Blog

By: Michael Lutes CFP, CLU

Certified Financial Planner

Introduction

In Canada, the taxation of passive income earned by corporations has been a topic of interest and debate for many years.

The rules and regulations surrounding this income have evolved, impacting how businesses manage their investments and financial strategies.

In this blog post, we will delve into the essentials of Canadian corporate passive income, including what it is, how it is taxed, and strategies for optimizing your corporate investments.

What is passive income?

Passive income refers to the income earned by a corporation from investments in assets such as stocks, bonds, rental properties, and other passive sources. This income is distinct from active business income, which is generated from a corporation’s core business operations.

Common types of passive income include:

1. Dividend Income: Earnings received from investments in shares of other corporations.
2. Interest Income: Earnings from investments in bonds, GICs, or loans.
3. Rental Income: Income generated from leasing out real estate properties.
4. Capital Gains: Profits realized from the sale of investments, such as stocks or real estate.

How is passive income taxed?

Taxation of passive income is governed by the Canadian Income Tax Act. The key principle is that passive income is subject to a higher tax rate compared to active business income to discourage corporations from accumulating excessive passive investments.

Moreover, having too much passive income in any given year will reduce or eliminate a corporation’s access to the following year’s Small Business Deduction, the effect of which can be an additional approximately 15% income tax.

Strategies for managing passive income

To minimize passive income and avoid the potential loss of the Small Business Deduction, business owners should consider the following strategies:

1. Withdraw additional funds for investment in RRSP or TFSA accounts.
2. Use accumulated Capital Dividend Account (CRA) credit to withdraw funds tax-free and reduce potential for passive income.
3. Remove funds tax-free by having the corporation repay any outstanding shareholder loans.
4. Focus on capital gains-oriented investment. Unlike interest and dividend income which is earned regularly and taxed in the year it’s received; capital gains can be realized strategically and only 50% of capital gains are included in income.
5. Let your winners ride! In other words, if you have unrealized capital gains, you might consider hanging on to them until a future year when you may avoid a further reduction of your SBD. Or hang on and sell them in a year when you already have greater than $150,000 of passive income and have already eliminated the SBD anyway.
6. Spread out your gains. Instead of deferring capital gains to future years, sell your winners over two or more years to potentially avoid reducing your SBD.
7. Implement an Individual Pension Plan (IPP). An IPP is essentially a business owner’s very own defined benefit pension plan. The money contributed is eliminated from the calculation of passive income.
8. Buy permanent life insurance inside the corporation. The investment income is sheltered inside the policy as “cash value” and doesn’t count to the calculation of passive income. Furthermore, on death the entire death benefit can often be paid out to shareholders tax-free.
9. Donations from a corporation will reduce the funds that would otherwise be producing passive income. Further, if donating securities or funds with unrealized gains, there are additional benefits such as no tax payable and a credit to withdraw funds from corporation tax-free.

Conclusion

Understanding Canadian corporate passive investment income and its taxation is crucial for businessowners looking to optimize their financial planning strategies. By staying informed about the rules and employing effective tax planning strategies, businessowners can strike a balance between accumulating passive investments and managing their tax liabilities. Consulting with a qualified tax professional or financial advisor is often recommended to navigate the complexities of corporate taxation in Canada effectively.

By:  William Henriksen, CFP^®

Farmers play a vital role in our society, providing food and sustaining our communities. However, there comes a time when farmers may start thinking about selling their farm or retiring from the agricultural business. This exit requires careful planning and consideration to ensure a smooth and successful transition. According to a recent census, 60% of farmers are 55 or older, but only 13% of farmers have written succession plans in place!

In this blog post, we will explore the essential factors that farmers need to consider when they are contemplating selling or retiring from their farming operations, with a specific focus on the lifetime capital gains exemption.

