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Pension Options for the Canadian Business Owner-Managers Retirement

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Planning for retirement is an important objective for owner-managers operating their business in a Canadian-controlled private corporation (“CCPC”). In this article, we discuss three available pension options:

  1. Registered Retirement Savings Plans (“RRSPs”)
  2. Canada Pension Plan (“CPP”) or Quebec Pension Plan (“QPP”)
  3. Individual Pension Plans (“IPPs”)
business owner retirement planning

Each of these options requires a payment of salary or bonuses as part of the owner-managers annual remuneration strategy. Where corporate profits are retained within the corporation, a different strategy other than pensions must be used to fund retirement.

In general, a pension is a plan funded by an employer to provide payments to an employee once they are in retirement. Pension plans can be contributory, where the employee also contributes to the plan, or they may be fully funded by the employer. In Canada, pension plans are defined by provincial legislation and must be registered with the Minister of National Revenue to be deemed a pension plan under the Income Tax Act (ITA). Pension plans also have statutory contribution limits.

RRSPs
RRSPs share similarities with defined contribution pensions in Canada, including annual contribution limits and the tax-deductibility of contributions. Earnings within the plan, and amounts contributed, are not subject to tax until withdrawal and the plan must start to distribute funds at retirement or at a specified age. RRSPs have more flexibility than pensions, as withdrawals can be made at the discretion of the RRSP annuitant and can be made at any time − even earlier than the traditional retirement date. The ease of setting up an RRSP and its portability make it an attractive option. While pensions may only pass in a reduced form to a spouse, RRSPs can pass directly into an estate.

To make an RRSP contribution, the individual must have received in the prior taxation year “earned income,” including a salary or bonus as defined under subsection 146(1) of the ITA . The RRSP contribution is limited to the lower of 18% of earned income in that previous year, or a legislated annual limit. The annual limit for RRSP contributions in 2023 is $30,780 and in 2024 will be $31,560. To make the maximum RRSP contribution for 2023 would require a respective salary of $171,000 in 2022 and $175,333 in 2023. Unused contribution room carries forward and adds to the contribution limit calculated for the year before.  No contribution can be made to your own RRSP after December 31 of the year you turn 71 years old (at that time your RRSP must be converted into a Registered Retirement Income Fund or RRIF) . But a contribution to a younger spouse’s RRSP can still be made. In addition, contributions do not need to be deducted in the year they are made. They can be carried forward and deducted in a future year, which is helpful if you expect that you will be in a significantly higher marginal tax bracket in the future.

It is important to note that there are penalties for contributing more than your RRSP limit (contribution room), although an over-contribution of $2,000 can sit in the plan without incurring penalties. RRSPs can also be used for income averaging, which is the strategy of reducing income by contributing during high-income years and making withdrawals during low-income years. Finally, once you reach age 65, RRSP income is eligible for pension income splitting with your spouse, to help reduce the overall tax paid on RRSP withdrawals. 

CPP
As an owner-manager, making salary payments also includes contributing to the CPP. While regular employees only pay the employee portion of CPP, your corporation − as the employer − will also pay the employer portion of CPP premiums.

Owner-managers of incorporated businesses have the choice to pay either salaries or dividends to extract funds from their companies for personal use. For individuals who have close to the maximum 40 years of contributions to the CPP, paying dividends may be a good option. That can allow them to avoid the expected significantly increased CPP premiums starting in 2024, as the increased premiums will not result in any significant increase in the CPP pension. However, for younger business owners, the choice to pay or not pay salaries to avoid CPP premiums is subject to other considerations. Those include diversifying sources of retirement income, investing the savings for a higher return by not paying CPP premiums, and contributing to an RRSP if no salary is paid.

Note that it is possible to share CPP benefits with your spouse by making an application to Service Canada.

IPPs
IPPs are a form of defined benefit pension plan, and can be set up for just one person. An IPP is established by the employer corporation, funded by the corporation, and can be tailored for your individual needs. An IPP is subject to provincial pension rules and administrative requirements.

