Patty (55) and Doug (56) own an manufacturing company with several employees. They were considering selling their business in about five years. They are concerned that the sale may not provide sufficient funds to meet their retirement needs, as they have not saved much money for retirement, opting instead to retain earnings within the business. The corporation has unused retained earnings, and Patty and Doug are looking for ways to reduce the tax burden on current business income.
Solution: Implement an IPP
Upon meeting with us to discuss their exit options, we conducted a comprehensive review of their investments, goals, and completed an initial business value assessment. During our discussion of sale options, we noted that, they would be almost $3 million short of their retirement goals and at present, they would not qualify for the Lifetime Capital Gains Exemption due to failing the passive asset test.
After careful consideration of Patty and Doug’s financial goals, we recommended implementing an Individual Pension Plan (IPP) as a strategic solution. An IPP is designed to provide several benefits, including asset diversification, increased retirement savings compared to a Registered Retirement Savings Plan (RRSP), significant corporate tax deductions from contributions, tax deferral, and creditor protection. By working with a team of actuaries, we were able to create substantial past service contribution room and established higher annual contribution limits, funding the IPP from the corporation’s pre-tax income.
End Result
- Tax-Deductible Contributions: The company funded the IPP, making contributions and costs tax-deductible to the company, without creating a taxable benefit for Patty or Doug.
- Creditor Protection: The money within the IPP was protected from creditors, providing enhanced financial security.
- Passive Income Reduction: By reducing passive income within the corporation, the IPP facilitated eligibility for the Lifetime Capital Gains Exemption upon the sale of the business, resulting in $1,250,000 in tax-free income from the transaction.
- Increased Retirement Savings: Patty and Doug were able to grow $1,800,000 more within their IPP compared to if they had started an RRSP.
- Retirement Goals: By implementing the IPP, they were able to meet their retirement goal.