must mean that the shareholder has more money for the last stage of life than the one who followed the traditional corporate investing strategy.
Those who think little of the pension solution will be quick to point out that pension benefits are personally taxable at personal graduated tax brackets and often make the observation that:
"You now have to pay over 50% on your pension benefits!"
Aside from the obvious point that you'd rather pay 50% on a pool of $2,000,000 than 25% tax on a pool of $1,000,000,even the assertion of being taxed at the top personal bracket is often not even true.
For example, Canada has signed tax conventions with over100 countries around the world where the non-resident withholding tax on pension income is fixed at a flat 15%(not 53.5%). Even those who retire to a tax haven face a flat 25% withholding tax in Canada on their pension income.
And even those who stay put and retire in Canada as 'residents' might be able to do "pension income splitting" with a spouse who has little or no income, and save the couple thousands of dollars in personal tax every year.
Get Started with the INTEGRIS Personal Pension Plan®
It starts with an illustration or demo of your situation. We'll get in touch with you and review your high-level numbers together to determine whether the PPP is a fit and then go into detail with specific numbers from your accountant. Complete the form and we'll get back to you to see if the PPP is right for you.
*The "Plan Sponsor" is the company that will be making monetary contributions to the Personal Pension Plan. This company currently employs and provides T4 income to plan members.
capital gains tax 2024
Final note on the Capital Gains Tax and Personal Pension
Understandably it's easier to stick with the conventional and traditional corporate investing than to delve into learning about personal pensions. There are the objections of complexity and cost that people imagine as obstacles. Unfortunately, this was a viable way of offering help to business owners and doctors in the past. However, with tax authorities now more than ever looking to 'tighten the screws' on the traditional corporate passive investing strategy, one can no longer be 'passive' about it (no pun intended). It's no surprise that doctors in particular are at the forefront of lobbying against the new capital gains tax.
Fortunately, those who take advantage of the tax and pension laws that govern Registered Pension Plans and Retirement Compensation Agreements can benefit from the much-needed tax relief against the recent punitive capital gains tax inclusion rate of the 2024 budget.
Jean-Pierre Laporte BA, MA, LLB, RWM
"I do not claim that a pension solves all of the Earth's problems. Other solutions (permanent life insurance, estate freezes, family trusts, etc.) continue to be critically important and co-exist with a pension strategy. However, I sincerely believe that a 100% corporate passive income retirement approach cannot be more tax-effective than a pension-based approach for the reasons set out above."
Frequently Asked Questions
In general yes, you do. One of the main aspects of a pension plan is an employer / sponsor company that will make contributions towards a pension plan in which you, the beneficiary/owner, are a member of.
Not necessarily you don't need to be incorporated as a requirement. In order to qualify, however, you will be required to have an employment relationship with a T4 (salary) income.
A Limited Partnership, General Partnership, Joint Partnership (e.g. engineering or law firm) or even a Sole Proprietor could offer a PPP to its employee such as a spouse if the employee is receiving a salary T4 income. However, the partners themselves or the sole proprietor would not be eligible for a PPP. Why? because they cannot employ themselves and pay themselves T4 income.
If you are looking to setup a pension for yourself and seeking the optimum way to take an income tax efficiently, a mix of salary and dividends is ideal since dividends are not pensionable and thus 100% dividends precludes adopting a Personal Pension Plan.
It's designed specifically to meet your needs today and for the future. Your tax saving and reduction needs today as a business owner in the form of tax deductions. Your retirement savings needs for the future. It recognizes that you as a business owner shouldn't be using a solution meant for the general population, an RRSP, and helps you take advantage of generous pension laws whilst protecting you from creditors.
For a pension to be eligible it needs sponsorship. The company or professional corporation in this case sponsors the plan. The trustees (investment or insurance company you invest with) hold the assets on behalf of the members and their beneficiaries. No one truly ‘owns’ the pension plan, since it is a bundle of liabilities/promises and corresponding assets.
