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May 28, 2021

Tax Planning

Maximizing wealth for business owners and professionals

Canada is home to more than one million small and medium-sized businesses*. These businesses are of vital importance to our economy, to our communities and to the people who own them.

At Cumberland**, we are often asked to help business owners and successful professionals plan for retirement. When this happens, we find it is often worthwhile to pair our wealth management expertise with the insight of dedicated tax planners.

Recently, our clients were treated to a presentation by Peter Routly, CPA, CA, TEP and Jeff Noble, DMC, FEA from accounting firm BDO Canada, where they specialize in helping high net worth individuals and families maximize their wealth through strategic tax planning.

Among the many insights they shared were three potential real life stories involving scenarios that you may find relevant and relatable.

Mary the law firm partner

Mary earns about $500,000 per year, which would place her well into the top tax bracket. To help manage this, she has established a professional corporation which allows her to lower her tax rate.

Since she does not have a pension plan and will not be able to sell her practice to fund her retirement, she needs to find a tax-efficient way to maximize her savings. One potential strategy is to create an Individual Pension Plan or IPP, which can be likened to a supercharged RRSP. An IPP would allow Mary to make significantly higher tax-deductible contributions than a regular RRSP, and essentially create her own pension plan.

She is also looking at establishing a discretionary family trust, funded through a loan, to hold some of her and her husband’s investments. This will effectively allow them to cover their university-aged daughter’s living expenses on a tax-free basis.

Bob the business owner

Bob owns a successful manufacturing business that generates about $1 million of annual net income after paying himself a salary of $200,000. As he approaches retirement, he has many tax planning options to consider, including the implications of selling the business or transferring ownership to his son.

He is also exploring the option of setting up a Retirement Compensation Agreement or RCA. An RCA would permit his company to make tax-deductible contributions to a fund from which Bob will make withdrawals once he retires.

At that time, if he decides to spend significant time at his property in a low-tax jurisdiction in the Caribbean, Bob may be able to keep his Canadian home and citizenship but draw his retirement income at a significantly lower tax rate.

Chris the startup founder

Chris and his two co-founders are about to sell their tech startup to a venture capital firm for $30 million. With his $10 million share, he is looking at two tax planning strategies.

The first is to create a discretionary family trust, funded through a loan, that will allow him to split his investment income with his wife and three children. Since his family members have no other income, they can potentially draw household income of more than $150,000 per year on a tax-fee basis.

The second is to place $1 million in a life insurance policy with an investment component that can grow significantly on a tax-free basis over the next several decades, and ultimately leave his children with a significant tax-free inheritance.

These are just three possible life stories, and there are nearly limitless variations based on your personal goals, business situation, family status, and how aggressively you wish to pursue your tax strategy.

One thing for sure is that, as a client of Cumberland**, you can look forward to expert retirement planning and proven wealth management combined with the integration of advice from some of the country’s very best tax planners.

*Source: Government of Canada: https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03126.html
**Refers to Cumberland Private Wealth Management Inc.