Presentation to ESTATE PLANNING COUNCIL OF ABBOTSFORD October 19, 2005 The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans
May 13, 2015
Presentation to
ESTATE PLANNING COUNCIL OF ABBOTSFORD
October 19, 2005
The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans
Retirement Compensation
Arrangement
(RCA)
Gordon B. Lang & Associates Inc.
Gordon B. Lang & Associates Inc. Actuaries & Consultants
FOUNDED JUNE 1995
PRESIDENT & C.E.O. GORDON B. LANG
FELLOW OF THE FACULTY OFACTUARIES IN SCOTLAND (1967)FELLOW OF THE CANADIAN
INSTITUTE OF ACTUARIES (1967)ASSOCIATE OF THE SOCIETY OF
ACTUARIES (1976)FELLOW OF THE CONFERENCE OF CONSULTING ACTUARIES (2005)
Gordon B. Lang & Associates Inc.
Gordon B. Lang & Associates Inc. Actuaries & Consultants
OFFICES VANCOUVER,PRINCE GEORGE, CALGARY, EDMONTON, LETHBRIDGE, TORONTO, OTTAWA, MONTREAL AND HALIFAX
EMPLOYEES26
Gordon B. Lang & Associates Inc.
Gordon B. Lang & Associates Inc. Actuaries & Consultants
SPECIALIZATION PRODUCTS DEVELOPED FOR:
PROFESSIONALS WITH PROFESSIONAL CORPORATIONS
OWNERS OF PRIVATE COMPANIES
SENIOR EXECUTIVES OF LARGER PRIVATE & PUBLIC COMPANIES
Gordon B. Lang & Associates Inc.
Gordon B. Lang & Associates Inc. Actuaries & Consultants
SPECIALITY PRODUCTS
-EMPLOYEE PROFIT SHARING PLAN (EPSP)-HEALTH & WELFARE TRUST (HAWT)-INDIVIDUAL PENSION PLAN (IPP)-RETIREMENT COMPENSATION ARRANGEMENT
(RCA)
Gordon B. Lang & Associates Inc.
RCA Overview
Tax deferment vehicle Defined in the Income Tax Act Provides asset protection For Owners and their Families, Key
Employees, Executives and Professionals with PC’s
Most suitable for high income earners
Gordon B. Lang & Associates Inc.
RCA - Overview
Defined in Section 248(1) of Income Tax Act (Canada)
Employer & Employee contributions tax deductible
Benefits taxable when received 50% of contribution remitted to CRA
Refundable Tax Account (RTA)
Gordon B. Lang & Associates Inc.
RCA - Overview
Each Year 50% of Net Amount of: Taxable investment income Less expenses Less benefit payments
Remitted or Refunded Excludes Unrealized Capital Gains Excludes Investment Income from
Qualified Life Insurance
Gordon B. Lang & Associates Inc.
RCA - Details Contributions Employer Employee Contributions
- Required by the Company- Not Greater then Employer contribution for
calendar year- Source contributions not subject to withholdings- May be made by cheque to Employer- May be made from Bonus -
carryback deductions to Employer.- Included in calculation of Eligible Earnings Base.
Gordon B. Lang & Associates Inc.
RCA - Details
Advantage of Holding Insurance Policy Assets
- Split dollar Life Insurance Policy Premiums &
Benefits- Company owns Pure Life Insurance- Trust owns Savings Portion - On death of Insured No RTA transfer of proceeds- Unbalanced RCA available to Survivors- New Policy then purchased on Surviving
Member(s)
Gordon B. Lang & Associates Inc.
RCA - Details
Add Spouse and Adult Children
- Increases Deductibility- Permits Income Splitting- No requirement for owner to take benefits- Spouse would take over benefit rights
on death- Benefits may be passed down to Children (even Grandchildren)- No 21 year Trust Rule
Gordon B. Lang & Associates Inc.
RCA Allowable Contributions
Contributions producing Annual Retirement Income up to 2% of Best Three Years Average Earnings per year of Eligible Service
Actuarial Certificate required for CRA reasonability test
Gordon B. Lang & Associates Inc.
RCA Allowable Contributions Company Owner aged 60 15 years since Company Established Best 3 years Average Earnings $500,000 Retirement Age 65 Maximum 2005 RCA Contribution $3,117,900 Additional Deductibility
2006 $205,7002007 213,4002008 221,4002009 229,700
Total over 5 years $3,998,100
Gordon B. Lang & Associates Inc.
RCA – Closely Held Companies
Objectives: Defer taxes into lower rates Protect Assets from Creditors through
trusteed arrangements Future Company growth funded
through leveraging
Gordon B. Lang & Associates Inc.
RCA - Closely Held Companies
For Owners, Professionals & Key Employees
Employer sets Contributions Suitable Investments:
Universal Life Insurance Policies ETF’s or Indexed Funds Equity Funds
Canadian & Foreign Blue Chip Stocks Buy & Hold Management Style – Low or No
distribution
Gordon B. Lang & Associates Inc.
RCA – Establishment
Board Resolutions Trust Deed & Plan Text Trustees
3 individuals (1 separate from Employer)
Trust Company CRA Registration
Gordon B. Lang & Associates Inc.
RCA – Establishment
RCA Account Number Annual Trustee Return
Part XI.3 Return Prepared by Accountant or GBL Inc.
T737 Return For Contributions
Gordon B. Lang & Associates Inc.
