Personal Pension Plan. The INTEGRIS Personal Pension Plan TM (INTEGRIS PPP) Designed Exclusively for Business Owners and Professionals

Transcription

1 The INTEGRIS Personal Pension Plan TM (INTEGRIS PPP) Designed Exclusively for Business Owners and Professionals PPP Handbook 2015

2 Table of Contents 1. Introduction 2. INTEGRIS PPP: How Entrepreneurs and Incorporated Professionals can Benefit 3. Changes that Enhanced the Appeal of a Registered Pension Plan 4. Why the INTEGRIS PPP now? 5. Key Benefits of the INTEGRIS PPP 6. Key Innovations of the INTEGRIS PPP 7. Optimizing Your Wealth 8. Escape Hatch 9. PPP Fund Investment 10. Additional Contributions 11. Retirement and Pension Income Commencement 12. Survivor Benefits 13. Canada Revenue Agency Approval of PPP 14. Fiduciary Oversight 15. Fees 16. Your Dashboard 17. Q & A 18. Summary and Limitations 19. Next Step

3 Introduction Canada s fundamental system for providing retirement pension income rests on three structural pillars. First, the Old Age Security Act, which was enacted by the Federal Government in 1927, was an initiative to help Canadians avoid poverty in retirement. Second, is the Canada Pension Plan that came into effect in 1966 to provide an earnings- - - related public pension plan that transfers income from the workers to the retirees. The third pillar is comprised of workplace employer- - - sponsored pension plans and Registered Retirement Savings Plans (RRSP). The RRSP began in 1957 as a tax deferred vehicle to promote retirement savings for the self- - - employed. In 1973 the program was extended to all Canadians, aimed particularly at those without an employer- - - sponsored pension plan. Since the inception of each of these pillars, legislation has been changed and amended to reflect the moving targets of societal changes. By the mid s, an alarm bell was sounding across the nation that pension incomes were woefully inadequate. The concerns were driven by a period of high inflation and the subsequent negative effect this was having on the fixed income streams of the elderly. By the mid s, the federal government was dealing with a burdensome national debt and on- - - going deficits that demanded a revision to the public pension systems. By the 1990 s the country was facing a new paradigm brought on by the signing of the North American Free Trade Agreement, global competiveness, computerization and a collapsing currency. This period saw the highest number of layoffs of both blue collar and white- - - collar employees. Many of these individuals were economically devastated and struggled to regain their economic footing. Employers shed employees with abandon along with their benefit plans and, in particular, employer sponsored pension plans. Employees responded by becoming more resourceful, setting up small companies and building their own futures as bona fide businesses. The result was a permanent change to the underlying social contract between the employer and employee.

4 In 1991 the Income Tax Act was amended to allow registered pension plans for individuals. In response to this, several provinces amended their legislation giving certain professions the right to incorporate their practices. In 2003, the Province of Ontario adopted legislation giving doctors with incorporated practices the opportunity to establish a registered pension plan. In 2007, pension lawyers S. Wayne and JP Laporte published Individual Pension Plans: Are they worthy of a second look? In 2011, the INTEGRIS Pension Management Corp was formed to provide an effective retirement solution to professionals and individuals operating small businesses. The INTEGRIS Personal Pension Plan (PPP) was born. The Canadian population is aging rapidly with seniors making up the fastest- - - growing age group. Aging baby boomers are viewed as a major factor in accelerating Canada s population aging. This trend is expected to continue for the next several decades during which we will see both the first and second pillars of retirement income increasingly under attack. It has therefore become imperative for business owners and professionals to establish an effective third pillar. The INTEGRIS PPP with its enhanced and unique design is an effective way to solve the retirement crisis allowing individuals to maintain their desired living standards during retirement. INTEGRIS PPP: How Entrepreneurs and Incorporated Professionals can Benefit Canadians need a secure retirement option, especially those without an employer- - - sponsored pension. By 2021, 1 in 5 Canadians will be over 65. As the Baby Boomer generation retires, with a longer life expectancy, the demand to generate income will increase exponentially. A sound retirement strategy is essential to maximize your income potential at retirement. As an entrepreneur or incorporated professional, you probably invested considerable resources in your enterprise likely at the expense of your long- - - term retirement savings.