1. Understanding the Lifetime Capital Gains Exemption: The lifetime capital gains exemption is a tax provision available to Canadian farmers and fishers. It allows them to claim a tax exemption on the capital gains realized from the sale of qualified farm or fishing property, up to a certain limit. Today, the exemption limit is $1 million. Understanding the details and requirements of this exemption is crucial for farmers considering selling their farm, as it can have a significant impact on their tax payable.
2. Eligibility and Qualified Farm Property: To benefit from the lifetime capital gains exemption, farmers must ensure that their property meets the criteria of qualified farm property. Qualified farm property typically includes land, buildings, and equipment used primarily in a farming business. Farmers should review the specific requirements outlined by the Canada Revenue Agency (CRA) and consult with tax professionals to confirm their eligibility and ensure compliance with the exemption rules. I’ve included the current requirements at the end of this blog.
3. Tax Planning and Optimization: Farmers considering the sale of their farm should engage in thorough tax planning to optimize the use of the lifetime capital gains exemption. This involves assessing the potential capital gains, considering the available exemption limit, and strategizing to minimize tax liabilities. Working with experienced tax advisors or accountants can help farmers navigate the complex tax rules, identify opportunities for tax minimization, structure the sale in a manner that maximizes the benefit of the exemption and ensures maximum long term wealth preservation.
4. Timing the Sale: The timing of the sale can have a significant impact on the utilization of the lifetime capital gains exemption. Farmers should carefully consider their tax situation, personal circumstances, and market conditions when determining the optimal time to sell. Changes in tax laws or regulations may affect the availability or value of the exemption, so staying informed and seeking professional advice is crucial.
5. Transition and Succession Planning: Farmers looking to retire and sell their farm must also consider the implications of the lifetime capital gains exemption for succession planning. If the goal is to transfer the farm to the next generation, structuring the sale in a way that allows for the use of the exemption by both parties can be advantageous. This may involve strategies such as share transfers, leasing arrangements, or implementing a gradual transition plan. Working closely with legal and financial professionals can help ensure a smooth transition while optimizing the tax benefits.
6. Professional Guidance: Given the complexities of tax laws and regulations, it is essential for farmers to seek professional guidance when considering the lifetime capital gains exemption. Engaging with tax advisors, accountants, and lawyers experienced in agricultural taxation can provide valuable insights and ensure compliance with the CRA’s requirements. These professionals can also assist in developing a comprehensive tax strategy that aligns with the farmers’ overall retirement and financial goals.

Hopefully by exposing more farmers to articles like this one, we start seeing the percentage of farmers with written succession plans trending higher year over year. If you’re a farmer or if you know a farmer, share this with them and encourage them to seek professional guidance so that they can optimize their retirement planning and ensure a smooth transition to the next phase of their lives.

Below are the current requirements to meet the criteria of qualified farm property for the purpose of the lifetime capital gains exemption:

1. Farming Activity: The property must be used primarily in a farming business, meaning that it is actively involved in agricultural production. This includes activities such as cultivating land, raising livestock, growing crops, or producing aquaculture or other agricultural products.
2. Ownership: The property must be owned by an individual or a partnership of individuals. Corporations or trusts generally do not qualify for the lifetime capital gains exemption on farm property.
3. Duration of Ownership: The property must have been owned and used in a farming business for at least 24 months before the disposition (sale) occurs. However, in some cases, the CRA allows for a shorter ownership period if there were circumstances beyond the farmer’s control that prevented meeting the 24-month requirement.
4. Nature of the Property: The property must meet specific nature criteria to qualify as qualified farm property. The following requirements generally apply:
   • Buildings and Structures: Buildings and structures, such as barns, storage sheds, or silos, that are used primarily in the farming business can qualify as part of the qualified farm property.
   • Shares of a Family Farm Corporation: Shares of a family farm corporation can be considered qualified farm property if certain conditions are met, including that the majority of the assets of the corporation are qualified farm property and that the shares are owned by individuals who meet specific eligibility criteria.
5. Farming Income Test: The farming income test requires that farming income, either alone or in combination with farming income of a spouse or common-law partner, exceed other income (excluding taxable capital gains) in at least two out of the last five years. This ensures that the lifetime capital gains exemption is primarily available to farmers and not individuals who may own farm property but do not actively engage in farming activities.

