How Can You Guarantee Your Key Employees Don’t Leave?

Key Employees Don’t Leave

There are few guarantees in business or in life.  In my discussions with business owners, one of their big concerns is “how do you keep your talent from leaving?”  Although you can never actually prevent someone from leaving, you can put certain safeguards in place that guarantee that you can get compensated if a key person leaves unexpectedly or before a mutually agreed upon timeframe.

 

So, what can you do to ensure your key people don’t leave and how is this enforceable?

 

There’s a registered vehicle under the Income Tax Act called a Retirement Compensation Arrangement (RCA) which can be a contract between an employer and a key employee which can allow top deductible contributions on behalf of a key employee for purposes of retirement.

 

This is how it works. The employer and employee draft a contract with mutually agreed upon terms.  It can stipulate the annual contribution to the RCA made on behalf of the employee by the company.  It can also identify how long the employee needs to remain with the contributing company.  This could be five, ten years or any stipulated time frame.  If the employee leaves before the terms of the RCA are fulfilled, the employer has the right to claw back any contributed funds made on behalf of the employee.

 

An example of this might be the company agrees to contribute $25,000/ year into an employee’s RCA with the stipulation that the employee stays for 10 years.  The money is contributed by the company and 50% of the money is placed in an RCA Trust. The other 50% contribution is held in a Refundable Tax Account (RTA) and held with the Canada Revenue Agency.  If the employee leaves in year eight, the employee forfeits the RCA contribution and the company has the right to dissolve the RCA contract and reclaim the $200,000 that it’s contributed to date!  It doesn’t guarantee the employee won’t leave but it can certainly act as a huge motivator to stay.

 

Obviously, there are tremendous advantages to both the employee and the employer.

  • The terms of the contract are flexible and need to be agreed upon by both parties.
  • The funds are not locked in and therefore there’s flexibility to both parties.
  • The funds within the RCA are creditor protected which means no creditor can go after either party.
  • The RCA is exempt from payroll taxes which is not the case in the event of a bonus being paid out instead.
  • It allows the employee to receive monies that are not subjected to income tax and thus helps to lower the employee’s marginal tax rate
  • Taxation only occurs at time of withdrawal by the employee
  • Unlike CPP, RRSPs or Pension funds, the employee doesn’t need to start making withdrawals at any point in time and can earmark the RCA to beneficiaries if they choose
  • Employees are not restricted by how much or how often they can withdrawal the RCA. They can take it out in as small or as large an amount as they choose.

 

An RCA can be used to retain key employees, but it can also be used in the following scenarios

  • A business owner can use an RCA to get funds out of his/her business whether to supplement a retirement fund or cleanse their company of any passive income that may exist in order to sell their business and qualify for the Lifetime Capital Gains Exemption (which for 2019 is $866,912)
  • It can help to facilitate the sale of a business, to either retain top talent or for the business owner to get money out from the sale of the business in a tax-preferred manner
  • Can assist with the intergenerational transition of a family business

If holding onto your top talent is a priority within your business, you may want to explore how a Retirement Compensation Arrangement can benefit your business and your key employees.

 

Chris Coulter is the Founder and President of The Finish Line Group.  Chris’ purpose in life is to convey the lessons learned from his past experiences so that others will thrive in their lives and be able to minimize the impact of their setbacks.

 In business, Chris works with business owners to protect their wealth, reduce corporate and personal taxes, create viable succession strategies and deploy tactics for key employee retention. Chris uses his experience running a successful business for 20 years, only to lose it all after the financial crisis of 2008 to educate business owners on how to protect their assets and their employees.

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