An IPP is a defined benefit pension plan. It sets your monthly income at retirement. Covered earnings for pension plan purposes are up to $122,222, in 2009 dollars. An IPP permits the accumulation of greater assets, up to 60% more than an RRSP.
The IPP is similar to an RRSP in that it uses an investment account that accumulates over time to provide retirement benefits. Unlike the RRSP, the IPP provides certain guarantees. The amounts are locked in and may generally be used only for retirement purposes. Plan contributions are determined by a series of Actuarial Valuation Reports in order to provide sufficient assets at retirement.
Allows for larger tax deductions – up to 60% more in contributions into your retirement account
If you have maximized your RRSP contributions, the IPP is an excellent way to increase retirement assets and have your company make large tax deductible contributions
Allows a significant tax deductible contribution at retirement
Safer investment rules and limitations compared to RRSPs
Allows for additional tax deductible contributions to be made by the company should the rate of return on plan assets be less than 7.5% a year
Pension plan surpluses belong to the member.
Provides pre-determined retirement benefits
100% creditor proofing of plan assets
No deemed disposition of plan assets upon death of first generation to next generation. (applicable under specific situations)
All costs associated with the pension plan are tax deductible to the company.
Assets are locked-in and may, in most circumstances, only be withdrawn during retirement.
There is little contribution flexibility – in most circumstances the plan must be funded each year.
The RCA is the super-sized Pension Plan, it allows for larger contributions making it the highest level of retirement product in Canada. It provides an excellent way to increase retirement assets to the maximum level allowable.
The RCA is for the high income earner who wishes to sustain their standard of living into retirement. It is ideal for business owners, executives and professionals with professional corporations.
The strategy also appeals to the business owner who can see additional benefits in its flexibility and can adapt it to meet his/her business and tax strategies.
Non-locked in funds
Ability to leverage
Exempt from payroll taxes
Taxation only occurs at the time of withdrawal
Taxation depends on place of residency at time of withdrawal
Ability to defer money to a time and place of ones own choosing
The company sets up an RCA to provide retirement benefits for its employees. Deductible contributions are made from the company into the RCA and are held in trust for the beneficiaries.
Each year the company will make contribution on behalf of the employees named in the plan. 50% of all these contributions are made to an investment account (IA). The other 50% is remitted to a refundable tax account (RTA) with CRA. The investment account (IA) is self directed and is subject to yearly remittance to or from the RTA.
Persons who seek their livelihood in business are often motivated by a need to place their fate in their own hands. Of course, the desire to make money for themselves and their families is not the least of their drives. As such, our life insurance products must be adapted to meet the needs and desires of this special class of person – the Canadian businessperson.
As you are aware, in the course of running a business, many owners choose to incorporate their business. Corporations issue shares and the shareholders own the business. The shareholders may be hired by the corporation and, as employees; they are paid salaries in addition to all other benefits the corporation can provide to its employees.
Most of these shareholders would prefer to see, in the event of death, his/her shares pass on either to family members or fellow shareholders. The major concern is that the family will have sufficient money to maintain the kind of lifestyle that it has become accustomed to. If family members are not able to assume control of the business, a practical solution to this problem is to enter into a buy-sell agreement amongst the other shareholders. As a funding means, corporate-owned insurance is an attractive option. However, it should be recognized that buy-sell funding is not the only reason why business people should consider having their corporation purchase life insurance.
Life insurance provides for the payment of cash at death, a financial benefit that is unique and incomparable. Business people need life insurance for these key reasons:
To provide funds for the family to pay estate debts and taxes on capital gains and to give the family a sum of money independent of the risks and hazards of private business.
As noted above, to provide funds to fulfill the terms of a buy-sell agreement amongst shareholders.
To pay the debts of the corporation so that creditors’ claims are satisfied and the business can either continue on a profitable basis or can be sold at a maximum price. Preferred shares can be redeemed and/or common shares repurchased where permitted by company articles.
To provide funds to help offset the economic loss of the death of the key employee. Life insurance funds will allow time to hire, promote and train new key people.
To provide funds for a death benefit to the insured’s widow(er). The amount paid out is deductible to the corporation. The amount received by the surviving spouse is tax-free to the extent of the lesser of $10,000 and the employee’s annual salary.
Where the policy has cash values, these appear as an asset on the corporate balance sheet. The cash values can be utilized as additional collateral or emergency funds during the insured’s lifetime. During their accumulation period, the increases in cash values are tax sheltered.
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