An IPP is often established in situations where the owner-manager has worked for the corporation for a long period and has not set aside retirement funds outside the company. An actuarial evaluation is required to determine the funding requirements for the pension for current and past service to the company. The most significant initial contribution will be for past service, which requires a history of paying yourself a salary/bonus from the company. Contributions set by the actuarial report are paid by the company and are deductible to the company in the year paid, or in the previous tax year if it is paid within 120 days of that tax year-end. Updated actuarial reports will be periodically required to ensure that the plan is adequately funded.

For entrepreneurs over age 50, the initial funding requirement should be significantly higher than for a younger employee and are likely more than can be paid into an RRSP. Note that participation in an IPP will almost eliminate your ability to continue contributing to an RRSP in future years. It is best to catch-up on RRSP contributions before instituting an IPP

Please contact Cardinal Point if you are a  Canadian business owner-manager and would like to discuss available pension options for funding your retirement as part of your overall financial planning. 

Moving Across the Border and Leaving Your Aging Parents Behind

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Moving from one country to another, whether for work, retirement, or any other reason, often means leaving close family and friends behind. This decision can take on a special significance when those family members are your aging parents.

The growth of the U.S. population age 65 and older exceeds that of the total population and those under the age of 651. Over the next 20 years, Canada’s senior population — those age 65 and older — is expected to grow by 68 percent2.

As we all get older, the dynamics of our relationships with our parents change in many ways. One significant change is the level of dependency on their adult children that many parents may begin to have. This can take many forms, but whether it is help with groceries or medication reminders, lending assistance is generally more complex when you live farther away.

Moving Boxes

Summary and Takeaways

Taking care of older parents is significantly more complicated if you are moving to a different country. But the challenges may be mitigated by careful planning prior to your move. Give yourself plenty of time to discuss plans with your parents and put them into place while you’re still nearby. Family members, professional care providers, financial advisors, and others can be enlisted to help ensure that your parents have the attentive help they need in your absence.

Key Takeaways

  • Open and empathic communication with your parents is essential, because it may involve sensitive discussions to create contingency plans to support their needs in the event they become less independent.
  • But such conversations can potentially become much more difficult if you’re away or if they become ill or incapacitated. It is always best to have these discussions now versus later. 
  • If you are designated with Power of Attorney over the affairs of your parents, it may be prudent and wise to appoint someone else who will be living close to your parents. 
  • Organize any important legal and financial documents that your parents have, so that they can be accessed if necessary, by that person with Power of Attorney.

When you are first thinking about a major move, it’s important to consider whether a parent or other family member has delegated power to you within a Power of Attorney for Personal Care or a Power of Attorney for Property (or other similar documents, which vary by jurisdiction).  Being an attorney for property or personal care means that in the event that the person is unable to make their own care or financial decisions, you have been named as their choice to do so.

You would likely have been chosen based on family dynamics at the time the documents were prepared. However, this should be revisited prior to a move to ensure that the person who is currently the most appropriate choice is named and that person can continue to act in their named capacity. If the designated attorney doesn’t live nearby, personal care decisions can be difficult to make. If the named attorney does not live in the same jurisdiction as the parent, financial institutions may be unable or unwilling to take instructions.

Additional tax reporting on the part of the named attorney may also be required in the event of a cross-border move. Generally, appointments within a will should be reviewed as part of an overall estate plan discussion. Where possible, schedule a family discussion about these matters ahead of your move. If changes are not made before a parent’s condition deteriorates, it will be difficult, if not impossible, to make amendments or appoint a new attorney. Of course, if your parents don’t have these documents already in place, they should be strongly encouraged to have them drawn up. Otherwise, by the time the attorney is required to act, it is too late to do so.

Whether named as an attorney or not, most of us have a strong interest in seeing our parents live their best life possible. In most cases, the aging process means that there are changes in need and ability that can either creep up gradually or very suddenly in the event of an adverse health situation.