5 In reality, investments injected to build your business over the long term likely diverted funds you would have normally invested in personal savings (if you were a regular employee), to be reinvested into the business to purchase equipment, pay salaries, market for growth, cover shortfalls, emergencies etc. Running and growing a successful business required your total commitment of time and money. You may have been contributing to your RRSP, but found you couldn t save enough for your retirement because of the caps imposed on RRSPs. Perhaps your investments did not grow at the desired rate of return, or were blind- - - sided by the markets that eroded the capital value. While waiting it out for the long term as you were advised to do, the resulting in a lack of compounding adversely impacted your retirement goals. You may be concerned that the lack of creditor protection could destroy the financial health of you and your family. Or you might be thinking about passing the torch on to your son or daughter and wondering how to effectively be remunerated for your hard work and sacrifices. You may be concerned that the costs of investing in your RRSP is not tax deductible and is eroding your returns. You would like to borrow money to invest in your RRSP but the interest costs are not tax deductible further eroding your potential effective rate of return. You may be concerned that you have nobody looking out for you and your best interests. Or, you would just like the reassurance of knowing that you can harvest the results of your life s work and receive an established regular income stream for both yourself and spouse for the rest of your lives. All of the above considerations are valid reasons for establishing a personal pension plan, to achieve the peace of mind you deserve.

6 Changes that Enhanced the Appeal of a Registered Pension Plan 1. Over the past decade, corporate tax rates were reduced thereby providing an opportunity for small business owners to pay themselves dividends for living expenses instead of a salary. This has led many accountants who counsel small business owners, to avoid salaries altogether and rely exclusively on dividend income to meet daily needs. In the 2013 Federal Budget, the Department of Finance closed this gap by increasing the taxation of non- - - eligible dividends. Effective January 1, 2014, taxation of non- - - eligible dividends for private companies has increased, effectively eliminating the benefit of taking dividends from lower- - - taxed corporate business income. 2. The arbitrage opportunity for keeping money in your corporation instead of putting it into salaries, RSPs or pension plans is shrinking and, in most provinces, is now a negative financial reality. Now, from a taxation perspective, it is more advantageous to receive a reasonable level of salary from your company than continuing to forego salary and ultimately, pensions by paying out dividends to yourself. Why the INTEGRIS PPP Now? All PPPs are Registered Pension Plans established under section of the Income Tax Act (Canada) and regulated by applicable pension regulatory authorities under provincial pension benefits standards legislation. PPPs are subject to the Individual Pension Plan rules found in the Income Tax Act (Canada), but provide additional and enhanced features and flexibility. The conventional Individual Pension Plan, commonly known as the IPP has been in existence since 1991 and are typically available to professional and business owners of incorporated companies. Essentially, IPP s are as beneficial to small business owners as the large pension plans owned and administered by large employers and unions. Unfortunately, IPPs have suffered from being associated with the following stigma:

7 1. Administrative Complexity 2. Lack of flexibility. Cannot adapt to changing business cash flows 3. Lack of economies of scale For a small business owner, entrepreneur or incorporated professional such as a dentist or a doctor, IPPs are viewed as involving a lot of work and expensive. The INTEGRIS PPP is an enhanced IPP that is packaged as a simple turnkey solution providing economies of scale and flexibility. The PPP effectively provides the solutions to the problems that have traditionally plagued the IPP. Key Benefits of the INTEGRIS PPP 1. Pension Plan Structure: The structure relies on pension rules rather than RRSP rules, so there is an ability to significantly increase retirement savings in some instances by approximately $1 million above and beyond what the RRSP can provide. 2. INTEGRIS Combination Pension Plan: A registered pension plan with 3 components. a. Defined Benefit (DB) Component: The traditional defined benefit that characterizes the traditional IPP. b. Defined Contribution (DC) Component: Operates similar to an RRSP. There is a mandatory 1% required contribution but there is also the option to make employee additional voluntary contributions to the AVC account which range from 0% to 17% of salary. The AVC account is strictly voluntary and is not locked- - - un under pension laws. c. Additional Voluntary Contribution (AVC) Sub- - - Account: Existing RRSP assets can be rolled into the AVC Sub- - - Account on a tax- - - free basis. Further, to increase your retirement savings, the AVC Sub- - - Account also allows you to make voluntary employee contributions each year.