If you are a farmer, and you are contemplating selling or retiring from your farming operations, or if you would like to set up a succession plan, click HERE to book an appointment with us today!

Executive Summary

Business owners regularly face complex retirement planning and insurance needs. It is not uncommon for business owners to have a large amount of their wealth tied up in their corporation.  This can create a complex need for both insurance coverage to protect that wealth and the flexibility to use that wealth.  The Corporate Retirement Strategy was developed to address both of those needs.  This strategy can provide insurance protection and a flexible income stream in the future.

Below are the basics of how this particular strategy can work for a business.

What You Need to Know

The Corporate Retirement Strategy has two key components.

The first of which is a permanent life insurance policy.

The idea is that the corporation will purchase a permanent life insurance policy on the business owner to provide them with the insurance coverage needed to protect the company assets.  On top of the monthly insurance premium, the business would direct any surplus earnings into the permanent life insurance policy. These surplus funds would build up significant amounts of tax-advantaged cash value within the policy. This policy serves a dual purpose.  The insurance provides much needed protection for the company all the while accumulating funds that could be used by the business owner in the future.

The second component to this strategy is utilizing the funds that the insurance policy has accumulated. 

The corporation may be able to pledge the policy as collateral in exchange for a tax-free loan from a lending institution.  The corporation could then use these loaned funds to supplement a shareholder’s retirement and the loan would be repaid by the life insurance policy when the insured dies.  On death, a portion or all of the life insurance proceeds are used to pay off your loan. Even though the benefit was used to pay off the loan, the corporation may still post the death benefit amount to its Capital Dividend Account.

This strategy may be good for any shareholder or key person of a Canadian Controlled Private Corporation who has a successful business with either excess income or a large corporate surplus.  With proper planning this strategy can help reduce taxes, supplement retirement, and provide insurance protection fort the company.

The Bottom Line

While this strategy may work for some business owners, it is not the right fit for every corporation.  It is important that the strategy is executed carefully to be successful and fulfill its intended purpose.  It may be prudent to work with a tax professional, your insurance advisor, financial planner, and the lending institution to ensure that your corporation will benefit from the Corporate Retirement Strategy.

By: William Henriksen, CFP

Congratulations! Officially becoming the professional that you studied so long to become is an amazing achievement and that deserves to be recognized! The path to becoming a professional such as a doctor, dentist, or lawyer requires almost a decade of post secondary education or more. Take a moment here to acknowledge your achievement. Think of all the work you’ve put into those years and think of all the various paths you can take your career from here. It’s exciting, scary, stressful, and wonderful all at once. Let’s explore how you can best position yourself for the future.

Managing your cash flow as a professional

The moment you start making an income, you begin feeling the biggest cashflow flip that you’ve ever had. This is where you have an opportunity to set up a great habit for yourself by creating a budget that incorporates your values, priorities, and the wellness of your future self.

Things to consider when creating a budget:

