Has the new capital gains tax inclusion rate part of the 2024 federal budget changed how you should view passive corporate investing.
We provide an analogy on why you should consider that this isn't likely the end of taxes like this on business owners and incorporated professionals and not tax efficient going forward. Corporate investing from the government's perspective.
capital gains tax & coporate investing
Can a leopard change its spots?
It's one of those idioms or verses you learn as a youngster and never know it's significance until it applies.
Leopards have always been my favourite animal and most fascinating, especially if you ever have the privilege of witnessing it hunting prey on a night game drive in a place like Hwange National Park in Zimbabwe.
Corporate Investing & Taxes in Canada
What does a leopard have to do with passive corporate investing?
The Government has been sending a message with new taxes on corporate investing in Canada
The point of this article isn't about leopards. It's about how the government acts in somewhat similar ways to leopards when it comes to how they function. Just like a leopard, the government cannot/does not 'change its spots'. It will always behave like a government. Especially when it comes to taxes!
Just like a leopard is part of the Big 5 (most dangerous animals to hunt in Africa on foot) our government is part of the G-7. Similarly to our government making sovereign decisions on things like taxes, a leopard does things on it's lonesome.
A leopard typically hunts at night in stealth mode catching impalas off guard. Our government does things in broad daylight. One such example is the recent capital gains tax inclusion rate which was seemingly 'broadcast' by the government since 2014 showing its opinion on corporate passive investing and the gentle 'coercion' it was imposing on business owners and corporate investing.
The trouble is, it always seems as though people are caught off guard by new government taxes even though they've been broadcast for a while!
It's as though the government has been 'nudging' incorporated business owners like medical doctors, entrepreneurs and consultants, that the corporation will no longer be a viable option to save, invest and build wealth without punitive tax measures. 2014 and 2018 are recent examples of targeting private corporate investing and now 2024 a more aggressive measure, with no sign of abating.
Are you the goose and your savings in your corporation are your golden egg pension for retirement? Is corporate investing part of your retirement plan.
Corporate Investing Solution: Personal Pension Plan
Tax Efficient Investing for Incorporated Professionals
If you're an incorporated professional or business owner and you've relied on using your corporation to invest passively and use as your future pension, what could be a solution to address this new tax on corporate investing? An RRSP isn't sufficient (limited tax deductions and contribution room) and there's only so much whole life insurance you can buy?
A Personal Pension Plan is one thing (vehicle), like a lion, that a leopard can't seemingly attack.
Advantageous pension laws have been around for a while but largely ignored or not truly understood as a one-stop tax remedy in contrast to conventional corporate investing. If you're investing conventionally using your corporation you're still subject to 5 taxes before this new capital gains tax. With a registered pension or retirement compensation agreement you are subject to 1 tax.
A leopard will be a leopard. As a business owner or incorporated professional you can choose to be a 'lion' or an 'impala' when it comes to corporate investing ...sleep like a king or continue to be hunted (taxed).
Highlights of a Personal Pension Plan (PPP)
Personal Pension Plan FAQ
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 bookkeeper or corporate accountant
- Request through the CRA website
- Contact CRA by phone 1-800-959-8281
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.