Retirement Plans for Executives and Senior Managers CIFPs Annual Conference. June 15, Broadlybased Plans. Senior Executives.

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1 Lynn Biscott, CFP, RFP, M.Ed. CIFPs 8th Annual National Conference SERPs and RCAs Stock Option Plans Locked-in Retirement Accounts Broadlybased Plans Senior Executives 1

2 Any unregistered plan with a promise to pay that goes out beyond 3 years Can be designed to bridge the gap between the maximum benefit that can be provided by a pension plan under income tax legislation and the amount of income that would be expected, based on the executive s earnings and the pension formula Can be used for retiring allowance arrangements No impact on RRSP room Funded Status Funded Unfunded Arrangement that allows employers to pre-fund retirement arrangements without using registered pension plans, or as a top-up to an RPP Employees report no income until they receive benefits from the RCA in retirement 2

3 Investments Letter of Credit Life Insurance Avoid unfunded SERP if possible Ensure executive understands that SERP may be at risk if not funded SERP must be set up properly in order to avoid CRA deeming as SDA Vesting Survivor Pension Non-competes Payout Schedule Plan Amendments 3

4 Employees may be required to contribute to RCA contributions are tax-deductible except where the employee is the sole shareholder of the corporation Payments out of an RCA are taxed as other income not eligible for pension income tax credit, cannot be assigned to spouse/partner Use RCA as retirement account off balance sheet, creditor protection Can do both IPP and RCA Pro no refundable tax on IPP portion Con extra admin cost of IPP Must have enough corporate income above small business threshold to make it worthwhile RCA not attractive compared to eligible dividends Be careful when deciding what to contribute if you manipulate future income, CRA will automatically deem this an SDA 4

5 Right to purchase a certain number of company shares at a future date at a fixed amount (exercise price) No immediate tax implication when employee granted option Difference between exercise price and FMV of shares at time of purchase is taxed as employment income, not capital gain Timing of taxation differs depending on whether company is CCPC or not Taxation deferred until stock sold, e.g client granted options no tax 2009 client exercises options by purchasing shares no tax 2015 client sells shares 2 steps involved - difference between exercise price and FMV on purchase taxed as employment income; difference between FMV on purchase and sale price taxed as capital gain/loss Calculated as 50% of the taxable benefit Designed to bring tax treatment into line with capital gains tax Conditions: Must be normal common shares Option holder must be at arm s length from employer Exercise price must not be less than FMV when option granted For CCPC, options must have been held for at least 2 years at the date of sale 5

6 Original rule: taxed when option exercised Effective 2000, option holders could elect to defer tax on FMV (when options granted) of up to $100,000 Conditions: Resident of Canada Arm s length from employer Not a specified shareholder Notify employer by Jan 15 of following year Tax deferred until shares are sold Tax treatment at that time same as CCPC Problems with deferral What if options under water? Large taxable benefit not offset by capital loss on shares when sold No more deferral as of March 4, 2010 Result: employees may have to sell a portion of the shares to cover the tax liability As of 2011, employers must withhold tax on stock option benefit when exercised 6

7 Deferral continues to apply until shares sold If shares sold before 2015, can use special election to limit the tax liability to the proceeds of the sale Those who have already sold underwater options prior to 2010 can make a retroactive election Must be made by due date for filing 2010 tax returns Without election: $40,000 taxable employment benefit $50,000 allowable capital loss With election: $10,000 tax owing on proceeds On termination or retirement, employees generally have specified period to exercise options be aware of deadlines Taxable benefit is considered earned income for RRSP purposes Consider OAS clawback when triggering gains on stock options: Trigger before age 65 Spread income inclusion out over several years Take income all in one year 7

8 Creating new opportunities for unlocking: increased access to pension funds for retirees Special situations: small amounts, financial hardship, shortened life expectancy, non-residence More flexibility in doing away with requirement to annuitize by age 80 Restricts both minimum and maximum withdrawals Maximum withdrawal set as percentage based on prevailing interest rates Available everywhere except for Saskatchewan Ontario variation: maximum withdrawal based on greater of LIF table and investment earnings in previous year Newfoundland: plan holder must purchase life annuity by age 80 Lock-in disappears on death, except for federal LIFs 8

9 Maximum withdrawal based on investment earnings of the plan, not age of annuitant Available in Newfoundland only Manitoba: Existing LRIFs must be converted to LIFs by Dec. 31, 2010 Unlocking of up to 50% allowed on transfer Client who purchased new LIF before Jan. 1, 2010 could unlock up to 25% of the amount transferred in within 60 days of transfer An additional 25% of the amount transferred in can be unlocked by Dec. 31, 2010 Client who purchases new LIF after Dec. 31, 2009 can unlock up to 50% of the amount transferred in within 60 days of transfer Holders of old LIFs and LRIFs can unlock up to 50% of the amount transferred in by Dec. 31, 2010 No cap on withdrawals How is it different from RRIF? Fund assets protected from creditors Spouse/partner must provide written consent 9

10 SERPs and RCAs Stock Option Plans Locked-in Retirement Accounts