1. Your fixed expenses: This establishes a baseline for all future lifestyle expenses so be careful.
2. Your insurance premiums: If you are running your own practice you may need to get individual insurance and should factor the premiums into your budget early on.
3. Your savings rate: How much should you be putting away for your future self and for your long-term goals? Do you have an emergency fund in place and how much should you aim to have in it? The amount will vary from person to person and should be discussed in the context of your unique goals and situation. As a professional, keep in mind that you will likely need to fund your own pension as you may not have an employer to fund a pension plan for you.
4. Debt repayment: Many professionals come out of school with significant student debts. Should you focus on paying it down first? If so, how aggressively? This will also depend on your unique situation.
5. Automation: Having all the above automated will create the possibility to implement point number 6.
6. Guilt-free spending: What’s left over in your budget is non-allocated money. In the real world the amount will vary from month to month depending on how often you get paid, but if you’ve automated everything to come out on the same date, once it’s past you can confidently spend money that’s left over with a clear conscience because you will have already allocated money to pay your fixed expenses, protect your income, health and family through insurance, and you will have paid yourself through saving and debt repayments. If the amount you’ve allocated to points 1-4 allow you to reach your goals, the amount left over can be spent guilt free.
7. Reviewing regularly: Keep in mind that being financially organized is a continuous process, so learning and adapting your strategies as your financial status evolves is key.

Following these steps and living below your means is a huge step toward reducing the stress or uneasiness you may feel about your financial situation. It will also have the effect of increasing your confidence that you’re doing the right things to align your capital with your values and priorities.

Protecting your future self and your loved ones

It’s easy to avoid thinking about what happens if life doesn’t go the way we plan because we don’t want to believe bad things can happen to us. We tend to avoid difficult conversations until we’re prompted to have them. As a planner I have a responsibility to have these kinds of conversations with clients when evaluating their insurance needs. More often than not, people don’t know what would happen if they got sick or injured to an extent where they can’t work to receive an income. They aren’t sure if they would be leaving enough financial support for their loved ones should they pass away. Ask yourself now, what kind of financial impact would something like that have on you and your family? Without insurance, your potential income you’ve studied for would go down to zero. If you passed away, those who depend on you may be left with financial hardships. You may want to consider if your current needs are going to change down the road and structure your insurance to account for those potential needs. Disability insurance, life insurance and critical illness insurance are ways to ensure that you and your loved ones will be financially taken care of if you’re faced with such events which are out of your control.

A common reason people avoid looking into insurance early on is that they believe it will be too expensive. This doesn’t have to be the case. Not only does it cost less to get insurance the younger you are, but you can also structure insurance plans as starter policies that are easily graduated into more robust long-term policies later. This keeps costs low until you have a handle on your cash flow and protects you right away with the coverage you need. If your insurance need today is relatively low compared to what it will become, you may want to have the option to buy more later when your situation changes without needing to prove you’re insurable. This is possible and should be discussed when evaluating your insurance needs.

Incorporating

As a young professional, you may be considering starting your own business or working as a freelancer. If you plan to grow your business, you may want to consider incorporating. Incorporating means creating a corporation, which is a separate legal entity from its owners.

Why should you consider incorporating? Here are some reasons:

• Limited liability protection: One of the main benefits of incorporating is limited liability protection. As a corporation is a separate legal entity, the corporation’s creditors cannot go after your personal assets. This means that your personal assets are protected from any lawsuits or debts incurred by the corporation. This can be particularly important for businesses that are exposed to higher risks or liabilities.
• Tax advantages: Another benefit of incorporating is tax advantages. A corporation pays corporate income tax on its profits, which is typically much lower than personal income tax rates. Additionally, as a corporation, you are subject to many different rules that create opportunities for various tax planning strategies.
• Insurance strategy benefits: Incorporating can also provide benefits for your personal insurance strategy. When I mentioned graduating your insurance policies earlier, this would be the place to graduate them to. Some of them anyway. This point could be an article on its own and is not the focus for today, but seeing the full game plan from a bird’s eye view can make the action plan for your current stage easier to understand.
• Credibility: Incorporating can also enhance your business’s credibility. It shows that you are serious about your business and committed to its success. It can also give your business a more professional image, which can help attract more clients or customers.
• Access to capital: If you plan to raise capital to grow your business, incorporating can make it easier to do so. Corporations can issue shares or bonds to raise funds, which can help you grow your business faster.

