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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

Renting during retirement? 10 cases where it might be right for you

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Home ownership is the deeply ingrained Great Canadian Dream. Adding to the dream is retiring as a homeowner without debt. Although that dream is alive and well, and something that most retirees hope for, there can be some very good reasons not to be a homeowner in retirement.

While renting in retirement may not be your goal, perhaps some of these 10 scenarios might get you thinking differently.

  • You can’t afford it. Either you have never been a homeowner because of the high costs, or you were a homeowner but simply needed the liquidity and access to the capital that was tied up in your home. While there are certainly ways to remain a homeowner and access some of the capital, the greatest access to capital is to sell your home.
  • You don’t want to carry debt in retirement. You can make a good case that having debt in retirement is just fine as long as you have home equity that is much larger than the debt. Having said that, it is understandable that many retirees don’t want the worry of debt. Usually the best way to achieve this is to sell real estate and use the capital to pay off debt (often debt still owing on the house).
  • You don’t want the responsibility of maintaining a house. Let it be someone else’s problem. It can be very nice to suddenly realize that the leaking faucet is no longer up to you to fix. It can be even nicer to know that the roof that needs replacing isn’t going to come out of your pocket (at least directly).
  • You don’t want to pay any more realty commissions and land transfer taxes. You may be at a stage of your life where health concerns are either a reality or looming larger. One less home purchase can save you tens of thousands of dollars by eliminating the money that disappears to real estate commissions and land transfer taxes.
  • You don’t want to be trapped in a home you can’t sell quickly. You don’t know how long you will be staying in your home. By renting, you have much greater flexibility to move, and with far fewer worries than if you own your home. This can be an even bigger worry outside of urban centres where it can take many months or even years to sell a home.
  • You want to spend more money while you are healthy enough to enjoy it. With a major amount of money freed up, you may feel more comfortable spending on vacations, cars, boats or other items that you have long dreamed about. Of course, this should be done with a long-term financial plan in place to ensure you can actually afford it. I have found that while many retirees can afford to do all of these things, “realizing” the cash in their homes often gives them the psychological comfort to start spending.
  • retire_rentYou want more diversification in your investments. While most people view their home as more than an investment, it can certainly be looked at as a large and extremely concentrated one. Let’s say someone owns a home worth $700,000, and they have a decent pension from work. They could very well have few other assets in their net worth. Maybe $150,000 in other investment savings. This person’s net worth is over-concentrated in real estate, and not just diversified real estate, but 100% in residential real estate in one location. By selling and investing the funds, they can now be much more diversified across a wide range of industries and types of investments.
  • You want to be able to test out different homes and places. Some people know they want to move to a condo. Some want a backyard garden. Some know the neighbourhood or city or small town they want to live in, some aren’t so sure. By renting you may be able to try out a few options to see which one is the best fit. I am not suggesting that moving is a fun or easy process, but it is a lot easier when you are just renting, as opposed to being an owner.
  • You may be needed out of town. Many retirees are happy to finally have their freedom and some independence from family. Others may want or need to move to be closer to children, grandchildren or increasingly elderly parents. Renting may allow you the freedom to spend significant time with family in other cities, without still being responsible for real estate back home.
  • You are spending less and less time at “home” anyway. Florida, Arizona, the south of France. Some of these places can be quite compelling in retirement. As you spend less and less time in Canada, does it really still make sense to own a home? By renting you may save a lot of money, especially if you are able to rent for only three or four months at a time. The monthly costs will likely be much higher due to the flexibility, but when compared to a full year of rent for a place that you won’t be in for months at a time, the cost savings and flexibility can be of great value.

Reproduced from the National Post newspaper article 27th January 2015.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Leaving money to charity in your will? There is a better way

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ted_financial_postI recently met with someone who wants to leave all of their money to two charities. They put this in place because they didn’t have close family members (or didn’t feel the family members needed the money), and they wanted to leave a real legacy to a couple of causes that were close to them.

Their situation was as follows: Age 85. $550,000 in savings (75% non-registered and TFSA). Pensions and RRIF withdrawals totaling $70,000 a year. Living in an upscale retirement residence. Drawing roughly $20,000 a year from savings.

While it seemed like his estate plan made sense, there are better ways to leave that legacy than through a will — ways that could grow the amount of giving by over $100,000.

Here are 3 problems with leaving money to charities in the will:

1. By leaving money to a registered charity you will receive a charitable tax credit of between 40% and 50%. The only issue is that you will only receive the tax credit on charitable giving of up to 75% of your current years’ income. For example, if you make $100,000, you could give up to $75,000 and receive the full tax credit. In your ‘final’ tax return, you will get a credit for up to 100% of your income.

The problem is if you have income of $80,000 in your final return, and leave $800,000 to charity, you will have foregone almost $360,000 of tax credits! If you die with a very large RIF, this may work because your RIF would be considered as income on your final tax return (if you don’t have a surviving spouse). Otherwise, it is a real missed opportunity.

