What will your retirement income sources be as a business owner or physician during retirement? Have you considered a PPP for your retirement planning strategy?
Retirement Planning Income for Business Owners and Physicians: The Benefits of Using a PPP (Personal Pension Plan) During Retirement
Retirement Planning for Self-Employed
Retirement planning is an essential part of financial security for business owners and physicians. With various savings and investment vehicles available, choosing the right one can have a significant impact on your long-term financial health. One of the most powerful yet underutilized tools in retirement planning is the Personal Pension Plan (PPP). In this article, we’ll explore the many benefits of a PPP during retirement, particularly how it can save on taxes and offer more advantages compared to an RRSP or corporate investments.
Why Multiple Sources of Retirement Income Matter
Diversification for Flexibility and Stability
One of the foundational principles of effective retirement planning is having multiple sources of asset classes and retirement accounts. This includes a mix of:
Corporate investments
Having multiple sources of income provides flexibility, allowing retirees to choose where their money comes from based on their financial needs at any given time. This flexibility becomes particularly important in situations where income requirements vary, such as funding a wedding, giving a large gift, or traveling.
The Role of a PPP in Retirement Planning
A PPP offers a valuable source of income and flexibility in retirement. Unlike traditional savings vehicles, the PPP is structured to provide stable income while maximizing tax efficiency. Let’s explore how a PPP works and why it outshines alternatives like RRSPs or corporate investments.
Key Benefits of a Personal Pension Plan (PPP)
1. Tax Savings Through Income Splitting
Income splitting is one of the most compelling benefits of a PPP. With a PPP, individuals can split their pension income with their spouse, regardless of age (with the exception of Quebec residents who can only split provincial tax after age 65). This strategy can result in significant tax savings.
For example, a couple with an annual pension of $169,000 could save $17,000 per year in taxes through income splitting. By distributing income more evenly between spouses, both partners stay in lower tax brackets, reducing their overall tax burden.
2. Early Access to the Pension Amount Credit
Another major advantage of a PPP is the ability to claim a $2,000 non-refundable pension amount credit starting at age 40. This gives individuals a 25-year head start over those with an RRSP, where the credit only becomes available at age 65. Over the long term, this results in substantial tax savings.
To qualify for the pension amount credit, individuals must be receiving pension income and cannot simultaneously contribute to the pension plan.
3. Tax Advantages for Non-Resident Canadians
Non-resident Canadians who receive a pension are subject to a 25% withholding tax. However, if they reside in a country with a tax treaty with Canada, this rate can be reduced to 15%, representing a 40% reduction in tax paid.
Furthermore, individuals facing double taxation in another country, such as the U.S., can apply for foreign tax credits to offset the higher tax rate. For example, if a Canadian pensioner is taxed at 15% in Canada and 30% in the U.S., they can apply for a foreign tax credit to avoid being taxed twice.
4. Exemption from Departure Tax
When Canadians leave the country, most of their assets are subject to a departure tax. However, PPP assets are considered exempt assets and are not subject to this tax. This provides a significant advantage over RRSPs and corporate investments, especially for business owners planning to relocate internationally.
5. Continued Contributions Beyond Age 71
One limitation of an RRSP is that contributions must cease at age 71. In contrast, a PPP allows for continued contributions through special payments, enabling a corporation to claim tax deductions well beyond age 71. This feature allows business owners and physicians to maximize their tax-deferred savings for a longer period.
6. Tax-Deductible Investment Management Fees
Another significant advantage of a PPP is the ability to deduct investment management fees. Unlike RRSPs, where fees are paid with after-tax dollars, PPP investment fees are tax-deductible, leading to considerable savings over time. For those with large portfolios, this can translate into tens or even hundreds of thousands of dollars in tax savings over their lifetime.
7. Creditor Protection
PPP assets are protected by pension law, making them off-limits to creditors. This provides ongoing financial security in retirement, ensuring that your retirement savings remain safe even in the event of legal or financial issues.
8. Division of Pension Assets in Case of Separation
In the event of separation or divorce, pension assets are considered part of the family patrimony and are subject to division between spouses. However, surplus assets within a PPP may be treated differently, offering some protection.
While income from a PPP is also divisible, individuals are not obligated to split their income, and up to 50% of the pension can be assigned to a spouse. If a portion of the PPP is transferred due to separation, it is converted into an RRSP or RIF, losing the unique tax benefits associated with the PPP.
Practical Examples: How a PPP Outperforms an RRSP or Corporation
Example 1: Tax Savings Through Income Splitting
Imagine Dr. Smith, a physician, and her spouse, both aged 60, receive $169,000 annually from their PPP. By splitting this income evenly, they both fall into a lower tax bracket, resulting in $17,000 in annual tax savings. If they had relied solely on an RRSP, income splitting would only become available at age 65, leading to higher tax liabilities in earlier retirement years.
Example 2: Maximizing Tax Credits
John, a business owner, begins receiving income from his PPP at age 40. By claiming the $2,000 pension amount credit each year, he saves significantly on taxes for 25 years longer than if he had used an RRSP, where this credit only becomes available at age 65.
Example 3: Avoiding Departure Tax
Sarah, a Canadian entrepreneur, plans to move to the U.S. with her corporation. By transferring a significant portion of her corporate assets into a PPP, she avoids the Canadian departure tax, as PPP assets are exempt. This strategy results in tens of thousands of dollars in saved taxes.
Example 4: Continued Contributions Beyond Age 71
Mark, a 72-year-old physician, continues to make special payments into his PPP through his corporation, allowing him to claim additional tax deductions. If he had relied on an RRSP, his contributions would have ceased at age 71, limiting his ability to defer taxes and grow his retirement savings.
Example 5: Deducting Investment Management Fees
Jane, a business owner with a large investment portfolio, saves thousands annually by deducting investment management fees from her PPP. If she had an RRSP, these fees would be paid with after-tax dollars, increasing her overall costs.
Implementing a Pension Solution
Steps to Set Up a Pension Plan
- Consult a Pension Specialist: Work with a qualified advisor to determine the most suitable pension plan for your needs, whether Individual Pension Plan or Personal pension Plan.
- Establish the Plan: Register the pension plan with the Canada Revenue Agency (CRA) and the provincial pension authority.
- Determine Contribution Levels: Calculate annual and past service contributions based on age, income, and years of service.
- Invest Pension Funds: Choose a diversified investment strategy to maximize long-term growth.
- Monitor and Maintain: Ensure compliance with regulatory requirements and adjust contributions as needed.
Calculate How Much You Can Save PPP vs RRSP
retirement planning for business owners & physicians in canada
Conclusion: Retirement Planning Income for Business Owners and Physicians: The Benefits of Using a PPP (Personal Pension Plan) During Retirement
Reach your retirement goals faster
A Personal Pension Plan (PPP) offers unparalleled benefits for business owners and physicians planning their retirement. From significant tax savings and income splitting to ongoing contributions beyond age 71 and creditor protection, the advantages of a PPP far outweigh those of an RRSP or corporate investments.
By integrating a PPP into your retirement strategy, you gain the flexibility, security, and tax efficiency needed to maintain your lifestyle and achieve your long-term financial goals. Consulting with financial advisors and legal experts, like Blue Alpha Wealth and JP Laporte from INTEGRIS Pension Management, can help you set up and manage a PPP tailored to your unique needs.
If you’re a business owner or physician looking for a superior retirement planning tool, consider the Personal Pension Plan — your future self will thank you.
Pension Plan Qualification Request
PPP 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 bookkeeper or corporate accountant
- Request through the CRA website
- Contact CRA by phone 1-800-959-8281