However, incorporating also comes with some drawbacks:

• Higher costs: Incorporating can be more expensive than other business structures. You will need to pay fees to incorporate and file annual reports with the government. There may also be legal fees associated with incorporating.
• More paperwork: As a corporation, you will need to keep detailed records and file annual reports with the government. This can be time-consuming and requires a higher level of record-keeping than other business structures.

In conclusion, incorporating can be a smart choice for young professionals who want limited liability protection, tax advantages, insurance strategy benefits, credibility, or plan to raise capital. However, it also comes with higher costs and more paperwork. If you are considering incorporating, it is important to speak with a financial professional or legal expert to determine whether it is the right decision for your specific circumstances.

Creating Options 

All things considered, there are a lot of big topics to approach at this stage of your life and of your career. You likely have some degree of uncertainty regarding the future and it’s very possible that your life changes significantly in your early career as you juggle your personal goals and your professional ones. To get off to the best start, and to account for these possible changes, it’s important to create options for your future self. Finding the right financial planner for you, creating a budget, getting the right type and amount of insurance in place, and working with your planner and their team to build your vision are the best things you can be doing now for your future self. Your future you will thank you!

If you would like to discuss this – book an appointment with us, we would love to hear from you!

By: Shawn Todd, CFP

Being a business owner is exciting.

You’ve thought of an idea for a business, made it work, helped it make its mark in whatever you do. It also brings with it challenges that can be overlooked as the business grows.

The topic that gets avoided

If you are a business owner and have avoided talking about what happens in the event of your business partner’s sickness or death – then you aren’t alone.  It’s a tough topic, one that gets avoided a lot. Talking about death and sickness is tough, and it’s hard to bring up.

It’s a common situation we run into often, where a business has been started with multiple partners, and it is now running smoothly, and may be experiencing some strong success.  The balance sheet may be positive, and the owners may be enjoying some smoother sailing than when the business first started.  If we broke down business growth into four time periods – early, growth, expansion, and mature times.  We often see this issue first, once the business hits a strong growth period, and achieves higher valuations of the company than owners expected.

What happens if a business owner dies, gets sick or injured and cannot look after the business in their capacity?

The shareholder’s agreement & buy sell agreement

Some of these initial pains to these questions can be somewhat worked out within the shareholders agreement and a buy sell agreement between the parties.  Some questions that a shareholder’s agreement may help solve will be; what responsibilities do the parties have to each other, when is a sale triggered if there is long term sickness, what happens at death of a shareholder, and some key discussions on evaluation and its formulation.  A buy sell agreement helps ensure this sale happens after death, or a triggering event.

The most common issue I see on this topic with business owners is an unfunded shareholders agreement. Often it has been talked about, but not put into place or solidified.  In the event of a shareholder’s death – normally the corporation would be expected to pay the estate of the deceased shareholder [in return – take back the shares], or there would be a well laid out insurance plan to offset this immediate cost, pay the estate, and have the shares returned in exchange.

In this example above, if Phil was to become sick long term or died, then Phil’s family or estate would be expecting a value for Phil’s shares. Ideally Olivia would rather not be in business or be left making business decisions with Phil’s family. What happens if the corporation doesn’t have enough to pay the value of Phil’s shares to the estate, or if there isn’t an insurance policy in place?

How to fix

There is a variety of ways to fund a shareholder’s agreement, the most common being with an insurance policy.  The policy can be paid personally or corporately, but the most common and most popular [for obvious reasons amongst owners] is to have the corporation pay the premiums.

Insurance policies can be set up to provide coverage for death of a business partner, loss of income due to disability, injury, or a critical illness such as Cancer.

It’s not too late to spend time with your business partner(s) to discuss these ‘what if’ situations.  Planning on what happens if a shareholder has to exit [especially under terrible & stressful circumstances] is a great way to strengthen your business in the back-end, and lower any fiscal risk.

Let us know if you have any questions, or please book a time with us to review your own shareholders agreement.  Click HERE!

