Articles

IPP – Why so many dentists have set this up to save taxes in 2018 and beyond

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As a dentist you know that from time to time you may be presented with a challenging case of a difficult extraction.  As a Wealth Advisor and Financial Planner, I can tell you we are also often presented with a case of a potentially difficult extraction but instead of it being a molar, our challenge is to how best extract funds in the most tax efficient manner from the Dental Professional Corporation (DPC) of a practicing dentist.

One of the methods which has become more popular, especially given the recent tax changes involving Canadian Controlled Private Corporations (CCPC), is the Individual Pension Plan or IPP.

An IPP is a defined benefit pension plan tailored to small business owners such as dentists.  It allows for the DPC, as sponsor of the plan, to fund a defined benefit style pension for the dentist and even their spouse if they are also employed by the practice. Thus, extracting corporate funds and directing them to a source which will provide tax efficient retirement income.

The amount of annual funding is similar to an RRSP in that it is a percentage of T4 earnings to a maximum annual limit; however, for an IPP that limit is even higher than the RRSP contribution limit – and grows each year.  In addition to the annual funding, the company can also contribute any past service earnings as well as a lump-sum terminal funding at retirement.  All these contributions are tax deductible to the corporation.  Like an RRSP, your investment choices are broad and any income or capital gains generated inside the plan are sheltered from taxes, but unlike an RRSP, all of the administration fees and investment management fees are tax deductible expenses to the corporation.

Because an IPP is a formal pension plan, it must be registered with the provincial government and must make annual filings and reporting.  In addition, a triennial valuation must be performed by an actuary.  The plan administrator will generally perform all these requirements and the cost for these is customarily included in the annual administration fee, which is tax deductible.

At retirement the plan can be set up to provide a regular stream of income by way of a pension or the commuted value of the pension can be transferred to a Locked-in Retirement Account or LIRA.

The difference in value over an RRSP at retirement can be significant.  One projection we had calculated for a 55-year-old dentist and his 50-year-old spouse had them with over $1 million more in the IPP than if they just went the RRSP route at retirement.

This will not only allow them to extract more money from the company in a very tax efficient manner, but it will also provide them with a known pool of capital at retirement, which will provide them with a predictable income stream through retirement.

Upon death of the annuitant the remainder of the plan can be transferred to a surviving spouse or if there is no surviving spouse, the annuitant’s estate.

However, there are some drawbacks to an IPP.  The most common drawback is that it limits contribution room to an RRSP. However, this limitation isn’t a major one for dentists since the bulk of retained earnings, is destined to provide for a retirement income in the future. Some of the other drawbacks are because regular contributions are required to be made, this can be problematic for businesses that don’t have regular income streams.  Another small limitation is that funds within the IPP can’t be accessed before the age of 55, but for most dentists these constraints are not an issue.

At TriDelta Financial we recognize that the recent tax changes, IPP’s have become a very effective tool for extracting funds efficiently from your DPC and should be given serious consideration by every incorporated dentist over the age of 45.

Alex Shufman
For more information, please contact:
Alex Shufman
Vice President, Portfolio Manager and Wealth Advisor
alex@tridelta.ca
(416) 733-3292 x 231

Arlene Pelley
For more information, please contact:
Arlene Pelley
Vice President, Wealth Advisor
arlene@tridelta.ca
Edmonton office: (780) 222-6502

Major changes to the Ontario Disability Support program

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The Ontario disability support program (ODSP), the income benefit for adult Ontarians with a disability, aged 18 years to 65, was introduced in 1998. The ODSP benefit replaced the old Family Benefits Allowance (FBA) which had been in place for a number of years, however on September 1 2017 the ODSP will undergo a number of major changes. These are the first major changes to the program since it was introduced 19 years ago.

Over the past 19 years the income benefit has been increased in increments of between 2% and 1% to the current maximum monthly benefit of $1,128 for a single person living on their own. On the other hand the changes in the asset limits and cash gifts for people who receive ODSP have changed little, that will change on September 1 2017. The changes will help to enhance the lives of the more 400,000 Ontarians who receive support through the ODSP plan.

The Ontario Disability Support Program (ODSP) increased the exemption limits on compensation awards for loss or injury in order to allow individuals to benefit more from these awards without reducing their income support. Compensation awards for pain and suffering have been increased from $100,000 and are now fully exempt as income and assets for individuals receiving Ontario Disability Support Program (ODSP). People with disabilities are now able to use their compensation for day-to-day living expenses or to reduce any debt, not just for pre-approved disability-related costs. This change was effective as of August 1st 2017.

