Gordon B Lang - The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans

The Truths and Myths of
Retirement Compensation
Arrangements
and Individual Pension Plans

Presentation to
ESTATE PLANNING COUNCIL OF ABBOTSFORD
October 19, 2005

Retirement Compensation

Arrangement

(RCA)

Gordon B. Lang & Associates
Inc. Actuaries & Consultants
FOUNDED JUNE 1995

PRESIDENT & C.E.O. GORDON B. LANG

FELLOW OF THE FACULTY OF
ACTUARIES 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.

OFFICES VANCOUVER,PRINCE GEORGE,
CALGARY, EDMONTON,
LETHBRIDGE, TORONTO,
OTTAWA, MONTREAL
AND HALIFAX

EMPLOYEES 26



SPECIALIZATION PRODUCTS DEVELOPED FOR:

 PROFESSIONALS WITH PROFESSIONAL
CORPORATIONS

 OWNERS OF PRIVATE COMPANIES

 SENIOR EXECUTIVES OF LARGER PRIVATE &
PUBLIC COMPANIES


SPECIALITY PRODUCTS

-EMPLOYEE PROFIT SHARING PLAN (EPSP)
-HEALTH & WELFARE TRUST (HAWT)
-INDIVIDUAL PENSION PLAN (IPP)
-RETIREMENT COMPENSATION ARRANGEMENT
(RCA)


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

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)


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

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.


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)


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


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


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 $205,700
2007 213,400
2008 221,400
2009 229,700
Total over 5 years $3,998,100


RCA – Closely Held Companies
 Objectives:
 Defer taxes into lower rates
 Protect Assets from Creditors through
trusteed arrangements
 Future Company growth funded through
leveraging


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


RCA – Establishment
 Board Resolutions
 Trust Deed & Plan Text
 Trustees
 3 individuals (1 separate from Employer)
 Trust Company
 CRA Registration


RCA – Establishment
 RCA Account Number
 Annual Trustee Return
 Part XI.3 Return
 Prepared by Accountant or GBL Inc.
 T737 Return For Contributions


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


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


Implications

 Employee Contributions
 In U.S. - are included in income of Employee
 In Canada - are deductible by Employee


Implications

 RCA Investment Income
 U.S. – Unless IRS forms completed, is included in
income of Employee
 Canada - no Employee income inclusion


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


Implications
Net Impact on RCA

 Canadian Income Tax reduced when
Resident of Canada
 Reduced Tax Payable on RCA Proceeds if
U.S. Resident


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.


The Leveraged RCA Example
XYZ Corporation

TAX SAVINGS ON RCA
CONTRIBUTION OF (35.6%) $391,600
less RCA CONTRIBUTION FROM
P.C. (100,000)
less Expenses (40,000)
NET ADDITIONAL AVAILABLE
FUNDS FOR INVESTMENT $251,600


RCA Lenders
 Bank of Montreal
 Royal Bank
 TD Bank
 CIBC
 National Bank
 HSBC
 Manulife Bank
 AIG Finance

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.


RCA – Summary

 Tax Deferral Vehicle
 Greater security through Trusteed
Arrangement
 For Owners, Key Employees,
Executives and Professionals


Individual Pension Plan


Outline
 Individual Pension Plan (IPP)
 Retirement Compensation Arrangement
(RCA)
 Questions


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

IPP Contributions

 Contributions by employer (and
employee) tax deductible
 Benefits taxed when received
 Investment income tax exempt


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 Current Service
1.1.91**
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
March 2005

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


IPP Advantages
 Greater tax deductible contributions
 Creditor protection
 Expenses tax deductible
 Plan surplus belongs to Participants
 Investment returns balanced by
contributions


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


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


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

Individual Pension Plan (IPP)


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