8 Conventional IPPs typically offer only the Defined Benefit Component and therefore does not offer this flexible contribution structure. All of the MER's, HST, and INTEGRIS costs are now deductible for a corporate client. This is another way of further reducing costs, in addition to creditor- - - protecting assets. 1. Defined Benefit Defined Contribution Additional Voluntary Contribution 3. Robust Creditor Protection: Pension plan rules provide full protection from trade- - - creditors. In some provinces, RRSP assets are not protected from the claims of trade creditors. In Ontario, unless a life insurer issues the RRSP, it is subject to seizure. Pension assets, on the other hand, are fully protected from the claims of trade- - - creditors. 4. New Corporate Tax Deductions: The PPP generates new and additional corporate tax deductions that are not available to RRSPs. These additional tax refunds, in addition to paying the extra fees associated with the pension platform, also generate new and immediate savings. Corporate tax deduction is available for corporate borrowing from a financial institution to make pension plan contributions. This qualifies as a business

9 expense relating to labour costs and deductible under the Income Tax Act (Canada). 5. HST Refund: Since July 2010, plan sponsors as pension plan administrator can claim the HST refund if you are a Pension Plan Administrator. This is not available to individuals who save through RSPs.. 6. Fiduciary Oversight and Turnkey Solution: INTEGRIS provides fiduciary, turnkey and a simplified pension administration. The compliance burden typically handled by the IPP sponsor (the client Corporation) is now handled by INTEGRIS in partnership with its well- - - established financial institution partners (e.g. RBC Dominion Securities, Industrial Alliance etc.). 7. Client Controlled Custody and Investment Management: INTEGRIS is not the custodian of the pension assets. Additionally, INTEGRIS does not manage the pension assets. The advisor continues in the capacity of the investment manager. The resulting effect is, the business owner benefits on both fronts. They receive first- - - rate money management from their trusted financial advisor while taking advantage of a more secure and tax- - - efficient platform to build a true pension plan for retirement. Key Innovations of the INTEGRIS PPP 1. Superior Plan Design: The ability to have both DB and DC contribution components with the AVC overlay. 2. Fiduciary Oversight. 3. Pricing: Takes advantage of economies of scale resulting in lower cost to clients and providing more value at a competitive price.

10 4. Greater Contributions: Individuals participating in a PPP are allowed to exceed the RRSP limits at any age and claim additional tax deductions for fees by virtue of being in a pension plan. Under the conventional IPP, individuals between the ages of 18 to 39 would effectively be penalized in terms of the contributions they can make to the IPP as compared to the contributions they are allowed to make under an RRSP. The PPP solves this problem by introducing the DC Account. Therefore, a younger person can still benefit from a PPP by participating first in the DC component and then switching over to the DB component of the PPP after age Transfer RRSP Assets to PPP: Rolling existing RRSP assets over to the AVC Sub- - - Account means that those assets are now creditor protected as pension assets under the pension rules AND triggers additional corporate tax deductions since the investment management fees for those assets are deductible under the pension plan (under paragraph 18(1)(a) of the Income Tax Act (Canada)).