Shawn Todd CFP – Partner – ECIVDA

By: Corey Butler, Wealth Advisor

Meriam Webster’s definition of succession:

“The order in which or the conditions under which one person after another succeeds to a property, dignity, title, or throne.”

The next 10 years will be the largest period of succession for business owners like never before. Aging demographics are highlighting this exposure for business owners. Who, what, and how will one take over the business practice. Biz owners of all walks of life have the same trait of control hardwired in them. Control is what has allowed him/her to make those hard decisions. Control has offered a sense of freedom with direction and outcome. For most the thought of succession equals loss of control, purpose and the end of the chapter.

The reality is something much different with a well thought out and executed succession plan the business owner can have their cake and eat it too. How is that possible? Share structure and tax planning are the key ingredients to make this happen. The buy/sell agreement that has not seen the light of day since inception must have the I’s dotted and T’s crossed so revisiting and reviewing is so ever important. To ensure you have a successful passing of the torch you really need to make sure you and your buyer are not just on the same page but same paragraph and better yet same sentence. Having a trusted advisory team representing all parties will ensure that all parties are happy with the result.  Everyone may not get exactly what they want as everyone may have to give a little, this is where your advisory team is key.

Too much time is spent on making sure everything is perfect with a succession plan when the reality is that success can only be achieved when all parties are willing and able to come back to the table anytime there are challenges. Life is never dull, and the grind is real in business. Stuff always happens and to be successful one must accept that stuff will happen.

A succession plan starts by planning from “Right to Left”. You know where you want to be but how do you get there? Creating a succession plan pending complexity can take anywhere from 6-18 months. As you know the days and weeks pass by quickly, and with every year we continue to age, so completing a plan that will provide for 20-25 years of income certainly will take a considerable investment of one’s time. Let alone the sheer fact that business keeps happening each and every day. No one solution but a combination of solutions will equal success.

Ecivda Financial Planning Group is trusted advisory team with over 50 years of experience helping business owners pass their torch! We have recently completed our own in-house succession plan and can so relate to your concerns and challenges. If this resonates then you know what to do next!

Executive Summary

There are numerous ways to take money from corporate earnings while keeping your tax bill to a minimum. Often, business owners opt to receive a portion of corporate earnings through a salary. While others opt to extract profits using a mix between salary and dividends.

Finding the optimal combination to maximize your tax savings depends on many factors including (but not limited to) your cash flow needs, income level, payroll taxes on salary, or the corporation’s income level.

Understanding the tax treatment of payments is important as you want to ensure that the maximum amount of funds is left to be invested back into the corporation.

Earning Options

Paid-Up Capital: If you funded your corporation with a large sum of capital, you may be able to extract funds tax-free by reducing the corporation’s paid-up capital; essentially this is the amount of capital contributed in exchange for shares. Typically, you are allowed to pay shareholders any amount less than the corporation’s paid-up capital without tax consequences.

Repay Shareholder Loans: Another option to receive corporate funds is to repay shareholder loans. If you loaned funds to your own corporation, you are entitled to receive any amount of repayment of the loan tax-free. You may also arrange to have the corporation pay you interest on the loan. Taxation of the interest income is about equivalent to the taxes deducted if the corporation paid you a salary.

Passive income: Investment income earned inside your corporation is classified as ‘passive income’ as it is not generated by direct business operations. The combined tax rates are over 50%, depending on your province of residence, on the taxable portion of earnings. In the case of interest, that is the entire earned amount. For capital gains, half of the gain is subject to the combined tax rate and for dividends the rate is 33.33%. All three of these rates are higher than the highest marginal rate for individuals. Subjecting passive income to higher tax rates within a corporation can lend some benefits like:

• Building your nest-egg inside the business to fund future expansions
• Cover short-comings during difficult periods
• Facilitate borrowing

However, the largest risk with this option lies in losing the capital gains exemption on the sale of shares of a ‘qualified small business corporation.’ As the invested assets build over time, and operating assets decline in value thanks to depreciation, the asset mix could be lopsided. To have the capital gains be exempt, the ‘passive’ invested assets cannot exceed 10% of the fair market value of the corporations’ assets.

