Gordon B Lang - The Truths and Myths of Retirement Compensation Arrangements and Individual Pension...

Presentation to

ESTATE PLANNING COUNCIL OF ABBOTSFORD

October 19, 2005

The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans

Retirement Compensation

Arrangement

(RCA)

Gordon B. Lang & Associates Inc.

Gordon B. Lang & Associates Inc. Actuaries & Consultants

FOUNDED JUNE 1995

PRESIDENT & C.E.O. GORDON B. LANG

FELLOW OF THE FACULTY OFACTUARIES IN SCOTLAND (1967)FELLOW OF THE CANADIAN

INSTITUTE OF ACTUARIES (1967)ASSOCIATE OF THE SOCIETY OF

ACTUARIES (1976)FELLOW OF THE CONFERENCE OF CONSULTING ACTUARIES (2005)



OFFICES VANCOUVER,PRINCE GEORGE, CALGARY, EDMONTON, LETHBRIDGE, TORONTO, OTTAWA, MONTREAL AND HALIFAX

EMPLOYEES26



SPECIALIZATION PRODUCTS DEVELOPED FOR:

PROFESSIONALS WITH PROFESSIONAL CORPORATIONS

OWNERS OF PRIVATE COMPANIES

SENIOR EXECUTIVES OF LARGER PRIVATE & PUBLIC COMPANIES



SPECIALITY PRODUCTS

-EMPLOYEE PROFIT SHARING PLAN (EPSP)-HEALTH & WELFARE TRUST (HAWT)-INDIVIDUAL PENSION PLAN (IPP)-RETIREMENT COMPENSATION ARRANGEMENT

(RCA)


RCA Overview

Tax deferment vehicle Defined in the Income Tax Act Provides asset protection For Owners and their Families, Key

Employees, Executives and Professionals with PC’s

Most suitable for high income earners


RCA - Overview

Defined in Section 248(1) of Income Tax Act (Canada)

Employer & Employee contributions tax deductible

Benefits taxable when received 50% of contribution remitted to CRA

Refundable Tax Account (RTA)


RCA - Overview

Each Year 50% of Net Amount of: Taxable investment income Less expenses Less benefit payments

Remitted or Refunded Excludes Unrealized Capital Gains Excludes Investment Income from

Qualified Life Insurance


RCA - Details Contributions Employer Employee Contributions

- Required by the Company- Not Greater then Employer contribution for

calendar year- Source contributions not subject to withholdings- May be made by cheque to Employer- May be made from Bonus -

carryback deductions to Employer.- Included in calculation of Eligible Earnings Base.


RCA - Details

Advantage of Holding Insurance Policy Assets

- Split dollar Life Insurance Policy Premiums &

Benefits- Company owns Pure Life Insurance- Trust owns Savings Portion - On death of Insured No RTA transfer of proceeds- Unbalanced RCA available to Survivors- New Policy then purchased on Surviving

Member(s)


RCA - Details

Add Spouse and Adult Children

- Increases Deductibility- Permits Income Splitting- No requirement for owner to take benefits- Spouse would take over benefit rights

on death- Benefits may be passed down to Children (even Grandchildren)- No 21 year Trust Rule


RCA Allowable Contributions

Contributions producing Annual Retirement Income up to 2% of Best Three Years Average Earnings per year of Eligible Service

Actuarial Certificate required for CRA reasonability test


RCA Allowable Contributions Company Owner aged 60 15 years since Company Established Best 3 years Average Earnings $500,000 Retirement Age 65 Maximum 2005 RCA Contribution $3,117,900 Additional Deductibility

2006 $205,7002007 213,4002008 221,4002009 229,700

Total over 5 years $3,998,100


RCA – Closely Held Companies

Objectives: Defer taxes into lower rates Protect Assets from Creditors through

trusteed arrangements Future Company growth funded

through leveraging


RCA - Closely Held Companies

For Owners, Professionals & Key Employees

Employer sets Contributions Suitable Investments:

Universal Life Insurance Policies ETF’s or Indexed Funds Equity Funds

Canadian & Foreign Blue Chip Stocks Buy & Hold Management Style – Low or No

distribution


RCA – Establishment

Board Resolutions Trust Deed & Plan Text Trustees

3 individuals (1 separate from Employer)

Trust Company CRA Registration


RCA – Establishment

RCA Account Number Annual Trustee Return

Part XI.3 Return Prepared by Accountant or GBL Inc.

