Purtzki Johansen + Associates

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What we are telling now our clients about saving taxes and saving for retirement

 

 

April 3, 2018

 

Reducing personal taxes

No longer able to generously sprinkle dividends among  family members in the low tax bracket, many of our clients are bracing themselves for a big hike in personal taxes in 2018 on their dividend income from their corporations.

There is a tax strategy that lets you convert the dividend into a capital gain generating significant savings. To illustrate, the capital gains tax on $200,000 of income from the corporation is only $25,000, compared to a tax of $55,000 on dividend income.  A tax saving of $30,000! If you double the income to $400,000, the dividend tax is $140,000 while the capital gains tax is $65,000. A saving of $75,000! Basically, the more you take, the more you save. The savings will vary by province. The capital gains method allows you to reduce your personal taxes on funds needed for living expenses, make a lump sum payment on your mortgage, or transfer corporate investments into your personal name to avoid the claw back of the Small Business Deduction of $500,000. Don’t expect a tax strategy that good to be around for long.

Retirement savings

  1. ‘ Pensionize’ your Corporate Savings

As you squirrel away your excess cash in the corporate investment account, you eventually face the question of how to convert the savings into retirement income.

For a solution to create sustainable retirement income for life, look no further than the gold-plated “defined” pension plans our civil servants enjoy. Your corporation can set up such a defined pension plan, called Individual Pension Plans (IPPs), for one or two individuals.

The purpose of the IPP is to provide you with the maximum lifetime pension benefits permitted under the Income Tax Act. The retirement ages of the IPP are between 55 and 71 years.

 

The IPP advantages include:

  • greater contribution than is available under an RRSP;
  • interest on funds borrowed to make the contribution is deductible;
  • if the return on your investment becomes insufficient to fund the IPP benefits, you can top up the IPP;
  • IPP pension income is eligible to be split with spouse at age 50. RRIF income is not eligible for income splitting until age 65.

The annual contributions to the IPP for those over 40 years of age are substantially greater than the RRSP contribution. The big bonus is the huge deductible contribution you can make when you set up the IPP. The maximum initial contribution for a 55-year-old will be about $340,000, at age 60 it is $455,000.

The IPP gives you peace of mind in today’s uncertain investment climate, because you know the amount of retirement pension benefits you can enjoy during your lifetime.

The IPP also gives you the comfort knowing that your money is protected against future adverse tax legislation affecting your corporate investments.

  1. Life insurance policy

 

One effective tax shelter is to set up a whole life policy. The policy is designed to guarantee a growing cash value, which is sheltered from tax. If you wish to draw on the cash value you are able to borrow from the bank or insurance company using the cash value as collateral. Banks give you loans up to 90% of the cash value.

Here is an illustration. Your corporation purchases a whole life policy when you are 45 years old with annual premiums of $30,000. The death benefit is about $850,000. The death benefit and the premiums are established at the beginning of the policy and remain the same until you die. After paying premiums for 20 years, the policy has a projected cash value $800,000 with a total death benefit of $1.6 million. This cash value will keep growing and is sheltered from tax within the policy. You can borrow against the cash value to fund his retirement. The death benefit will be tax-free if it is left to your beneficiaries on your death.

 

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