In the first few months of the year Canadians spend a lot of time thinking about registered retirement savings plans. Should they top up before the RRSP contribution deadline, which this year falls on March 1 for the 2022 tax year? How much should they put in? Is borrowing the money to contribute a good idea?
For higher-income Canadians whose financial goals go beyond having enough money for a comfortable retirement, an RRSP may not be the best and only solution. If you’re drawing a salary of more than $70,000 annually and want to build wealth that you can pass on to the next generation, then you should consider two financial vehicles that will allow you to invest more, reduce your taxes and pass down your wealth tax-free: a personal pension plan (PPP®) and a retirement compensation arrangement (RCA).
The ABCs of the PPP
Launched more than 11 years ago, the PPP is a registered private pension plan that’s increasingly being used by high-earning professionals and entrepreneurs. It’s similar in some ways to the better-known individual pension plan or IPP, but offers a number of additional benefits.
Compared to an RRSP, a PPP boasts a lot of advantages. These include:
Higher contribution room. This year’s allowable maximum for an RRSP is $30,780. By comparison, a PPP would allow contributions of between $31,560 and $51,841 depending on the age of the plan member. With compounding interest, these differences can add tens of thousands of dollars to your portfolio over time.
Opportunities for more tax deductions. If you’re an incorporated professional like a lawyer or doctor, a PPP lets you claim a corporate tax deduction through a “buy back” of past service that can be retroactive to the date of incorporation. You can also claim an additional personal tax deduction in the first year of your PPP.
More investment options. You can use money in your PPP to invest a much wider range of asset classes than you could with an RRSP. This translates to greater potential for growth and better risk management. As with all investments, it’s best to talk to an experienced advisor first before deciding where to grow your money.
Contributions based on cash flow: PPPs are structured with three accounts: defined benefit, defined contribution and additional voluntary contribution. With a PPP, you can switch between defined benefit and defined contribution, giving you the flexibility to contribute based on the cash flow of your business or practice. The PPP also protects from penalties for overfunding by letting you direct any surplus funds from the defined benefit account to the additional voluntary contribution account.
Tax-free wealth transfers: If you have a spouse or children working in your business, you can add them as plan members to your PPP. This gives you a way to pass the money in your PPP to the next generation without having to pay taxes associated with so-called deemed disposition of assets.
Protection from creditors. Because the PPP is a registered pension plan, it is protected from claims by creditors of the plan member and of the business that owns the plan. It is, however, not protected from spousal creditors.
Do you make more than $250,000 in salary a year? Consider an RCA
If your income from salary is $250,000 or greater, then you should consider a retired compensation arrangement – a supplemental pension plan that would, ideally, be built on top of your PPP. An RCA allows for even larger tax deductions than a PPP – contributions are 100 per cent tax deductible – and are not capped as they are with pension plans. RCAs also provide creditor protection of assets, greater control because there’s no requirement to start withdrawing at 71, and tax-free intergenerational wealth transfer to children who work in your business.
Pay tax but get it all back: Understanding a key RCA advantage
RCAs are complex. To understand how they work, you’ll need to sit down with someone familiar with all of the contribution and tax rules. For instance, RCA contributions are taxed upfront at 50 per cent. But under RCA rules, that upfront tax is 100 per cent refundable. By comparison, someone making more than $500,000 a year and paying 53.5 per cent personal income tax will not be getting any of that money back from Canada Revenue Agency.
Thinking of retiring in another country? Your RCA will be safe from the ‘departure tax’
Should you decide in the future to live permanently in another country – essentially becoming a non-resident of Canada – your RCA assets (just like your PPP assets) will be exempt from the departure tax you would otherwise have to pay when you relocate. If you move to a country that has a tax treaty with Canada, you could also be looking at a relatively lower 15 per cent tax rate on pension income.
So how come you’ve never heard of a PPP or RCA?
Unlike RRSPs or TFSAs, a PPP and RCA are both complex financial vehicles that require careful consideration and a lot more paperwork for setup and annual reporting. They’re not for everyone, which may explain why they’re not discussed much in mainstream media or by most financial advisors. They do, however, provide a lot of financial, tax planning and wealth transfer benefits to high-income Canadians. If you’re making $70,000 or more, talk to the experts at Rubach Wealth today about how a PPP or RCA – or both – can help you.
