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FINANCIAL PLANNING - Business Planning

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Supplementary Retirement Income Arrangements
In order to attract and retain key executives, some companies have created supplementary retirement income arrangements for certain executives.

Individual Pension Plans
For business owners and senior executives that receive T4 Earnings, you should be aware of the growing interest in Individual Pension Plans (IPPs). An IPP is a designated defined benefit pension plan that not only provides for higher pension benefits for qualified individuals, they also provide greater tax deferred contributions than those available through a Registered Retirement Savings Plan (RRSP).

Pay as you go
The vast majority of companies that have established supplemental retirement income arrangements for their executives haven’t purchased a funding vehicle. The executive, in this instance, is relying entirely on the company’s “promise to pay.” When the executive retires, the funds may not be available to pay the retirement benefits that were promised. As well, the executive is totally unsecured in the event of bankruptcy of the employer or change in management or ownership.

Salary increase
One way of providing key executives with a supplemental income at retirement is for the corporation to give executives the funds (through a salary increase) to purchase their own funding vehicle to meet their retirement income objectives. The salary increase provides a tax deduction for the corporation and is taxable to the executive.

Depending on the funding vehicle purchased either the accumulation within the plan or income withdrawn from the plan is taxable. Contributions to the funding vehicle, by the executive, aren’t tax deductible. Another major disadvantage of this option is the company has no control over how the executive spends the funds.

Funded arrangements
1. Deferred accumulation
This is a simple, common, and effective solution to the problem of unfunded retirement income arrangements.

2. Retirement compensation arrangements
An RCA is a concept created by the Department of Finance in its effort to apply some direction over the non-registered pension options made available to employees. Generally, an RCA is defined as a plan or arrangement under which an employer makes contributions to another person, referred to as a “custodian,” to fund benefits payable to an employee on, after or in contemplation of retirement of that employee. An RCA may also exist where benefits are to be paid to an employee upon termination of employment or as a consequence of any substantial change in the services rendered by an Employee.

Who should consider an RCA?

  • Senior executives of large public corporations earning in excess of $100,000 a year who are seeking a means of supplementing their pension.
  • Owners of medium-to-large businesses.

For small businesses with taxable income of less than $200,000, an RCA is probably not an appropriate mechanism.

3. Strategic loan
How does strategic loan work?
With strategic loan, the corporation can collaterally assign its cash value life insurance policies to a lending institution of their choice instead of making partial withdrawals or surrendering the policy and purchasing an annuity.

4. Secular trust
A secular trust is an arrangement whereby an employer funds the retirement benefits on an after-tax basis through the executive.

5. Shared ownership
A creative way of funding a supplementary retirement income, to the benefit of both the employer and the employee. Shared ownership insurance isn’t really a life insurance product. Nor, is it a reason for buying life insurance. It’s a method of sharing life insurance costs and proceeds between two parties – to their mutual benefit.

Executive Disability Insurance
The peace of mind that income protection can provide is available for professionals, business owners, and business executives.

Overhead Disability Insurance
Reimburses office overhead expenses for a small business or professional practice during disability.

Buy-Sell Disability Insurance
Provides funds for the healthy owners of a small business or partnership to buy out the shares of a disabled partner.

Pension Disability Insurance
Provides benefits to ensure continued retirement funding.