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Writer's pictureDr. Vu Kiet Tran

Business owners have a tool at their disposal that is barely known: the Personal Pension Plan

Summary

Canadian business owners face significant financial challenges, particularly in retirement planning and succession. With recent legislative changes, such as the Tax On Passive Income and increased capital gains taxes, utilizing corporate structures has become even less effective as retirement planning tools.

The Personal Pension Plan (PPP) offers a compelling alternative. It allows business owners to maximize tax deductions—up to three times more than an RRSP—while providing strong creditor protection and flexible investment options.

By establishing a PPP, business owners can effectively reduce their corporate tax liabilities and preserve more wealth for their retirement and loved ones. Understanding and leveraging the benefits of PPPs can provide a crucial advantage in today's challenging financial landscape.

To learn more about how Personal Pension Plans can benefit you, visit https://cppp-mgt.com or contact vtran@cppp-mgt.com.

Credits: https://cppp-mgt.com/
 

It is well known that business owners must contend with many challenges including how to make sure they will have enough to live on in retirement and how to successfully pass on their business either to third parties or to loved ones.

The fiscal environment in Canada is making it increasingly difficult to save for retirement by using the business as a substitute for a true pension plan.  Legislative measures adopted over the past decade make it clear that the Federal Government takes a dim view of any strategy that purports to treat one’s corporation as if it were a retirement plan.  Examples include the Tax On Passive Income (2018) and the recent increase in the capital gains inclusion rate (2024) jacking up the portion of a capital gain now subject to taxation from 50% to 66.6%.

As for succession planning, most Canadian business owners are aware that registered wealth such as RRSPs and RRIFs are treated as ordinary income to one’s estate upon one’s passing and thus taxed at the highest tax brackets that apply to individuals (over 53% in Ontario for example).

In this very challenging financial environment, business owners and their financial advisors must tread very carefully to avoid these various pitfalls.  Luckily, the Income Tax Act (Canada) does contain provisions enabling business owners and their loved ones to set up registered pension plans for themselves, plans that do not need to be offered to other ‘rank and file’ employees of the company.

These registered pension plans such as Personal Pension Plans or PPP for short, enable its users to triple the tax deductions otherwise available to those relegated to using an RRSP over a lifetime.  The PPPs benefit from the highest levels of creditor protection and have the legal right to invest in alternative asset classes such as private real estate or private equity.

More importantly, when children of the business owners work for the family enterprise, they are also eligible to participate in their parent’s PPP.  Should the parents pass away, instead of exposing this retirement money to immediate taxation (as is the case with RRSPs for example), the capital inside the PPP remains untaxed and considered pension ‘surplus’.  This surplus continues to grow free of taxation until the surviving children eventually start drawing down the funds for their own needs in their own retirement.

PPPs are designed for owners of companies and their loved ones.  As such they are not subject to the various rules that normally apply to a classic pension plan (such as Ontario Teachers’ Pension Plan).  Contributions are not mandatory. Funds contributed are not locked-in and can be withdrawn at any time.

When a corporation sponsoring a PPP decides to contribute to the pension plan, the funds so contributed become tax expenses thereby reducing the company’s tax exposure.  In the current fiscal climate, the PPP deductions can serve to eliminate all corporate tax owing upon selling assets generating capital gains such as stocks owned by the business as investments.   A simple numerical example below provides a better understanding of how the PPP provides this tax relief:

 

Company purchased 1,000 shares of ABC Inc. each one worth $100 five years ago.

ABC inc. shares are now worth $300/share.

Company sets up a PPP and is entitled to contribute $140,000 to the plan.

$100,000

Adjusted cost base of the 1,000 shares

$300,000

Proceeds of disposition of Company selling ABC Inc. shares.

----


$200,000

Capital gains generated

$133,200

Taxable Capital Gain

($66,826)

Tax payable if no PPP set up.

$140,000

Tax deduction granted to Company for making PPP contribution

$0.00

Taxable Capital Gain after PPP contribution/deduction claimed

$0.00

Tax payable if PPP set up.

As a bonus, of the $200,000 capital gain, a capital dividend account (CDA) credit of 33.3% or $66,660 is also available.  Since only $140,000 of the $300,000 in cash was used for the PPP, the $160,000 left could be paid out as a dividend.  Of that $160,000, $66,660 can be paid to the business owner as a tax-free ‘capital dividend’.

There are many additional features and benefits that come with PPPs but suffice it to say that business owners do have tools to manage their tax bill and preserve more of their wealth for their own enjoyment or to pass along to loved ones.  Knowledge about pension laws can become an important asset for anyone tired of being overtaxed in Canada.

 

To learn more, please visit https://cppp-mgt.com/ or contact directly vtran@cppp-mgt.com.


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