Keep in mind that your parents are adults with a lifetime of caring for themselves and making their own decisions. Their identity and self-respect may center on their role as parents and adults. If they feel they are losing control to others, they may resent and resist what they may see as efforts to rob them of their independence. There are no easy solutions, but open communication and allowing them look after themselves and make their own decisions, to the extent possible, is important.

Over time, and at different ages, most people will experience some decline in physical and/or cognitive capability. Staying in close contact with your parents may make it easier to become aware of these changes.  However, bear in mind that if changes occur gradually, they can actually be difficult to notice unless you are making a conscious effort to do so. It can also be helpful to stay in touch with local family members or friends who see your parents more often and may have somewhat different perceptions than you have at a distance.

These physical/cognitive declines in capability, as well as your parents’ responses to them, will dictate what type of help they need and will welcome, or at least accept. The particular combination of needs will develop over time and will be as individual as your parents are, based on their abilities and lifestyle. There could be difficulties keeping up with what is required for day-to-day life: housework, meal preparation, yard work, or paying bills on time. It could be that personal care will become an issue where support is required for grooming, dressing, medication, and other personal tasks. They may need support in running errands and attending appointments, even to the extent that they are no longer safe drivers. Modifications to the home might be needed such as grab bars or adjustments like removing rugs and other trip hazards. There may also be emotional support required by the parents whose lives are changing and by those providing primary care.

If you are the property attorney and working from afar, preparation is key. Set up online access where possible to facilitate future activity such as access to financial statements, medical records, and tax receipts. This may be easier to set up when you are local to your parents rather than at home across the border. Having the Power of Attorney document accepted by your parents’ institutions may require an in person visit as well, so contact the institution to determine what will be needed. This is a priority for critical providers such as the bank and insurance companies.

If your parents need help paying bills, setting up payments to run automatically, rather than requiring manual activity, will reduce the risk of missed payments as well as the amount of work required. Consolidation of accounts such as investment accounts or credit cards, where possible, will simplify their financial situation as well.

Create a place to store important information such as your parents’ SSNs, bank account and insurance policy details, and health card numbers so you have them handy as needed.  Include a list of payments being made manually and those that require periodic activity. It may be helpful to have copies of documents such as deeds, loan documents, investment statements, and insurance policy statements.

As needs increase over time, it becomes essential that providing support is a team effort consisting of local family members or friends, distant family members, and local community support services. It’s ideal to start the team approach early to avoid crisis situations such as preventable falls, dangerous neglect of health needs, or emotional burnout. If possible, reach out to your parents’ neighbors and exchange information, encouraging them to contact you if they have any concerns.

The family doctor is a key member of the team, providing an objective view of the situation.  Ensure that the Personal Care Attorney document is on file with the doctor and any specialists. Your parents’ doctor should also be able to point you in the direction of available community services. An assessment of your parents’ needs, to determine whether they qualify for any free or inexpensive support, may be available. If so, take advantage of that opportunity. Keep in mind that reassessment should be made periodically as their ability to manage their life independently changes over time. An assessment of the home environment with recommendations to improve safety and comfort is also valuable if this is offered by community services in their area.

Depending on financial resources, a wide range of services are likely available for both household and personal help. Starting to engage help early, when the help required is less invasive (such as yard work rather than meal preparation), may make it easier for independent-minded parents to accept.

Whether paid help is accessible or not, family members near and far need to work as a team, contributing what they are able to the parents’ care to avoid overburdening any one person. Anyone who offers to help should be given something to do, making them part of the team as needs evolve. This can include financial, logistical, and emotional support that may be easier to provide from afar in addition to tasks that must be done in person.

As much as it takes a village to raise a child, it takes a community of people working together to support family members who are no longer able to live as independently as they once did. We encourage you to work with your family and within your parents’ community to ensure that they continue to live well as their life evolves.

Through our financial planning process, Cardinal Point assists clients and their families by reviewing estate plans, including appointments in place, and outlining strategies to assist all parties.

1 https://www.census.gov/library/stories/2018/10/snapshot-fast-growing-us-older-population.html

2 https://www.cihi.ca/en/infographic-canadas-seniors-population-outlook-uncharted-territory