Tax Deferral Strategies

Catalin Zetu, PFP, MBA Professional Financial Planner

Strength ● Stability ● Performance

Investors Group Inc. (IGM Financial) Over 80 years strong Over 100 wealth management

centres across Canada 4400+ Professional Consultants Serving 1 in 18 Canadians Publicly traded (TSX:IGM)

The Investors Group Advantage…Of Industry Leadership

Source – IFIC

Tax Deferral RRSP vs. Individual Pension Plan Tax Efficient Investments Retirement Compensation Agreements Insured Retirement Plans Estate Bonds Health And Welfare Trusts

Agenda

Sample Corporate Share Structure

Trustee = Owner

Paying for Children’s Education

$25,000 Tuition + $15,000 Expenses

Dividend

Share. Loan

Taxes

Credits Used

Net Cash

Shareholder Student Student Professional Jr.

56,400

(17,513)

1,113

40,000

40,000

(930)

930

40,000

40,900 (40,900)

(6,940)

6,040

40,000

Assumptions: Shareholder & Prof. Jr., MTR = 46.41%; No other income for Student

Tax Refund 18,980

0%

100%

100%

0% - 100%

Retirement Income Streams

Retirement Planning – The IPP

“Super-RRSP”

Additional pre-tax funds out of corporation in a tax-deferred manner

Based on benefit formula Who does it best suited for? Who’s involved?

Individual Pension Plan

Individual Pension Plan (IPP)

Assumptions

50 year old executive / shareholder Active in business since 1990 RRSP value ~ $325,000 Expected 2010 T4 earnings ~ $125,000

Individual Pension Plan: Case Study

Year AgeIPP

Contribution ($)

RRSPContribution

($)

IPP Advantage

($)

2010 50 198,970* 22,000 176,970

2015 55 39,879 27,254 12,625

2020 60 57,251 35,620 21,631

2025 65 82,191 46,554 35,637

*Includes past service contribution of $171,192 from corporation.

RRSP vs. IPP

(Allowable Contributions)

* Includes RRSP transfer-in of $307,500

Year AgeIPP

Balance ($)RRSP

Balance ($)

IPP Advantage

($)

2010 50 546,709* 352,336 194,373

2015 55 995,223 652,570 342,653

2020 60 1,729,182 1,128,641 600,541

2025 65 2,912,165 1,870,978 1,041,187

RRSP vs. IPP

(Plan Balance at Year End)

RRSP vs. IPP – Estimated Annual PayoutRRSP vs. IPP – Estimated Annual Payout

Year AgeIPP

Payout ($)RRSP

Payout ($)IPP

Advantage ($)

2010 50 29,761 19,180 10,581

2015 55 57,594 37,764 19,830

2020 60 108,006 70,496 37,510

2025 65 200,475 128,799 71,676

46.4% 46.7%

Top personal marginal tax rate

Corporate tax rate on passive income

Tax Quiz

Retirement Income Tax Planning

Interest Dividends Capital Gains

income

Fully TaxableEvery year

income

Tax-preferredEvery Year

income

50% taxableWhen You Choose

Corporate Class Structure

50% taxable When You Choose

income

Growing Non-Registered Investments Tax Preferred

Moderate Portfolio Initial Investment $400,000

Moderate Portfolio after 10 years $400,000 now worth $642,833

Moderate Portfolio after 20 years $657,516 now worth $1,033,087

$937,900 after tax

Corporate Class Structure

$400,000

$712,236

$1,268,200

$1,063,525 net after tax13% More

Tax rate = 46.7%Rate of return on regular portfolio: 1.5% interest + 0.5% dividends + 1.0% capitals gains + 3.0% deferred growth = 6.0%

Rate of return on corporate class portfolio: 0.25% capital gains + 5.75% deferred growth = 6.0%

Retirement Compensation Agreements: Retirement Compensation Agreements: Features Features

Defined under section 248(1) of the Income Tax Act

Contributions are deductible

Business owner or key employee Upon Sale of Business

Bullet-proof creditor protection Avoids payroll taxes Benefits taxable when received: tax deferral

RCA StructureRCA Structure

Contributions50%

Contributions50%

50% of Income earned in IA remitted to RTA annually

50% of withdrawals remitted to IA annually

Withdrawals at retirement.Member taxed

Funding the RCA: Tax Deferred Funding the RCA: Tax Deferred

Investment Grade Insurance Split Dollar Arrangement

Corporate Class Investments Little or no income distributions

Corporate Insured Retirement Plan

Secret 7The Best Tax Shelter!!

IRP: Participating PolicyIRP: Participating Policy

CCPC

LIFE INSURANCE

Option 1 Traditional investment portfolio earning 6% Invest $30,000 per year for 20 years Investment subject to tax

Option 2 IRP – Investment Grade Insurance Contribute $30,000 per year for 20 years $1,000,000 death benefit

Brian: 45 year old business owner Needs additional life insurance & retirement

income

Corporate Insured Retirement Plan

Corporate IRP – Participating PolicyCorporate IRP – Participating PolicyTraditional Investment

Corporate IRP

Annual Contribution

Portfolio Mix (FI/Equity)

Rate of Return

Annual Income (Age 65 to 85)

Investment Values at age 65

Guaranteed Cash Value at age 65

Death Benefit at age 85

$30,000

6%

$60,000

$774,500

40/60

N/A

$129,000

$30,000

7.4%

$60,000

$1,029,500

80/20

$629,000

$1,597,000

Corporate Estate BondCorporate Estate Bond

Option 1 Traditional conservative investments earning 5% Invest $20,000 per year for 10 years Investment subject to tax, probate costs

Option 2 Estate Bond – Investment Grade Insurance Contribute $20,000 per year for 10 years $500,000 death benefit (on 2nd death)

Corporate Estate Bond

Jack & Jill: 65 year old couple Wish to leave an estate for children

Estate Bond vs. InvestmentsEstate Bond vs. InvestmentsAfter-Tax Estate ComparisonAfter-Tax Estate Comparison

Corporate Estate BondCorporate Estate Bond

AgeDeath Benefit

$500K plus CSVAfter-Tax Rate of

Return

85 $685,000 8.1%

90 $710,000 6.2%

95 $730,000 5%

HAWP - FeaturesHAWP - Features

Enable all uninsured medical, dental, and vision expenses to be paid out of pre-tax expenses, as incurred

Fund group critical illness and long term care insurance.

HAWP - BenefitsHAWP - Benefits

Employer pays with pre-tax income Fully tax deductible to corporation Employee will not include taxable benefits Very flexible choice of expenses that can be

covered – medical, vision, & dental procedures

HAWP - PaymentsHAWP - Payments

Trustee receives the claim and receipts & issues a cheque for

100% of the expense from the HAWP to the

employee

Employee submits claim

form & receipts

Employer Receives claim form & issues a cheque for 100% of the expense to the trustee (HAWP)

Tax Deferral RRSP vs. Individual Pension Plan Tax Efficient Investments Retirement Compensation Agreements Insured Retirement Plans Estate Bonds Health And Welfare Trusts

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