11 Optimizing Your Wealth 1. By investing your maximum contributions in a PPP at age 45 through to age 65, you will have substantially increased your accumulated registered assets under the PPP. 2. Example over a shorter savings horizon: As a year- - - old business- - - owner, incorporated since 2002, you have received T4 income from your corporation for the past 13 years. You earn $400,000 in You earned the Maximum Pensionable Earnings from 2002 to You have $600,000 in accumulated RRSP assets and you have $500,000 available in your corporate account. If you remain in your RRSP until age 65 you will have accumulated:$1,662,139 But if you choose the INTEGRIS PPP instead, you will have at age 65:$2,458,943 Difference The PPP Advantage (extra registered assets accumulated):$796,804

12 Escape Hatch 1. The ability to switch from DB (Defined Benefit) to DC (Defined Contribution) where a minimum 1% contribution is required. 2. Owners (Ontario regulation 48) who own 10% or more voting shares of their company can also elect to reduce accrued benefits in their plan and to amend their plan and reduce the pension payable. This allows you to get rid of any deficit that might have been accumulating. In some provinces, there are no deficits to contend with in any event. PPP Fund Investments 1. Governed by pension rules. 2. Limitations are more on the "concentration limits" rather than the type of investment. It is structured similar to the Teachers Pension Plan. It is not possible to buy shares of your own company because that's a related party transaction unless you qualify under one of the exemptions. However, you could use PPP monies to purchase shares of a local franchise for example, since those are private companies. 3. No more than 10% of the portfolio can be held in any one stock. When investing in a particular company, no more than 30% of the voting shares can be held by the pension fund as shareholder. 4. An existing IPP is transferred to an INTEGRIS PPP simply by way of a Board Resolution. The PPP investments remain the same.

13 Additional Contributions 1. Special Payments Under the DB component, if assets contributed to the pension fund do not experience an investment return of at least 7.5%, the actuary will declare that the plan is in an actuarial deficit position and the company is required to make additional contributions to bring asset levels back in line with the liabilities. These special payments into the pension fund are also tax deductible to the plan sponsoring company.. 2. Past Service Buyback Business owners who have owned an incorporated company for a number of years and were paying themselves T4 income (salary & bonuses), can increase the size of their pension by purchasing years of past service under the PPP. To purchase past service, the INTEGRIS actuary calculates the total past service cost first. Then, a determination is made as to the percentage of the total cost that is required to be paid by Qualifying Transfer, the existing RRSP assets held by the business owner. The difference is a corporate obligation that is paid by the company as a lump sum past service contribution (but can be amortized over 15 years). The corporate contribution is fully tax- - - deductible to the corporation. These corporate deductions can reach $200,000 or more. 3. Terminal Funding Because INTEGRIS offers a true pension plan solution, the ultimate pension paid at retirement is determined by a pre- - - determined benefit formula assuming retirement at age 65. However, if a business owner decides to start collecting the pension at an earlier age, under normal circumstances, the annual pension amount would have to be reduced to account for the fact that the funds would now have to be paid over a longer period of time.

14 Pension and tax laws do, however, give an INTEGRIS client the option of receiving an unreduced early retirement pension, indexed to inflation years before reaching age 65. By enhancing the pension promise in this way, a large deficit is created in the pension fund since more assets will be required to fund these extra benefits of early unreduced pension and indexation. The solution is called terminal funding, a corporate contribution to the pension fund made when the plan is terminated or at the time the member retires. The terminal funding amount, which can reach as much as $600,000 or more, is also fully tax- - - deductible to the corporation sponsoring the PPP. Retirement and Pension Commencement 1. The pension can accrue to age 71 before commencing periodic pension income payments. 2. Instead of retiring normally at age 65, retirement can be delayed until age 71 at which time the postponed retirement pension would be greater than the pension that would have been paid at age 65. The corporation can keep making contributions until age 71 thereby increasing the pension income available at retirement. 3. The PPP allows retirement income to commence as early as age 55 at which time the early retirement pension will be actuarially reduced to reflect a longer period of pension income payments. Pre- - - Retirement Death Benefits If death occurs before retirement, an amount equal to the value of accrued benefits will be paid to the member's spouse, designated beneficiary or estate as applicable under provincial pension legislation.