RCA - Tax Deferment into Lower Rates
Beneficiary Can: Move to lower-taxed province Defer income when tax rates are declining Leave Canada -benefits taxed pursuant to
Tax Treaty USA – 15% Installment Payments, 25% Lump Sum
Canadian Withholding credited against U.S. Federal Tax.U.S. Taxes at Marginal Tax Rates
Ireland – 15% for installment payments Australia and New Zealand – 15% for both lump
sums and installment payments Most others Treaties – 15% on installment
payments and 25% on lump sums
Gordon B. Lang & Associates Inc.
U.S./Canada Tax Treaty Implications
Tax Treatment
Employer Contributions In U.S. -are included in income of
Employee and are deductible to Company
In Canada - there is no employee income inclusion
Gordon B. Lang & Associates Inc.
U.S./Canada Tax Treaty Implications
Employee Contributions In U.S. - are included in income of Employee In Canada - are deductible by Employee
Gordon B. Lang & Associates Inc.
U.S./Canada Tax Treaty Implications
RCA Investment Income U.S. – Unless IRS forms completed, is
included in income of Employee Canada - no Employee income inclusion
Gordon B. Lang & Associates Inc.
U.S./Canada Tax Treaty Implications
Taxation of Benefits if Employee U.S. Resident no longer subject to Canadian Tax In U.S. - no tax on benefits. Canadian
Withholding Tax reduces U.S. Federal Tax In Canada - 15% Withholding Tax on
installment payments, 25% on lump sum payments
Gordon B. Lang & Associates Inc.
U.S./Canada Tax Treaty Implications
Net Impact on RCA
Canadian Income Tax reduced when Resident of Canada
Reduced Tax Payable on RCA Proceeds if U.S. Resident
Gordon B. Lang & Associates Inc.
The Leveraged RCA – Example
XYZ Corporation establishes an RCA with a first contribution of $ 1.1 million.
$550,000 invested by Trustees $550,000 in Refundable Tax account
(RTA) Financial Institution lends $1,000,000 to
Investco. XYZ Corporation takes out insurance on Mr. Smith for amount of the loan.
Gordon B. Lang & Associates Inc.
The Leveraged RCA ExampleXYZ Corporation
TAX SAVINGS ON RCA CONTRIBUTION OF (35.6%) $391,600less RCA CONTRIBUTION FROMP.C. (100,000) less Expenses (40,000) NET ADDITIONAL AVAILABLE FUNDS FOR INVESTMENT $251,600
Gordon B. Lang & Associates Inc.
RCA Lenders
Bank of Montreal Royal Bank TD Bank CIBC National Bank HSBC Manulife Bank AIG Finance
Gordon B. Lang & Associates Inc.
Leveraged RCA
GBL & Associates Inc. has established strategic relationships with certain law firms to provide comprehensive actuarial and legal documentation to establish this Leveraged RCA structure.
Gordon B. Lang & Associates Inc.
RCA – Summary
Tax Deferral Vehicle Greater security through Trusteed
Arrangement For Owners, Key Employees,
Executives and Professionals
Retirement Compensation
Arrangement
(RCA)
Individual Pension Plan
Gordon B. Lang & Associates Inc.
Gordon B. Lang & Associates Inc.
Outline
Individual Pension Plan (IPP) Retirement Compensation
Arrangement (RCA) Questions
Gordon B. Lang & Associates Inc.
IPP Features
Registered Pension Plan Limited to Participant, Spouse and
adult children Same contribution limits as Defined
Benefit Registered Pension Plans Designed to maximize contributions
permitted by CRA
Gordon B. Lang & Associates Inc.
IPP Contributions
Contributions by employer (and employee) tax deductible
Benefits taxed when received Investment income tax exempt
March 2005
IPP Maximum Allowable Contributions
Post February 2005 Federal Budget
Amounts certified by actuary to fund defined benefits*Samples of maximum year 2005 tax deductibility:
Age in 2005 Past Service from 1.1.91**
Current Service
35 $20,700 $16,300
40 $42,300 $17,900
45 $66,100 $19,700
50 $92,200 $21,600
55 $120,900 $23,700
60 $152,400 $26,100
65 $192,400 $29,000
* Based on Maximum Earnings updated to 2006 of $100,000 per annum** Subject to RRSP transfer of $199,200
Gordon B. Lang & Associates Inc.
IPP – Closely Held Companies
Greater tax deductible contributions than RRSP’s
More funding for retirement Creditor protection Multiple plans for individuals with T4
income from several unrelated sources Investments fairly similar to those for
RRSP’s
Gordon B. Lang & Associates Inc.
IPP Advantages
Greater tax deductible contributions Creditor protection Expenses tax deductible Plan surplus belongs to Participants Investment returns balanced by
contributions
Gordon B. Lang & Associates Inc.
IPP Advantages
No need to wind up plan on retirement Spouse and adult children may be
Participants Additional lump sum contributions
available immediately before retirement CPP/OAS Bridging benefit to age 65 Unreduced pension @ 60 with 3%/yr
reduction to age 50 Full CPI indexing
Gordon B. Lang & Associates Inc.
IPP – Requirements
Trust Deed and Plan Text Trustees
3 individuals (1 separate from Company which must be GBL and Associates)
Actuarial Valuation Report Directors’ Resolutions
Establishing Plan Appointing Investment Manager
Gordon B. Lang & Associates Inc.
IPP Requirements
Investment Agreement Investment Objectives Document Registration with Province & CRA Connected Persons Information
Return Locking-in Agreement for RRSP
Qualifying Transfer Past Service Pension Adjustment
Certification
Gordon B. Lang & Associates Inc.
Individual Pension Plan (IPP)