Should You Treat Your Business Like a Pension Plan?

Articles Should You Treat Your Business Like a Pension Plan?

Incorporated professionals and business owners no longer have to worry that some Canadians have access to superior pension plans. The Personal Pension Plan (PPP) was developed specifically for business owners and entrepreneurs who want a robust pension plan that is comparable to the pension plans teachers and civil servants receive.

As a business owner, you can also enjoy the benefits of an employer-sponsored pension plan. In addition to maximizing retirement savings at every stage of your life, PPP members enjoy contribution flexibility – Defined Benefit (DB) or Defined Contribution (DC) – to ensure your pension plan fits into your overall business needs.

When a business owner treats their business as the main source of income, they can:

  1. Sell it
  2. Invest within it
  3. Put the proceeds of the sale into a trust or holding company
  4. Treat it as a pension plan

Some of the problems with the first three options are:

  • The valuation of the business might be lower the principal investment
  • It might be difficult to sell the company shares
  • It is complicated to determine the real value of the company
  • Lawsuits could negatively impact company value
  • The business owner pays tax on inactive income within a trust/holding company
  • About half of the returns are depleted by taxation within a trust

Ideally, as an individual approaches retirement, it is recommended to stray away from risky moves such as betting solely on the business to fund their remaining years. However, if the corporation possess significant cash deposits, the money can be used to make tax-deductible contributions to a pension plan. In other words, a business owner’s corporation can sponsor a PPP, creating robust retirement savings for him or her. Saving for your future is an important part of your work life. At DFS Private Wealth we focus on making retirement planning simple and easy so that you can focus on growing your business.

In addition to being able to save more, PPP members can supplement their savings, in the event stock markets underperform or crash. Special payments permit plan members to top up their retirement savings by making additional contributions over and above the prescribed annual contribution.

Compared to the RRSP, the PPP is a superior product. Once the contribution limit is reached in an RRSP, you are not allowed to add more money to your investment. Therefore, during a market decline, RRSP owners will potentially suffer a financial loss and not have an option to compensate for the financial decline of their investment portfolio by topping-up.

As an example, RSPs are subject to income-based contribution limits. Once the maximum is reached no additional money can be added (without penalty). The PPP is also subject to contribution limits – which, incidentally, are much higher than RSPs. However, should the annual investment return be less than 7.5% in any given year, top-up is allowed; therefore, providing plan members with an opportunity to add extra money to the PPP over and above any contribution limits.

$500,000 invested in a 5-year GIC at 2%

Year Growth Total Amount Additional Top-up Room*
1 $10,000 $510,000 $90,544.44
2 $10,200 $520,200
3 $10,404 $530,604

 

*In years where a portfolio does not return 7.5%, top-up room is created. Actuarial calculations are performed every 3 years.

The special payment option can be combined with a conservative investment strategy. By opting to hold low-yield investments in the defined benefit component of your pension plan portfolio, you can actively create additional contribution room. Your corporation can then make those extra tax deductible contributions to your PPP.

If you’re a business owner and/or incorporated professional, and you wish to learn more about retirement planning or the Personal Pension Plan, please contact the trusted advisors at DFS Private Wealth (DFS) for a complimentary retirement savings illustration. The PPP is a product that is sold in partnership with and through INTEGRIS Pension Management Corp. We recommend speaking to a DFS Private Wealth Manager to find out the right retirement plan for your specific needs.