15 Post- - - Retirement Survivor Benefits On death of a plan member after retirement, the survivor benefit is paid in accordance with the normal or optional form of pension selected at retirement. 1. Where the member has a spouse at retirement, the normal form of pension is paid to the spouse who receives pension payments that are 66 2/3% of the member s pension with a year guarantee. Other joint and survivor and guarantee pension options exist as well. 2. If the member does not have a spouse at retirement, or the spouse has waived entitlement to a survivor pension, the normal form of pension is where payments of survivor benefits are made to the member s designated beneficiary(ies). This includes a named legacy trust or charity foundation. Other pension options exist as well. 3. If there are no designated beneficiary(ies) at the time of the member s death, the pension assets are paid to the member s estate. Canada Revenue Agency Approval of PPP The INTEGRIS PPP has been approved by the Canada Revenue Agency (CRA), Director of Policy and the Director of Registration of the Registered Plans Directorate, the body within the CRA with responsibility over all registered pension plans. Fiduciary Oversight This provides the highest standard of care under the law. The fiduciary standard under section 22 of the Pension Benefits Act (Ontario) is what governs the actions of INTEGRIS. INTEGRIS provides economies of scale and takes care of all administration and compliance functions relating to the plan. In essence, INTEGRIS takes on the role of a personal pension committee, responsible for ensuring peace of mind for the business owner when it comes to the smooth running of the pension plan.

16 INTEGRIS also uses its own proprietary software and tools for pension plan compliance, actuarial valuation and administration. These tools include the INTEGRIS Wealth Optimizer and the INTEGRIS Online Enrolment Tool. The INTEGRIS Secure Distributor and Client Portals provide 24/7 related access to all distributors and clients wishing to access their specific client accounts. Pension officers are also available to provide guidance and answer any questions relating to the plan. Online Enrolment Tool Secure Client Portal with 24/7 access to pension records Pension Officers for questions and guidance Trust/Insurance Platforms The INTEGRIS PPP can be structured legally on any one of the following platforms: 1. Corporate Trust and Custodial Platform 2. Insurance Platform 3. Tri- - - Partite Trust Platform Individual Trustees where the custodial functions lies with a financial institution The fees associated with the PPP vary depending on the platform selected. Fees All fees (including the INTEGRIS fees discussed below) are tax- - - deductible to the corporate sponsor of the PPP. To provide a general guide, two fee structures to pay for the PPP are available:

17 1. Flat Fee Per Plan: $2500 the 1st year and $1800 each year thereafter (group discounts are available) Or 2. Assets Under Management (AUM) Per Plan: 50 bps to a maximum of $2500 for AUM under $500,000 (for smaller accounts) Note that the fees relating to the INTEGRIS PPP are paid out of the large additional corporate tax deductions previously unavailable to business owners and professionals under the RRSP that are now available under PPP. Example: Business owner is 60 years old. Transfers $500,000 from RRSP where he was paying 2% MER fees. Results: (1) extra tax- - - deductible contribution above RRSP limit $12,400. At 15.5% corporate tax rate, this generates an additional refund of $1,922. (2) $500K x 2% = $10,000. At 15.5% corporate tax rate, this generates a refund of $1,550. Total refunds ($1,550 + $1,922 = $3,472. Minus INTEGRIS fee of $1,800 = $1,672 excess cash in hand of corporate sponsor. This example ignores the following additional sources of refunds: (a) large tax refunds generated by the purchase of past service; (b) the application for the HST pension entity rebate; (c) any deductions permitted if the corporation borrows money to make a contribution and (d) large tax deductions permitted by Terminal Funding.

18 Your Dashboard To simply your life, the Client Dashboard has everything you need to know about your plan 24/7. All scanned documents and access to the investment platform and communication log with pension officers who answer all questions. Q & A Q: I want to maximize my Past Service Buyback but don t have my T information going back to A: T4 information that is provided and used in generating the PPP Illustration will ultimately be confirmed by CRA. If clients or their accountants do not have this information in their files, they may approach CRA directly for this information or they may choose to appoint a representative (either the advisor or INTEGRIS) to get this information from the CRA by filing Form T1013. CRA Form T1013 authorizes the CRA to provide this information to the client s representative. Q: What is a reasonable time expectation for CRA response to Form T1013 confirmation of T4 income? A: This process time for the CRA Form T1013 varies. CRA has indicated that the processing time is within 20 business days of the date it is received at the tax centre.