You are eligible for the pension credit (reducing the taxes otherwise payable) on the first $2,000 of pension income you receive. In addition, your spouse can use the pension income splitting rules to allocate up to 50% of the pension income to a spouse who is not in receipt of a pension, thereby potentially moving the PPP member’s tax bracket to a lower bracket and reducing the couple’s overall taxes in the process. When pension income splitting is used, the first $4,000 of pension income can be claimed as a ‘pension amount’ credit to further reduce your individual taxes.
There are 2 key instances where a PPP® would not be suitable for you:
- Individuals who will treat the account as a special kind of short-term savings account to be used towards an upcoming expenditure before retirement. While it is possible to withdraw some funds in a certain situation or even opt for early retirement -- treating the PPP as a short-term savings account is not the best strategy.
- Individuals who want to invest all of their money in a single security. If you think you've found the perfect stock and want to leverage all of the funds by concentrating on that stock, you will be prohibited from doing so in a PPP. Like all pension plans, you cannot hold more than 10% of a single security within your Personal Pension Plan.
In short, the new 2018 passive income tax law makes this harder. Retained earnings have already faced corporate taxes, albeit at a preferential tax rate. In addition, those profits will face ongoing further taxation if the annual investment gains exceed a threshold. The benefit of your PPP contributions is that they come straight from your revenues before they face corporate taxes. This is the power of the PPP. Add to all this the new capital gains tax brought forward with the 2024 federal budget, your tax liability is much larger now.
Tax Free Savings Account (TFSA) Contributions
You can always contribute to your TFSA at all times, whether you have a PPP or not.
RRSP - Pension Adjustments
Once you setup a this creates what's called a "Pension Adjustment" or PA. The following year, the PA eliminates a lot of the RRSP contribution room generated during the year due to contributions you make to the PPP. RRSP contribution room in 2021 is based on earned income in 2020, thus the lag.
However, some RRSP contributions are still permitted even with the PA. For instance, in the first year, you can contribute to the PPP and to your RRSP. Why? because the Pension Adjustment will only impact your RRSP room for the next year.
When you setup the PPP, in the first year your RRSP contribution can range from $6500 to $27,230 (2021). In the following years, your RRSP contribution is capped at $600 because of the PA system.
Simply put, the Personal Pension Plan provides more flexibility than and Individual Pension Plan. In short, the PPP improves upon the main objections of the IPP. In particular, the PPP takes away the burden of having to ensure you make mandatory minimum contributions which can become burdensome especially if your cash flow doesn't allow for it. The IPP similar to a Define Benefit Pension has those types of requirements. Whereas the PP< which has the Defined Benefit component, also has a Defined Contribution component which provides flexibility when it comes to contributions. Get the PDF summary of the differences. Or, see a more in depth comparison of PPP vs IPP here.
Yes, you're able to convert the IPP into a PPP® and gain the tax deduction and savings advantages as well as having more flexibility when it comes to your cash flow. The process involves filing an amendment with the pension regulators and completing a few documents.
Yes, as long as you are taking T4 salary income.
For each member:
- Proof of age – copy of driver’s license/passport that shows the name and date of birth
- Latest Notice of Assessment
- Latest RRSP statement for all RRSPs/LIRAs/LIFs/RRIFs etc.
- Document to verify the SIN Number - e.g. a T4 slip or a notice of assessment if the full SIN number is available.
- T4’s for every year buying back past service (PLEASE NOTE THIS CAN TAKE UP TO 6 MONTHS – TIPS ON HOW BEST TO OBTAIN T4s BELOW)
For the company that is sponsoring the plan:
- Articles/Certificate of Incorporation for the company
- Document to verify the CRA Business Number of the company that is sponsoring the pension plan – e.g. the first page of a corporate tax return or the T4 slip that shows the employer number
Tips for obtaining T4s:
- Request from your corporate accountant
- Request through the CRA website
- Contact CRA by phone 1-800-959-8281