T737 Return For Contributions


RCA - Tax Deferment into Lower Rates

Beneficiary Can: Move to lower-taxed province Defer income when tax rates are declining Leave Canada -benefits taxed pursuant to

Tax Treaty USA – 15% Installment Payments, 25% Lump Sum

Canadian Withholding credited against U.S. Federal Tax.U.S. Taxes at Marginal Tax Rates

Ireland – 15% for installment payments Australia and New Zealand – 15% for both lump

sums and installment payments Most others Treaties – 15% on installment

payments and 25% on lump sums


U.S./Canada Tax Treaty Implications

Tax Treatment

Employer Contributions In U.S. -are included in income of

Employee and are deductible to Company

In Canada - there is no employee income inclusion



Employee Contributions In U.S. - are included in income of Employee In Canada - are deductible by Employee



RCA Investment Income U.S. – Unless IRS forms completed, is

included in income of Employee Canada - no Employee income inclusion



Taxation of Benefits if Employee U.S. Resident no longer subject to Canadian Tax In U.S. - no tax on benefits. Canadian

Withholding Tax reduces U.S. Federal Tax In Canada - 15% Withholding Tax on

installment payments, 25% on lump sum payments



Net Impact on RCA

Canadian Income Tax reduced when Resident of Canada

Reduced Tax Payable on RCA Proceeds if U.S. Resident


The Leveraged RCA – Example

XYZ Corporation establishes an RCA with a first contribution of $ 1.1 million.

$550,000 invested by Trustees $550,000 in Refundable Tax account

(RTA) Financial Institution lends $1,000,000 to

Investco. XYZ Corporation takes out insurance on Mr. Smith for amount of the loan.


The Leveraged RCA ExampleXYZ Corporation

TAX SAVINGS ON RCA CONTRIBUTION OF (35.6%) $391,600less RCA CONTRIBUTION FROMP.C. (100,000) less Expenses (40,000) NET ADDITIONAL AVAILABLE FUNDS FOR INVESTMENT $251,600


RCA Lenders

Bank of Montreal Royal Bank TD Bank CIBC National Bank HSBC Manulife Bank AIG Finance


Leveraged RCA

GBL & Associates Inc. has established strategic relationships with certain law firms to provide comprehensive actuarial and legal documentation to establish this Leveraged RCA structure.


RCA – Summary

Tax Deferral Vehicle Greater security through Trusteed

Arrangement For Owners, Key Employees,

Executives and Professionals

Retirement Compensation

Arrangement

(RCA)

Individual Pension Plan



Outline

Individual Pension Plan (IPP) Retirement Compensation

Arrangement (RCA) Questions


IPP Features

Registered Pension Plan Limited to Participant, Spouse and

adult children Same contribution limits as Defined

Benefit Registered Pension Plans Designed to maximize contributions

permitted by CRA


IPP Contributions

Contributions by employer (and employee) tax deductible

Benefits taxed when received Investment income tax exempt

March 2005

IPP Maximum Allowable Contributions

Post February 2005 Federal Budget

Amounts certified by actuary to fund defined benefits*Samples of maximum year 2005 tax deductibility:

Age in 2005 Past Service from 1.1.91**

Current Service

35 $20,700 $16,300

40 $42,300 $17,900

45 $66,100 $19,700

50 $92,200 $21,600

55 $120,900 $23,700

60 $152,400 $26,100

65 $192,400 $29,000

* Based on Maximum Earnings updated to 2006 of $100,000 per annum** Subject to RRSP transfer of $199,200


IPP – Closely Held Companies

Greater tax deductible contributions than RRSP’s

More funding for retirement Creditor protection Multiple plans for individuals with T4

income from several unrelated sources Investments fairly similar to those for

RRSP’s


IPP Advantages

Greater tax deductible contributions Creditor protection Expenses tax deductible Plan surplus belongs to Participants Investment returns balanced by

contributions


IPP Advantages

No need to wind up plan on retirement Spouse and adult children may be

Participants Additional lump sum contributions

available immediately before retirement CPP/OAS Bridging benefit to age 65 Unreduced pension @ 60 with 3%/yr

reduction to age 50 Full CPI indexing


IPP – Requirements

Trust Deed and Plan Text Trustees

3 individuals (1 separate from Company which must be GBL and Associates)

Actuarial Valuation Report Directors’ Resolutions

Establishing Plan Appointing Investment Manager


IPP Requirements

Investment Agreement Investment Objectives Document Registration with Province & CRA Connected Persons Information

Return Locking-in Agreement for RRSP

Qualifying Transfer Past Service Pension Adjustment

Certification


Individual Pension Plan (IPP)

Gordon B Lang - The Truths and Myths of Retirement Compensation Arrangements and Individual Pension...

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