Retirement and Tax Planning for the

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• Retirement and Tax Planning for the
• Self-Employed

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Agenda

• Tax Planning Strategies
• Retirement Planning Strategies
• RRSP
• Corporate Sponsored Plan
• Capital Dividend Account
• Capital Class
• Estate Planning Strategies

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Saving needs a strategy

• Budgeting is very important for self-employed
• Business or professional income have reduced
  withholdings
• Fluctuations in income
• Tax savings and Income-splitting opportunities

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Tax savings

• Salary versus dividend income
• Low-bracket family members as shareholders
• Low-value corporation
• Adult children
• Small business corporation exemption

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Small Business Corporation (SBC)

• Tax advantages
• 500,000 capital gains exemption (LCGE)
• Exemption from corporate attribution rule
• 10 year reserves on transfer of SBC to children
• Allowable Business Investment Loss (ABIL)

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Theory of Integration Business Run as a
Proprietorship

• Business income 100
• Less personal tax _at_ 50 50
• Cash retained 50

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Active Business Income Earned Through a CCPC

• Corporate income 100
• Less corporate tax 20
• Retained earnings 80
• Dividend paid to S/H 80
• Personal tax 30
• Cash retained 50

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Why Incorporate

• Tax deferral
• Flexibility as to remuneration
• Timing
• Nature

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Incorporationcontinued

• 3. Income splitting
• Salary
• Dividends
• Attribution
• 4. Pay for items with after-tax corporate
  dollars
• Reducing debt
• Insurance premiums

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Incorporation.continued

• 5. Estate freeze
• Future growth transferred to others
• 6. Capital gains exemption

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Tax Deferral Wealth Accumulation

• Example John leaves 100,000 income in
  corporation, takes out 250,000.

• Defer sending 25,000 every year to the CRA
• Invest that money for 25 years with a 5 return
• Total amount after 25 years is 1,193,177

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Corporate Planning Strategies

• Tax deferral
• Dividend sprinkling
• Bonus down to small business deduction
• Shareholder loans to children
• Salaries to family members
• Multiplying the capital gains exemption

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Asset Protection

• Holding company
• Spin-outs
• Subsidiary company

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Estate Freeze

• Cap the amount of wealth accumulation
• Future growth transferred to others
• Crystallize capital gains exemption

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Estate Freeze Crucial Questions

• When to freeze will owner have enough value to
  live on in the future?
• How do you protect childrens shares from
  matrimonial claims?

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What If I Am Already Incorporated?

• Family members can buy existing shares from you
• Taxable capital gain
• File articles of amendment
• Authorize new class of common shares for future
  appreciation

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Disadvantages of Incorporation

• Incorporation costs
• Taxation of investment income
• 3. Ontario Health Tax

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Retirement Planning

• RRSP
• Corporate Sponsored Plan
• Capital Dividend Account
• Capital Class

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Corporate Investment Plan

• Discuss with financial advisor
• Integrate your corporate investment plan into an
  overall investment plan
• Invest in a tax-preferred manner (Corporate Class
  mutual funds)
• Retained earnings
• Move to holding company?

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Individual Pension Plans

• Who?
• Key people aged 40
• Owner or key executive
• T4 income of at least 100,000

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Individual Pension Plans

• What is it?
• Registered Pension Plan
• Subject to same limits as Defined Benefit
  Registered Pension Plans
• Designed to maximize contributions permitted by
  CRA
• Why?
• RRSP rules have not kept pace with society
• Can be inadequate for high income earners

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2006 contributions IPP vs RRSP
Note IPPs may be implemented for ages up to 69
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IPP contributions (next 2 years)
Note IPPs may be implemented for ages up to 69
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Case Study

• Bill is a 52 year-old entrepreneur
• Business has been incorporated for 15 years
• Benefits backdated to 1991
• Total first year contribution
• RRSP rollover (assumed) of 231,600
• Past Service Additional Contributions of 110,400
• Current Service Contribution of 23,700

Source GBL Inc.
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Case Study - continued

• Plan Assets at Age 69
• Plan Service RRSP rollover of 342,000
• Total current service to 69 of 888,000
• 7.5 per annum compounded to 69
• TOTAL PLAN ASSETS 2,816,637
• Compare to RRSP only strategy
• Existing RRSP 231,600
• 2006 contribution to RRSP of 18,000
• 7.5 compounded to age 69
• TOTAL PLAN ASSETS 1,825,083

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Other Considerations with IPPs

• Creditor-protection
• Indexation
• Market risk
• Estate planning

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Mackenzie Capital Class Funds

• Reduces difference between after-tax and pre-tax
  compounding
• No gain on switches
• Over 46 funds to select from

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Tax-Efficient Investing
Tax-Efficient Investing and Compounding Returns

• Over time the after-tax differences between the
  different types of returns are more pronounced
• Unrealized capital gains attract no taxation
  until the investment is sold this type of
  investment provides the highest after-tax cash
  flow

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Capital Dividend Account

• Private corporations
• 50 of capital gain is untaxed
• Accumulates in CDA
• Amounts in the capital dividend account may be
  paid out entirely tax-free to shareholders
• Maximizes retirement income

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Estate Planning

• Succession Planning
• Timing
• Fair versus Equal
• Will Planning
• Probate consideration
• Insurance

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Next Steps

• Analyze your own situation
• Talk to your financial advisor
• Introduction to specialists