The challenge for many business owners, they either haven’t contributed enough to one’s RRSP or they’ve maxed out your RRSP Contributions for the year. The challenge is RRSP contribution room is derived from one’s T4 income from previous years. If you choose to take money from your business in the form of a dividend, this doesn’t count towards RRSP eligible income. Check out to see whether it makes more sense to take a salary or a dividend,
For those business owners who have maxed out your RRSP contributions you may want to look at another solution. The Personal Pension Plan (PPP), may represent an opportunity to increase your contribution room, have your pension sponsored, guaranteed and funded by your business. Another tremendous benefit for business owners is the ability to creditor protect these assets. Many business owners are unaware, RRSPs in Ontario are not necessarily creditor protected and may be fair game for creditors to go after in a legal suit or bankruptcy proceeding. Also, you have the ability to roll existing RRSPs into your PPP. Any fees, commissions, administrative costs that have been incurred to date in your RRSP can be written off as an expense to your business.
Take Advantage of Past Experience
Even though you may have maxed out RRSPs in the past, doesn’t preclude from writing off additional eligible PPP room garnered from past experience through your company. If you are an incorporated business or an incorporated professional and have taken T4 income in the past, you may be eligible to contribute significantly more into your PPP.
As an example, if you are a 50 year old business owner, who has owned their own business for the past 10 years, you may be eligible to contribute more than $100,000 to your PPP even though the business owner may have maxed out RRSP contributions to date.
Another added benefit of the PPP, it may help a business pass the passive income litmus test and qualifying for a Lifetime Capital Gain Exemption (LCGE). If a business owner wants to sell his/her company and take advantage of the LCGE they must qualify in order to do so. A PPP is a great vehicle to help ensure they pass the passive income requirements. The taxable consequences if one doesn’t qualify can be considerable. Too many business owners believe that by simply selling his/her business that they automatically qualify for the LCGE.
Business Owners Who Have Additional RRSP Contribution Room
Conversely, for every business owner that has maxed out his/her RRSP contribution room, it has been my experience, there are two to three business owners that have tremendous amounts of RRSP contribution room. Having a business sponsored PPP, is a great way to catch up on unused RRSP room, not to mention contribute significantly more than their current RRSP limit allows.
Flexibility of the Personal Pension Plan Affords Reversible Decision Making
Due to the architecture of the PPP, it affords one flexibility to change the contribution format. For very profitable years, one may opt for a Defined Benefit model, whereas in leaner years, a Defined Contribution model may be something that business can afford. This allows the owner to toggle between both formats depending upon what the business can afford or not afford in any given year. You can contribute up to the maximum eligible PPP contribution level or as little as 1% of the owner’s T4 earnings. The key is having the flexibility to pay down corporate profitability and thus reduce corporate taxes paid when profitability is high and minimize the expense to the business when it can’t afford it.
The PPP Makes Sense for Business Owners
Whether a business owner wants to build his/her retirement nest egg, get retained earnings out of one’s business tax efficiently, creditor protect one’s personal assets or leverage a super-charged retirement vehicle, the PPP makes sense for all sorts of reasons. Given the federal Liberals recent attempt to squash small business owners ability to make money, the PPP affords business owners an opportunity to get money out of their business and invest into a well-deserved retirement plan.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolved from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.
Maxed out your RRSP contributions