The Changes to ODSP

These changes are part of a larger set of social assistance improvements that will be effective on September 1st, which include:

  • An increase in the monthly maximum deduction for disability-related employment expenses under ODSP from $300 to $1,000.
  • Changes to health benefits available under the Transitional Health Benefit to include batteries and repairs for mobility devices.
  • A full income exemption under ODSP of all donations received from a religious, charitable or benevolent organization for any purpose.
  • The basic cash exemption limit for a single person will be increased from $5,000 to $40,000
  • The basic cash exemption limit for a spouse included with the person will be increased from $7,500 to $50,000
  • Payments from a trust fund, or segregated fund: gifts and other voluntary payments will be increased from $6,000 for a 12 month period to $10,000
  • Gifts to purchase a principal residence will be exempt as income
  • Gifts to purchase a Primary motor vehicle will be exempt as income
  • Gifts to pay the 1st and last month’s rent will be exempt as income

The benefits of the Changes

These changes are welcomed, and people who receive ODSP no longer have to fear the loss of the monthly benefit if their bank account exceeds the $5,000 or $7.500 limit. Liquid asset limits of up to $40,000 or $50,000 will no longer be considered income in the month its received so they won’t lose their ODSP benefit that month. People on ODSP can even save a small amount from their employment income to buy a new coat, a new TV, furniture, a suit or dress, take a vacation or have a nice meal in a restaurant just like everyone else. They will no longer be forced to spend their small inheritance or hide the money from their case worker. They now have some breathing room to spare.

The New Regulations

The regulations have yet to be published so as they say, the devil is in the details. We expect to see the regulations published by September 1st. There are still many unanswered questions, can an individual who receives ODSP own a life insurance policy or segregated fund policy on their own lives with cash values of up to $100,000 without losing their disability benefits?.

Living on ODSP

Living on the ODSP monthly benefit is still not living in the lap of luxury. The rising cost of living makes it impossible to meet basic needs and people suffer as a result. Finding an apartment is next to unattainable on the current ODSP. Still parents will welcome the new changes because their hands will no longer be tied to an impossibly delicate $5,000 asset limit.

Case study vs the new asset limits  

A dentist, who has a daughter with a disability, employs her in his office. He pays her the minimum income allowed within the ODSP guidelines but his daughter is unable to save anything beyond the $5,000 liquid asset limit. Now with these new asset limits he can increase her salary and she can save money in her bank account to purchase those little extra’s, or buy her own clothes, and things that make her life just the same as other children who have part time jobs. She will no longer have to live within the confines of a $5,000 limit.

Case study vs a gift over the asset limit

Some time ago woman called me in despair, she was upset and crying. She told me her preauthorized rent payment had bounced because her ODSP office discovered she had received a $20,000 advance on her mother’s inheritance and her ODSP benefit had been cut off without notice. The estate trustee had given her the advance to buy a car because she lives in the country and she needs a car for shopping and doctor’s appointments in Toronto and other necessary trips. We began preparing her appeal to the Social Benefit Tribunal (SBT). She only had 30 days to prepare her case and submit her appeal to the SBT. However after September 1st this person will not lose her ODSP benefit and her rent payment won’t bounce because the asset limit has been increased to $40,000.

A case study vs a structured settlement

For people who receive structured settlements the unlimited awards will go a long way to assisting them with the lifestyle, for which the courts granted the settlement, to only to have the ODSP office take their benefit away. In most cases a structured settlement can take years to settle. In one case it took three years to settle the law suit. During that time the individual applied for and received a total ODSP income of approx. $40,000. In addition he also received  a lump sum payment of $63,000 in back payments from Canada Pension Plan Disability Benefits (CPPD). He had to repay ODSP the $40,000 he received over the three years, because he had an over payment. However through some creative planning we managed to dispose of the settlement and retain all but $125,000 which was paid to his mother for his personal costs and expenses. However when the new structured settlement regulations are in place he will only have to repay ODSP $25,000, and he can keep all of the structured settlement. He can use the funds in the settlement for what the courts intended, to maintain his lifestyle. 

Compiled in conjunction with John Dawson by:

Anton Tucker
Compiled By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448
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