If you are a Medical or Dental professional in Canada, you can use Individual Pension Plans (IPPs) or Personal Pension Plans (PPPs) to channel pre-tax funds from your professional corporation to a registered pension plan where it can be invested and grow to provide tax efficient income for life after you retire.
Recent changes to passive income rules in the Federal budget have created a punitive tax environment for you, making it much more difficult to plan for your retirement. You may have set up a Medical or Dental Professional Corporation (MPC or DPC) which, until recently, has been an effective vehicle to defer tax and put money away for retirement. Approximately 70% of Physicians and 64% of dentists in Ontario are incorporated. – Charles Shaver, Vancouver Sun.
Under the new rules, larger passive investments held in MPCs and DPCs – anything in excess of $50,000 – will reduce your ability to utilize the Small Business Deduction (SBD) for Canadian Controlled Private Corporations (CCPCs), which will taper to zero as those investments approach $150,000.
So if your strategy has been to retain and invest earnings in your corporation for your retirement, the result of the new rules has been to render your corporation effectively useless for retirement & tax planning purposes.
As a doctor or dentist, you already have enough difficulties planning for retirement:
- You have already assumed huge amounts of debt during your 10 – 15 years of professional training – typically approaching $200,000;
- You had to delay the start of your career until age of 30 or possibly 36 if you specialized;
- You were required to assume even more debt to raise the capital required to start your practice, lease office space, provide your fixtures & equipment and hire support staff; and
- You have no pension, benefits or sick days and no employment insurance.
The new rules have made it harder for corporations to even put away capital to invest in needed expansion, construction of a second location or even equipment needed to improve productivity.
To add insult to injury, Liberal Finance Minister Bill Morneau accused incorporated doctors of being tax cheats. It is no wonder we have seen an increase in talent flight to the U.S. and other jurisdictions, where credentials are transferable.
Fortunately there are planning strategies which you can deploy to reduce your tax burden, and build and preserve your hard-earned wealth for retirement.
Individual Pension Plan & Personal Pension Plan Strategies
Individual Pension Plans (IPPs) & Personal Pension Plans (PPPs) are registered defined benefit pension plans tailored to business owners, such as incorporated medical and dental professionals which allow your MPCs or DPCs to fund a registered DB pension plan for you as well as your spouse, if he/she is employed by the corporation.
The net result is to channel pre-tax funds from your MPC/DPC into a registered vehicle, where they can be invested on a tax-efficient basis to provide a lifetime pension when you retire.
Benefits of IPPs and PPPs
IPPs and PPPs offer similar primary benefits in a number of ways:
- Both utilize pretax dollars to make contributions to the registered DB plan, thereby moving the funds into a tax deferred environment;
- Significant lump-sum past service contributions can be made when first establishing an IPP or PPP;
- The $8,000 former RRSP over contribution is available and immediately deductible;
- Protect your assets from creditors;
- Interest on funds borrowed for contributions, plan expenses and investment management fees are tax deductible when paid directly by the company sponsor;
- Canada Revenue Agency requires a tax-free rollover/transfer from the planmember’s RRSP to offset the contribution generated for past service (Qualifying Transfer);
- IPP contributions may be topped up if investment returns are insufficient;
- Tax-deductible lump sum contributions at the time of your retirement are usually allowed;
- Both strategies work best if you are over 40 years of age and taking T-4 income; and
- Must comply with Revenue Canada’s guidelines and General Anti-Avoidance Rule (GAAR)
Advantages of PPPs
Personal Pension Plans offer a number of further advantages over IPPs in many circumstances, due to their greater flexibility:
- PPPs have a forgivable contribution schedule which can be enabled to provide an “escape hatch” in the event of irregular earnings years;
- Administrative advantages; and
- Transfers of RRSP balances into a PPP are not locked in.
Both Individual and Personal Pension Plans are excellent strategies for many medical/dental professional corporations to deploy to reduce/defer tax in light of adverse changes to passive income rules. A professional advisor can help you determine whether these strategies, in possible combination with others, might be appropriate for you.
After an initial illustration, your advisor can coordinate a team of professionals including tax & legal, accounting, actuarial, insurance, asset management and estate planning, to tailor a solution to fit your needs.
E. & O. E.