19 Q: I want to make sure I have a good understanding of the exit strategy, should for any reason the professional corporation was closed. A: There are two options if your corporation winds down: The commuted value of the pension benefit accrued in the pension fund is: I. Transferred the CRA maximum transferrable amount to a LIRA (Locked- - - In Retirement Account) or a LIF (Life Income Fund); or II. Used to purchase an annuity from an insurance company in Canada. There may be excess over the CRA maximum transfer amount. Here the commuted value would be transferred to a prescribed vehicle as in point I. above, where any excess over the maximum transferrable amount set by CRA would be taxable Q: Since the pension income is determined by actuarial calculation, do I maintain the same payout, with an adjustment for cost of living increases? A: The pension income that is paid to a member at retirement is calculated based on the benefit formula stated in the plan subject to CRA maximum ceilings. These payments are calculated at retirement and they do not change each year except that they may be indexed for cost of living increases if you have purchased indexing through a terminal funding payment at retirement. Q: What happens on death of the plan member? Does the PPP capital value become entirely taxable to the estate? Can you guide me through the estate process of the PPP? A: On the death of a plan member (being the only member of the plan) the PPP will be terminated since there are no other members in the plan. The survivor benefit will be

20 paid in accordance with the provincial pension rules. In such case, the pension fund assets will be distributed based on whether the member died before retirement or after he/she has retired. If the member dies before retirement, the commuted value of the pension benefit will be paid to the spouse or designated beneficiary, if there is no spouse or if the spouse has waived any rights to the death benefits. In such case the benefits are taxable to the estate in the year it is received. If the member dies after he/she has retired and was receiving pension payments from the plan, the death benefit will be paid to the spouse/beneficiary or estate in accordance with the form of pension elected by the member at retirement. For example, if the form of pension paid under the plan to the member has a guarantee, the guarantee on a pension payment is simply how much money is paid for a certain period of time. If both the client and spouse die after the expiration of the guarantee period, any excess funds remaining in the pension fund are considered as surplus and revert back to the company. In such case these surplus funds become company assets and can be paid to any children as shareholders of the company. All assets in the pension fund, including any surplus assets remaining after the death of the client and spouse, will always be available to the client's family. Q: What are the different trust and insurance platforms on which the PPP is offered? What are my options? A: There are two trustee/custodial platforms on which the PPP can be structured: I. Corporate Trust arrangement; or II. Three individual trustees under the Tri- - - Partite Trust arrangement; Under the Tri- - - Partite Trust platform, the client must select 3 individuals who are willing to act as trustees where one of these 3 trustees cannot be related to the client. There are a number of legal responsibilities attached to being a trustee, therefore great care

21 must be exercised in choosing the individuals who will take on the roles of individual trustees as they must be reliable and trust worthy in this role. The individual trustees must agree to take on the responsibilities inherent in this role. Under Canadian trust law, pension trustees have a very high standard of care and must act at all times in the best interest of the plan member and other beneficiaries of the pension plan. A third option is the insurance platform where the client enjoys the comfort of a large insurance company that is prepared and organized to assume this role. The drawback of using an insurance platform is that the range of investment options is limited to the investment options made available by the insurer. However, INTEGRIS has partnered with an insurance company to offer the PPP on an insurance platform that currently offers 84 different investment fund options. Summary and Limitations The INTEGRIS Personal Pension Plan is a registered pension plan designed for the incorporated business owner and professional. INTEGRIS Pension Management Corp. is a private Canadian based company that provides a turnkey solution and access to actuaries and pension compliance officers. We have endeavored to use all care and attention in the compilation of this information however this document in not intended to replace professional legal or tax advice. As such it is recommended that you review the elements and Illustration of the INTEGRIS Personal Pension Plan in its entirety with your advisors, legal and tax specialists prior to implementation.

22 Next Step For more information, please contact us at: INTEGRIS Pension Management Corp mgt.com questions@integris- - - mgt.com

23 NOTES/QUESTIONS FOR INTEGRIS: