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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

Financial to-do’s

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  1.   Healthy Homes Renovation Tax Credit:

The Healttodohy Homes Renovation Tax Credit is a permanent, refundable personal income tax credit for seniors and family members who live with them. As a senior 65 years or older in Ontario, you could qualify for this tax credit to help with the cost of making your home safer and more accessible.

If you qualify, you can claim up to $10,000 worth of eligible home improvements on your tax return each year.

For more information about the Healthy Homes Renovation Tax Credit you can also go to
http://www.ontario.ca/taxes-and-benefits/healthy-homes-renovation-tax-credit

2.       Are you unsure when your children should start filing tax returns?

As soon as they start earning some income they should file a return. Benefits of filing include:

  • Accumulating RRSP room
  • Recovery of amounts that may have been withheld from their pay that they were not required to pay.
  • Making sure they are in the system to start collecting benefits they may be entitled to when they turn 19.
  • To get them all the credits they quality for – such as rent, public transit, tuition and education amounts.

Also, make sure you file as a family.  This ensures that credits are used to their maximum advantage to the family.  Ensure you get all the credits and deductions you qualify for.

3.       Important information for many taxpayers!!

This January the CRA will send approximately 33,000 letters to taxpayers who earn self-employment income, receive rental income, or are employees who have claimed employment expenses on their income tax return.

The campaign is part of the CRA’s efforts to encourage voluntary compliance among groups of taxpayers who, their research indicates, may be at risk of non-compliance.

The CRA gives taxpayers a chance to come forward and correct their tax affairs through My Account, a T1 Adjustment Request or the Voluntary Disclosures Program.

If you receive correspondence from CRA and would like help understanding it please contact us at www.ShoeboxTaxPrep.ca. You can also get more information at www.cra.gc.ca/lettercampaign, or by calling the Individual Income Tax Enquiries line at 1-800-959-8281, or call the Business Enquiries line at 1-800-959-5525.

4.       Get ready for Tax Season

It will be tax time before you know it.  Why not start gathering all tax related receipts now?

This is a good time to review your medical expenses/premiums paid and donations made last year as well as other deductions and credits you may qualify for.  T4’s, T5’s and other income related slips and materials will be mailed starting in mid-February, followed by all other tax slips.

The RRSP deadline for a deduction in 2012 is March 1st, 2013.  The maximum RRSP contribution limit for 2012 is the lesser of 18% of earned income for 2011 to a maximum of $22,970. This is based, in part, on your earned income in the previous year, pension adjustments (PAs), past service pension adjustments (PSPAs), pension adjustment reversals (PARs), and your unused RRSP deduction room at the end of the previous year are also used to calculate the limit.

Article prepared by Sandra Janicki of Shoebox Tax Prep.
Let www.ShoeboxTaxPrep.ca make sure you get all the deductions and credits you deserve.

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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