2. Wills with very large charitable giving occasionally are contested by family members who feel that they should have received more. This can cause lots of delays, legal costs and heartache. All can be avoided by giving to the charities outside of the Will.

3. You are paying too much tax. In many cases, this money is getting taxed every year sitting in a non-registered investment account, never being spent. Finally it will go to the estate, and in some cases be hit with a probate fee as much as 1.5%, and then go to the charity.

The best way to avoid these problems is by some blend of giving annually and taking out a life insurance policy with the charity as beneficiary. By giving annually you will almost always be in a position to receive the full charitable tax credit (unless you give a very large amount).

You will also have significant flexibility in terms of how much to give, who to give to, and be able to change your mind any year you wish. The charity will also benefit today instead of having to wait for many years.

T2820027_saking out a life insurance policy is not as common, but is actually one of the best ways to leave a charitable legacy. Using an insurance policy with the charity as a beneficiary can be a quadruple benefit if you qualify. The first benefit is that if it is structured properly, the annual insurance premiums can be considered annual charitable giving, so that you get the tax benefit each year.

The second benefit is that the insurance policy bypasses the estate, and is paid directly to the charity. This avoids estate battles over the funds.

The third benefit is that the proceeds avoid probate because they don’t form part of the estate. In Ontario, this 1.5% fee can add up on a major charitable gift.

The fourth benefit is if you are in reasonable health for your age (even if you are 75 or 80 years old), the ‘rate of return’ on the insurance can be much higher than other options. This is because the money is tax sheltered and as a permanent life insurance policy, the actual rate of return (money put in vs. money that comes out) is often well over 7% per year.

There are several other good ways to leave funds to charities including community foundations, setting up a private foundation and donor advised funds. Every one of these options requires some personal planning to determine what makes the most sense for your situation.

In the case of the 85-year-old, by giving $30,000 a year to charity they are receiving the full tax credit every year. If he lives to age 97, he should still have an estate of about $200,000. If he is still alive at 97, he can stop giving to charity in order to ensure he has funds to cover another ten years. In his case, if we assume he lives to age 97, he will have given an extra $100,000 to the charities than if he simply left the money in his will, and he will have been able to see the impact of his giving in his lifetime.

Leaving significant money to charity can be of great value to you, the charity and society at large. However, if the plan is to simply leave it through your will, there are likely many other smarter ways to make a bigger impact with the same funds.

Written by Ted Rechtshaffen, President & CEO of TriDelta Financial.
Reproduced from the National Post newspaper article  23rd March 2013.

 

Give More, Spend Less: The Strategy for a Financial Donation

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major-charity-contribution-giftThis is a story about a couple that wanted to make better use of their hard earned money by leaving a significant legacy to the Alzheimers Society. They came to us for advice on how to execute their charitable contribution strategy, so we devised a plan. Let’s call them Joe and Susan.

As the retirement phase approached, Joe and Susan had some concerns to consider. They traveled frequently and wanted to maintain their lifestyle in retirement without fear of running out of money. At the same time, they wanted to pay as little tax as possible and help advance Alzheimer’s research to rid the world of this cruel disease.

We told them:

  • They have lots of financial flexibility to travel.
  • They will not outlive their money, but would likely have a $2 million Estate and a lifetime tax bill of $530k.
  • The $530k in taxes can be cut significantly with proper planning.
  • A good part of the tax savings can go towards charitable causes like the Alzheimer’s Society with the right strategy.
  • They can even afford to retire earlier, and potentially spend more time volunteering.

The strategy:

Joe & Susan already contributed $5,000 a year to charity, but after learning how efficient we could structure their situation, they felt they could afford to give more, and wanted to. We showed how they could substantially increase donations without it costing them much more than they had already been contributing. The Alzheimer’s Society would benefit greatly from this decision.

What we did:

  1. We set up a joint insurance policy that will pay out when they both pass away.
  2. Fund the policy with $11,000/year for 20 years. After 20 years, the policy will be fully paid for and their favourite charity will be the beneficiary of the policy.
  3. Because of the structure, Joe and Susan will receive a full donation tax credit every year of $4,400, so their net cost is just under $6,600 a year.
  4. As a result, the charity will receive a $1 million benefit!
  5. Essentially, Joe and Susan put $6,600/year in for 20 years, a total of $132,000, and the total benefit to their favourite charity will be $1 million.
  6. If Joe and Susan live to full life expectancy, the AFTER TAX rate of return on this charitable investment will be over 10%, guaranteed. There is not likely a better investment return available – especially given the low level of risk.

Joe and Susan can still give roughly $9,000 a year to charity – either through cash or stock – and help make a more immediate impact. You don’t need to donate $11,000 for this to work for you. The strategy is scalable and can be structured to match your particular situation.

To get a quick sense of your financial possibilities and what you can afford to give, use our free online calculator. Be sure to connect with us on Facebook or Twitter. This article was written by Brad Mol, Senior Financial Planner

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