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

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

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

  1. 1. The Truths and Myths of Retirement Compensation Arrangements and Individual Pension PlansPresentation toESTATE PLANNING COUNCIL OF ABBOTSFORDOctober 19, 2005
  2. 2. Retirement CompensationArrangement (RCA)
  3. 3. Gordon B. Lang & Associates Inc. Actuaries & ConsultantsFOUNDED JUNE 1995PRESIDENT & 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 CONFERENCEOF CONSULTING ACTUARIES (2005) Gordon B. Lang & Associates Inc.
  4. 4. Gordon B. Lang & Associates Inc. Actuaries & ConsultantsOFFICES VANCOUVER,PRINCE GEORGE, CALGARY, EDMONTON, LETHBRIDGE, TORONTO, OTTAWA, MONTREAL AND HALIFAXEMPLOYEES 26 Gordon B. Lang & Associates Inc.
  5. 5. Gordon B. Lang & Associates Inc. Actuaries & ConsultantsSPECIALIZATION PRODUCTS DEVELOPED FOR: PROFESSIONALS WITH PROFESSIONAL CORPORATIONS OWNERS OF PRIVATE COMPANIES SENIOR EXECUTIVES OF LARGER PRIVATE & PUBLIC COMPANIES Gordon B. Lang & Associates Inc.
  6. 6. Gordon B. Lang & Associates Inc. Actuaries & ConsultantsSPECIALITY PRODUCTS-EMPLOYEE PROFIT SHARING PLAN (EPSP)-HEALTH & WELFARE TRUST (HAWT)-INDIVIDUAL PENSION PLAN (IPP)-RETIREMENT COMPENSATION ARRANGEMENT (RCA) Gordon B. Lang & Associates Inc.
  7. 7. 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.
  8. 8. 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.
  9. 9. 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.
  10. 10. 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.
  11. 11. 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.
  12. 12. 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.
  13. 13. 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.
  14. 14. 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 Gordon B. Lang & Associates Inc.
  15. 15. 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.
  16. 16. 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.
  17. 17. RCA – Establishment Board Resolutions Trust Deed & Plan Text Trustees  3 individuals (1 separate from Employer)  Trust Company CRA Registration Gordon B. Lang & Associates Inc.
  18. 18. 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.
  19. 19. 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.
  20. 20. U.S./Canada Tax TreatyImplications 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.
  21. 21. U.S./Canada Tax TreatyImplications Employee Contributions  In U.S. - are included in income of Employee  In Canada - are deductible by Employee Gordon B. Lang & Associates Inc.
  22. 22. U.S./Canada Tax TreatyImplications 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.
  23. 23. U.S./Canada Tax TreatyImplications 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.
  24. 24. U.S./Canada Tax TreatyImplications 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.
  25. 25. 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.
  26. 26. The Leveraged RCA Example XYZ CorporationTAX SAVINGS ON RCACONTRIBUTION OF (35.6%) $391,600less RCA CONTRIBUTION FROMP.C. (100,000)less Expenses (40,000)NET ADDITIONAL AVAILABLEFUNDS FOR INVESTMENT $251,600 Gordon B. Lang & Associates Inc.
  27. 27. RCA Lenders Bank of Montreal Royal Bank TD Bank CIBC National Bank HSBC Manulife Bank AIG Finance Gordon B. Lang & Associates Inc.
  28. 28. 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.
  29. 29. RCA – Summary Tax Deferral Vehicle Greater security through Trusteed Arrangement For Owners, Key Employees, Executives and Professionals Gordon B. Lang & Associates Inc.
  30. 30. Retirement CompensationArrangement (RCA)
  31. 31. Individual Pension Plan Gordon B. Lang & Associates Inc.
  32. 32. Outline Individual Pension Plan (IPP) Retirement Compensation Arrangement (RCA) Questions Gordon B. Lang & Associates Inc.
  33. 33. 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.
  34. 34. IPP Contributions Contributions by employer (and employee) tax deductible Benefits taxed when received Investment income tax exempt Gordon B. Lang & Associates Inc.
  35. 35. IPP Maximum Allowable Contributions Post February 2005 Federal BudgetAmounts 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
  36. 36. 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.
  37. 37. 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.
  38. 38. 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.
  39. 39. 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.
  40. 40. 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.
  41. 41. Individual Pension Plan (IPP) Gordon B. Lang & Associates Inc.

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