Written by: Abbe Chivers, CPA, CA; Laurie Bertrand, CPA, CA; and Barb Chew, CPA, CGA
You’re progressing through your career and absorbed with both work and family, but as you approach age 40, it’s becoming more important to think about saving for your retirement.
If you own your company, you have six ways to save for retirement in Canada:
1. Annually Contribute the Maximum Amount Allowable To an RRSP
The first way you can save for retirement is by contributing 18 percent of your prior year’s employment income, to a maximum of $24,930 (2015), to your RRSP. If you haven’t used up all of your RRSP contribution room, you can carry forward the unused room to future years. This will shelter your retirement income until the end of the year you reach 71. Starting in your 72nd year, you will be required to withdraw a minimum amount based on the fair market value of your portfolio at the beginning of each year. The amount withdrawn will be subject to a lower tax rate than what you are paying now.
To be entitled to contribute to an RRSP, you must have earned income, such as salary, self-employed income, or rental income. Investment income such as interest and dividends doesn’t qualify as earned income for the purpose of calculating your RRSP contribution room. The tax refund generated in any given year can be contributed to your RRSP in the subsequent year – thus requiring less saving on your part.
2. Save Via a Tax-Free Savings Account (TFSA)
The second way you can save for retirement is with a TFSA. The maximum 2015 contribution limit for a TFSA is now $10,000. You won’t receive a tax refund from contributions to your TFSA plan, but all income earned within the plan is tax-free indefinitely.
If you have contributed the maximum amount to both the RRSP and the TFSA plans as outlined above, you are off to a good start!
3. Fund Your Retirement by Using a Holding Company as a Form of Pension
The funds held in the holding company could be invested in term deposits, marketable securities and real estate, offering you another way of saving for retirement. No business activity should take place in your holding company. All the funds accumulated in the company can be distributed by way of dividend payments at your discretion. Accordingly, the timing of receipt can be based on your needs and not government requirements.
You would have total control over when and how much income you earn, which in turn affects how much tax you would pay. It may be beneficial to pay dividends from the company after you retire and when your income is lower, to take advantage of lower tax rates. You can also choose any fiscal year end for the company, not just the calendar year end.
4. After Age 65 You Are Eligible to Receive CPP and OAS
The forth way to save for retirement is to maximize your CPP entitlement. The amount of CPP income you receive will depend on the salary you’ve earned since starting in the workforce. Therefore it’s important for you to receive a salary every year from your company. Dividend income you receive from your company is not considered pensionable earnings for purposes of determining your CPP entitlement.
The maximum CPP pensionable earnings for 2015 is $53,600. Your employer will not deduct CPP contributions for any salary greater than $53,600. Effective January 2012, the Canada Revenue Agency brought in new rules that affect CPP for employees between 60 and 70 years old, even if they are currently receiving a CPP retirement pension. Under the new rules:
- An employee between 60 and 65 years must contribute to CPP.
- An employee between 65 and 70 may contribute to CPP unless they file an election not to.
- If you retire at 65 and have earned the maximum pensionable earnings, you will receive a monthly retirement pension of $1,065 in 2015. This amount will increase if you defer your retirement until past the age of 65.
Until April 2023, OAS monthly benefits of $558 (2015) begin on the month following your 65th birthday. The age of eligibility is raised to 67 on a phased-in basis starting in 2023. As with the CPP, you can defer the benefit and receive a higher amount in the future.
5. Invest Your Personal Excess Savings in Non-Registered Products
Non-registered products include term deposits and marketable securities, plus your personal residence or other real estate. These investments should be held in your name and will be taxed on your annual personal tax return.
6. Another Saving Tool: The Individual Pension Plan (IPP)
The IPP opens up another retirement savings tool if you are operating a business through an incorporated entity. The IPP uses pre-tax corporate income to fund retirement savings. Rather than contributing to your RRSP, your company is able to make annual contributions to the IPP, which are deductible for tax purposes. Usually the amount of the IPP contribution is significantly higher than what your contribution limit would be towards your RRSP.
The company must pay start-up and recurring costs associated with the registration of an IPP. In addition, the company must commit to making contributions to the plan even in years when it may be in a loss position.
A benefit of the IPP plan is that the assets are protected from creditors. Another advantage of this form of pension is that the investment risks lay with the employer – as opposed to you, the individual. If the investment performance of the assets is poor and creates a plan deficit, the company will be required to top up the plan. That way, you will be able to receive the calculated benefit when you retire. Your RRSP and TFSA plans, by contrast, do not do this.
Payments from the IPP will start when you retire. When you turn 72, there must be a minimum amount withdrawn based on either the plan’s terms or RRIF terms – and these are based on your age or the age of a younger spouse. During your lifetime pension income can be split with your spouse; and on your death the income will be paid out to your spouse according to a survivor benefit set out in the IPP terms.If you do not have a surviving spouse, the plan will be taxed, then paid to your estate.
Each option has different tax attributes that will affect the decisions you make.
If you would like to discuss your options for saving for retirement, our advisors would be happy to review any or all of the above options with you.
Abbe Chivers, CPA, CA is a Partner with Manning Elliott LLP. Contact Abbe at 604-714-3615 or firstname.lastname@example.org
Laurie Bertrand CPA, CA is a Senior Manager with Manning Elliott LLP. Contact Laurie at 604-714-3648 or email@example.com
Barb Chew CPA, CGA is a Manager with Manning Elliott LLP. Contact Barb at 604-714-3630 or firstname.lastname@example.org
The above content is believed to be accurate as of the date of posting. Canadian Tax laws are complex and are subject to frequent changes. Professional tax advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.