Lifetime Capital Gains Exemption (LCGE): For 2021, the LCGE limit per person is $892,218 and is indexed to inflation. This means a married couple who both own shares and can both utilize the exemption could shelter $1.784 million from taxes. Farms and fishing operations that qualify have the individual limit of $1 million per person, allowing a couple to shelter a maximum amount of $2 million. Depending on your goals, a short-term increase in tax and the professional fees associated to establishing the appropriate corporate structure could save you significant amounts of tax in the long run.

Maximizing Capital Dividend Payments: When you have a capital gain, the untaxed portion (one half of the gain) is added to its capital dividend account. The corporation can pay any amount from this account to your client without attracting personal tax. Although this is likely your best option, you must ensure that you make the appropriate tax deductions and remember to file the directors’ resolutions with the CRA.

Bottom Line

Every corporation is going to present varying degrees of needs. When it comes to determining how to pay yourself, be sure to be well informed before making any final decisions. Of course, consulting with a financial expert, like myself, can prove helpful. I encourage you to get in touch with any questions or concerns or to simply learn more.

Book an appointment to discuss how you can get money from your Corporation – Book Here

Employers are always looking for an edge when it comes to attracting new talent and offering comprehensive employee benefits is one of the best ways to do so. Health Spending Accounts, also referred to as Private Health Services Plans, offer both business owners and their employees a flexible health benefits solution that can work as a replacement or compliment to traditional health plans.

What You Need to Know

1.  How It Works – A Health Spending Account (HSA) is an account with a predetermined dollar amount that employees can use to cover health expenses that are not covered by their traditional health plan.  The amount in the account is predetermined at the beginning of the year by the plan sponsor (employer).  The employees may apply to be reimbursed for eligible medical expenses for both themselves and their dependents.
2. What It Covers – Eligible expenses are determined by the CRA. The general rule is you can claim anything that can be claimed as a medical expense by the Income Tax Act. An HSA is available to cover unpaid balances that are not covered by your health plan, governments plans, or your spouse’s plan. For example, the HSA covers services such as vision care, dental care, and drug expenses that are not otherwise covered (such as fertility drugs).
3. Tax Implications – Businesses may deduct HSA payments made on behalf of employees and their dependents.  Benefits are received tax free by the employees. There are different rules for HSAs for incorporated and unincorporated businesses:

Incorporated

•  The Income Tax Act does not place a limit on the amount of deductions allowed for HSA premiums in a corporation.
• Can be set up with only shareholders as employees
• Payments for medical expenses may only be received by the shareholder as an employee
• Shareholder must be actively engaged in business activities.
• Benefits must be reasonable and be consistent with what would be offered to an arm’s length employee.

Self Employed or Partnership

•  Expenses may be deductible if:
• Individual is actively engaged in business
• In current or preceding tax year, more than 50% of income is from the business or individual’s income is less than $10,000 from other sources.
• Health Spending Account may not be accepted by CRA if the self-employed individual does not have at least one arm’s length employee.

The Bottom Line

Health Spending Accounts are a useful and beneficial tool that can be used by business owners to supplement their employee’s health coverage. Health Spending Accounts can help business owners budget their yearly expense more effectively as the cost of the plan is determined by the business owner, rather than traditional health benefits which have increasing yearly premiums based on claims.  It is important for business owners to pay close attention to the CRA rules surrounding HSAs to ensure that they are eligible for the deductions that are offered to plan sponsors.

Employers have several options available to them when it comes to setting up a retirement savings plan for their employees. Defined Contribution Pension Plans and Group RRSPs are the most accessible plans to most businesses. Here is what you need to know about each plan and how they can work for your employees.

