Most Canadians are painfully unaware that as business owners, they can use pension legislation to their advantage by setting up a Personal Pension Plan (“PPP”).  Due to this lack of knowledge they miss out on a multitude of tax deductions and tax minimization strategies that simply don’t exist when one is using an RRSP for saving purposes.  Chief amongst these tax minimization strategies is the concept of inter-generational wealth transfers within the context of a family enterprise.  Most know that on the death of an RRSP annuitant, especially if there is no surviving spouse to roll assets to, the estate must pay tax on the RRSP assets under the ‘deemed disposition’ rules of the Income Tax Act.  Not so when a PPP exists and the younger family members on the payroll are also part of the pension plan.  The simple reason is that any monies left behind by a deceased member simply convert into ‘pension surplus’ and these untaxed funds remain intact in the family PPP, to be used, eventually by the surviving children.  This strategy alone could save an estate millions of dollars. 

Now, if a decent financial plan also calls for some permanent life insurance that was purchased thanks to the tax refunds generated by  PPP contributions within the corporation, instead of having the ‘death benefit’ paid to cover off tax liabilities under the deemed disposition, that same money can now go directly (and tax free) into the pockets of the surviving children.  Talk about a better use of cash.  This simple example provides a sense of the magnitude of brand new, additional incremental value one can guarantee for oneself by having a PPP as part of the overall financial plan.

To illustrate the net, new value generated by this planning, let’s take a simple case.  Ms. Andrews has run a family business for 25 years and collected salaries in excess of $100,000 for a number of years.  She is now 67 and wants her granddaughter Céleste (22) to join the family business.  Your Rubach Wealth advisor will propose two solutions:  (1) a PPP with both family members as participants (2) a corporately-owned whole life policy with an annual premium of $10,0000 and a death benefit of $1,000,0000.  The premiums for the life policy are funded out of the tax refunds that the corporation claims thanks to the many deductions it can claim as a result of contributions made to the PPP.  By age 80, Ms. Andrews has over $4,000,0000 allocated to her pension inside the PPP in an account that is jointly owned with Céleste.  Ms. Andrews then passes away.   Two consequences flow from this planning exercise: (a) $1,000,000 in tax free death benefits are paid to the family corporation and credits the Capital Dividends Account.  That means that Céleste as a shareholder will be able to withdraw $1,000,0000 without paying any taxes for spending purposes. (b) the $4,000,000 commuted value in the PPP is now surplus and stays in the PPP. 

Since Céleste is the only surviving plan member, all of that surplus is now available to her.  The estate does not have to worry about any deemed disposition relating to the PPP cash, nor to probate that money in provincial court.  Céleste has options with the surplus: (i) withdraw some or all of it, in which case she will have to pay taxes personally on the amount so withdrawn (ii) leave it alone and let it grow tax sheltered over time (iii) take some of the surplus to return it to the corporation. That transaction is taxable for the corporation, however, if the corporation has carried forward tax losses that it has yet to utilize, these losses could mitigate or eliminate any taxes owed upon receiving the surplus cash.

If you have further questions about Personal Pension Plans, please don’t hesitate to reach out.

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