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The Truths and Myths of Retirement Compensation Arrangements and Individual Pension Plans Presentation to ESTATE PLANNING COUNCIL OF ABBOTSFORD October 19, 2005 Retirement Compensation Arrangement (RCA) Gordon B. Lang & Associates Inc. Actuaries & Consultants FOUNDED JUNE 1995 PRESIDENT & C.E.O. GORDON B. LANG FELLOW OF THE FACULTY OF ACTUARIES 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) Gordon B. Lang & Associates Inc. Gordon B. Lang & Associates Inc. Actuaries & Consultants OFFICES VANCOUVER,PRINCE GEORGE, CALGARY, EDMONTON, LETHBRIDGE, TORONTO, OTTAWA, MONTREAL AND HALIFAX EMPLOYEES 26 Gordon B. Lang & Associates Inc. Gordon B. Lang & Associates Inc. Actuaries & Consultants SPECIALIZATION PRODUCTS DEVELOPED FOR: PROFESSIONALS WITH PROFESSIONAL CORPORATIONS OWNERS OF PRIVATE COMPANIES SENIOR EXECUTIVES OF LARGER PRIVATE & PUBLIC COMPANIES Gordon B. Lang & Associates Inc. Gordon B. Lang & Associates Inc. Actuaries & Consultants SPECIALITY PRODUCTS -EMPLOYEE PROFIT SHARING PLAN (EPSP) -HEALTH & WELFARE TRUST (HAWT) -INDIVIDUAL PENSION PLAN (IPP) -RETIREMENT COMPENSATION ARRANGEMENT (RCA) Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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) Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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. Gordon B. Lang & Associates Inc. 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) Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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 $205,700 2007 213,400 2008 221,400 2009 229,700 Total over 5 years $3,998,100 Gordon B. Lang & Associates Inc. RCA – Closely Held Companies Objectives: Defer taxes into lower rates Protect Assets from Creditors through trusteed arrangements Future Company growth funded through leveraging Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. RCA – Establishment Board Resolutions Trust Deed & Plan Text Trustees 3 individuals (1 separate from Employer) Trust Company CRA Registration Gordon B. Lang & Associates Inc. RCA – Establishment RCA Account Number Annual Trustee Return Part XI.3 Return Prepared by Accountant or GBL Inc. T737 Return For Contributions Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. U.S./Canada Tax Treaty Implications Employee Contributions In U.S. - are included in income of Employee In Canada - are deductible by Employee Gordon B. Lang & Associates Inc. U.S./Canada Tax Treaty Implications RCA Investment Income U.S. – Unless IRS forms completed, is included in income of Employee Canada - no Employee income inclusion Gordon B. Lang & Associates Inc. U.S./Canada Tax Treaty Implications 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 Gordon B. Lang & Associates Inc. U.S./Canada Tax Treaty Implications Net Impact on RCA Canadian Income Tax reduced when Resident of Canada Reduced Tax Payable on RCA Proceeds if U.S. Resident Gordon B. Lang & Associates Inc. 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. Gordon B. Lang & Associates Inc. The Leveraged RCA Example XYZ Corporation TAX SAVINGS ON RCA CONTRIBUTION OF (35.6%) $391,600 less RCA CONTRIBUTION FROM P.C. (100,000) less Expenses (40,000) NET ADDITIONAL AVAILABLE FUNDS FOR INVESTMENT $251,600 Gordon B. Lang & Associates Inc. RCA Lenders Bank of Montreal Royal Bank TD Bank CIBC National Bank HSBC Manulife Bank AIG Finance Gordon B. Lang & Associates Inc. 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. Gordon B. Lang & Associates Inc. RCA – Summary Tax Deferral Vehicle Greater security through Trusteed Arrangement For Owners, Key Employees, Executives and Professionals Gordon B. Lang & Associates Inc. Retirement Compensation Arrangement (RCA) Individual Pension Plan Gordon B. Lang & Associates Inc. Outline Individual Pension Plan (IPP) Retirement Compensation Arrangement (RCA) Questions Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. IPP Contributions Contributions by employer (and employee) tax deductible Benefits taxed when received Investment income tax exempt Gordon B. Lang & Associates Inc. 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 Current Service 1.1.91** 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 March 2005 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 Gordon B. Lang & Associates Inc. IPP Advantages Greater tax deductible contributions Creditor protection Expenses tax deductible Plan surplus belongs to Participants Investment returns balanced by contributions Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. 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 Gordon B. Lang & Associates Inc. Individual Pension Plan (IPP) Gordon B. Lang & Associates Inc.
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