Many Professionals, (Doctors, Dentists, Lawyers, Accountants, etc.) have taken advantage of the ability to earn their income through a professional corporation. While there are several benefits, taxation is typically the main factor. In Canada, a corporation generally has a lower tax rate on active business income than an individual earning the same amount each year. With proper planning, this creates a significant tax deferral opportunity, providing the Professional with more after-tax dollars to invest today within the corporate structure.
Prime Minister Justin Trudeau has been quoted as saying that “a large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes.”1 While no action has been proposed thus far, his statement implies that the taxation of many professional corporations is going to change for the worse.
Astute Professionals will get ahead of the curve and use strategies to reduce the taxes within their corporation. However, many of the existing tools have significant limitations.
- Investments such as Corporate Class Mutual Funds can help defer tax on investment income, but they use after-tax dollars. There will be less to invest if tax rates were to increase.
- Flow through shares have traditionally been used to reduce taxable income but often carry a high level of investment risk and may not be suitable for the investor’s portfolio.
- Tax Accountants will often “bonus out” cash to reduce corporate income but this creates taxable income at a personal level. This can be offset by making RRSP contributions, but contribution room is limited ($25,370 for 2016).
Personal Pension Plans provide the Incorporated Professional with a number of tax-reducing strategies. Some of the key ones are:
- In most cases, the Defined Benefit sub-account provides greater contribution room than a standard RRSP
- Past Service Buyback is a strategy unique to Defined Benefit Plans that can further increase one’s contribution room.
- Unlike RRSPs, a Personal Pension Plan allows the investor to deduct Investment Management costs against corporate taxable income.
- Advanced strategies can take advantage of pension rules to create further contribution room. (I’ll explain this one in greater detail in a future article.)
While each of these strategies is distinct, they are most powerful when executed in the right order and timing. An Incorporated Professional should work with an Investment Advisor and Professional Accountant who are familiar with the Personal Pension Plan structure and are able to execute the strategies in a timely manner.
Personal Pension Plans (PPPs) require Plan Administration, Trustee and Actuarial services not provided by Richardson GMP Limited to be successfully implemented. We strongly suggest that clients obtain independent tax and legal advice prior to implementing a Personal Pension Plan strategy. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.