What Is A Defined Contribution Pension Plan?

Defined Contribution Pension Plans are an employer sponsored retirement savings option available to Canadian business owners and their employees. Defined Contribution Pensions Plans are made up of a combination of employee contributions, employers’ contributions, and an optional voluntary contribution component. Defined Contribution Pension Plans are regulated by provincial pension laws, which varies from province to province.

What Is a Group RRSP? 

A Group Registered Retirement Savings Plan (Group RRSP) is an employer sponsored retirement savings plan. Group RRSP’s have many similarities to individual RRSPs with the only difference being that they are administered on a group basis. The plans are made up of employee and employer contributions, but unlike traditional pensions, the employer is not required to contribute any amount to the plan.

Similarities and Difference 

1. Tax Deferred Savings: Both Defined Contribution Pension Plans and Group RRSPs offer tax deferred savings for employees that contribute to them.  Contributions are taken at the source before tax and contributed to the plans on the employee’s behalf. Both investment options allow employees investments to grow tax free until they retire, at which point the funds with be taxed as they are withdrawn.
2. Contribution Limits: Both plans are subject to annual contribution limits. This amount is equal to a percentage of each employee’s income from the previous year. Both employee and employer contributions count towards this annual limit.  Both plans will also cause a pension adjustment to employees. This means their individual RRSP will be reduced based on the amount contributed to their employer sponsored plan. This keeps an equal playing field for those who do not have work pensions.
3. Age Limits: Defined Contribution Pension Plans and Group RRSPs both require that employees stop contributing to the plan and start drawing on the funds at age 71. At this point, employees must convert the plans to an income fund that will pay them out a retirement income.  For Defined Contribution Pension Plans, this fund is called a Life Income Fund (LIF).  LIFs have minimum and maximum withdrawal requirements that plan holders must adhere to.   Group RRSPs holders have two options at age 71. Plan members can a) cash out the plan and pay all tax owing or b) convert the plan to a RRIF and start taking an income.  RRIFs have minimum withdrawal requirements that plan holders must adhere to.

Pros and Cons

Defined Contribution Pension Plans 

Pros

• Attractive to Employees due to the employer matching component. This can greatly accelerate employee’s retirement savings
• Funds are locked-in and therefore not accessible until the employee retires. They do not have the option to spend their retirement savings frivolously.
• Funds grow tax free if they stay in the account
• Employer Contributions are tax deductible
• Typically, the investments offered in a pension plan have a much lower fee than traditional investments.
• Simple, reduced selection of investment options available within the plan.

Cons 

• Defined Benefit Pension Plans can come with higher administration costs and require continuous maintenance.
• Due to the fact funds are locked in, employees have little to no flexibility in how they use the money they accumulate.
• Employer contributions are expected. This can be a significant expense, depending on how many employees a business has.
• Benefits at plan end are at the mercy of market fluctuations.

Group RRSP 

Pros

• Employer contributions are not mandatory. This allows for businesses to offer their employees a retirement savings option regardless of the financial abilities of the company, with the flexibility for the company to contribute at any point if it becomes feasible.
• Funds grow tax free if they stay in the account.
• Group RRSPS have low start up and maintenance costs.
• Generally, Group RRSP have a must larger investment shelf than pension plans.
• No legislative regulation means flexibility for employees to dip into their savings if necessary ie. Home buyers’ program or Lifelong Learners Program.

Cons 

• Employees have the option to withdraw from the plan at any time, which can severely impact their retirement savings.
• Larger investment shelves mean more opportunity for employees to take unnecessary or unsuitable risk with their investments.
• Employer Contributions are a taxable benefit to employees
• Benefits to employee are not guaranteed and are subject to market fluctuations

Bottom Line

Both plans offer their advantages and disadvantages, with each having something unique to offer. Whichever you choose for your business, you can rest assured you are helping your employees work towards a financially secure retirement!