Essential Insurance for Business Owners in Canada
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Employer/Employee Group RRSP Pension Programs
Most Canadian companies recognize the importance of helping employees properly save for retirement. These companies set up monthly savings plans for employees and most companies even contribute a bit of money towards the savings plan too.
A good pension plan will help to retain valued employees while also being a fully tax deductible valuable perk for all employees.
Sadly, many group RRSP pension programs are flawed. Here are some of the common problems we see in our competitors plans:
- Employees get no individual consultations to help them understand the plan.
- Website information is overly pushed on employees and no one likes a call center to talk to.
- Investment products in the plan are either less than 20 choices or more than 100 selections – both are problematic and can leave employees with poor choice or overwhelming choice.
- If your employees are confused or poorly treated in your existing group RRSP plan, do you consider this a successful program?
We integrate Canada’s leading money managers within a professional consulting approach to custom design a group RRSP pension plan appropriate for your employee base. We minimize all your fees (what fees do you pay today?). We meet with your employees to conduct proper retirement planning every year. No call centers. No websites. Upgrade to a common sense plan and make them understandable to employees.
We recognize the fiduciary and legal liability an employer faces, and the hit to company moral, if a retired employee sues you because of bad retirement planning. We will not let this be you.
Shareholder Buyout Insurance on Death
A business could be devastated if a shareholder dies without proper estate planning in place. A thorough written shareholder’s agreement is essential. Within this agreement, it should plan for the death or disability of a shareholder.
The death of a shareholder can have a negative impact from two sides:
- Company – a spouse or other heirs could inherit the shares, and can take control of the business. At a minimum, they will be in a position to wreak havoc on your operations.
- Deceased shareholder’s estate – on the shareholder’s death, a successful business may face a million dollar tax liability due to Revenue Canada.
The solution for both is corporate owned life insurance.
Properly structured corporate owned life insurance will pay out tax free proceeds on a shareholder’s death. This money can be used by the remaining shareholders to redeem the deceased’s shares or buy the shares from the estate. Similarly, the estate can use the cash received to pay their tax bill.
Business Overhead Coverage Insurance
John has his own consulting business with five employees. Last Saturday he was bicycling with his son when he got hit by a car. The doctor says he will be fine but he is expecting a three-week hospital stay.
John could have used business overhead insurance – a form of insurance that is very popular with small business and self employed professionals. This type of insurance will pay John’s utility bills, staff salaries, and other operating costs while he is laid up in the hospital and unable to generate revenue.
A business owner with a lot of cash held inside the business is exposed to losing this money from lawsuits against the business, creditors, bankruptcy, divorce or other risks to wealth.
If the cash is invested in a GIC, a bond, a mutual fund, a stock or other typical investment vehicle, the money will be lost to the creditors or a lawsuit.
However, if the bond is invested in a segregated fund (seg fund) the money is protected against threats against your wealth.
A seg fund is an insurance product that looks and smells like a regular mutual fund, but could offer creditor protection similar to that associated with life insurance policies.
Insurance Tax Shelter for Corporations
A big problem for business owners is paying high rate income tax on investment income inside the business.
Tax rates can exceed 46% on investment income earned on surplus money left inside your business. This can even be a higher tax rate compared to holding the investments personally (meaning a corporation may cause you more tax). Life insurance can help.
One of the best ways to tax shelter money inside a company is to purchase a corporate owned life insurance policy and contribute your surplus savings into the policy. This money grows tax-sheltered inside the policy every year and on death, pays out tax free to the corporation. This will result in a superior tax result compared to holding cash inside the company.
Top 5 Tax Planning Strategies for Business Owners
1. Used the same accountant for five years or more? Get a second opinion on all your personal tax planning, corporate tax planning, estate tax planning, family income splitting from another Chartered Accountant specialized in advanced tax planning. Examine for new and missed tax write offs and tax shelters.
2. Recognize the difference between tax planning, and tax return preparation. If all you are getting each year is someone to prepare your tax return, sto! Seek out a tax-planning expert to provide you with a planning review to examine for tax strategies to save your taxes. Tax planning is much more valuable than simple tax return preparation, and is the key to tax savings and tax planning ideas. You need planning not just preparation.
3. Take advantage of your $500,000 tax-free exemption as soon as your business is worth $500,000. Then take advantage of another $500,000 tax-free exemption for your spouse when your business is worth $1 million and $500,000 tax-free exemption for your child when your business is worth $1.5 million.
4. Design a testamentary trust into your Will, your spouse’s Will and even your parents’ Wills. The trust could save you $50,000 in income tax each year after death, while protecting your assets against spousal remarriage, divorce or lawsuits against your family.
5. Rethink the need for a holding company. If you already have one, tax rates have changed in Ontario and your holding company may be costing your more than it is saving you now. If you don’t have a holding company, consider their many tax and legal benefits: no probate fees on death, avoid OAS claw back on retirement income, avoid U.S. estate tax, lower tax rates on active business income, creditor protection against lawsuits and more.
Individual Pension Plans for Key Shareholders
Fifty years ago many Canadians had defined benefit pension plans to take care of them in retirement. Sadly today most people do not! Today only government employees and staff of some large companies still get the juicy pensions from a defined benefit plan.
However, a business owner can still share in this sweet benefit. A business owner can set up an individual pension plan (IPP) for key employees or for the owner alone within an incorporated business in Canada. This pension plan is the same kind that many government employees have, and the business owner can tax shelter far more money inside this IPP than can ever be contributed to an RRSP.
An IPP also offers powerful legal protection of assets and saves tax if the plan is transitioned to children on the death of the elder shareholder.