1. Retirement and Tax Planning for the Self-Employed

2. Agenda  Tax Planning Strategies  Retirement Planning Strategies  RRSP  Corporate Sponsored Plan  Capital Dividend Account  Capital Class  Estate Planning Strategies

3. Saving needs a strategy  Budgeting is very important for self-employed  Business or professional income have reduced withholdings  Fluctuations in income  Tax savings and Income-splitting opportunities

4. Tax savings  Salary versus dividend income  Low-bracket family members as shareholders  Low-value corporation  Adult children  Small business corporation exemption

5. Small Business Corporation (SBC) Tax advantages  $500,000 capital gains exemption (LCGE)  Exemption from corporate attribution rule  10 year reserves on transfer of SBC to children  Allowable Business Investment Loss (ABIL)

6. Theory of Integration – Business Run as a Proprietorship Business income$100 Less personal tax @ 50%$ 50 Cash retained$ 50

7. Active Business Income Earned Through a CCPC Corporate income$100 Less corporate tax$ 20 Retained earnings$ 80 Dividend paid to S/H$ 80 Personal tax$ 30 Cash retained$ 50

8. Why Incorporate 1.Tax deferral 2.Flexibility as to remuneration  Timing  Nature

9. Incorporation…continued 3. Income splitting  Salary  Dividends  Attribution 4. Pay for items with after-tax corporate dollars:  Reducing debt  Insurance premiums

10. Incorporation….continued 5.Estate freeze  Future growth transferred to others 6. Capital gains exemption

11. Tax Deferral – Wealth Accumulation Example – John leaves $100,000 income in corporation, takes out $250,000.  Defer sending $25,000 every year to the CRA  Invest that money for 25 years with a 5% return  Total amount after 25 years is $1,193,177

12. Corporate Planning Strategies  Tax deferral  Dividend sprinkling  Bonus down to small business deduction  Shareholder loans to children  Salaries to family members  Multiplying the capital gains exemption

13. Asset Protection  Holding company  Spin-outs  Subsidiary company

14. Estate Freeze  Cap the amount of wealth accumulation  Future growth transferred to others  Crystallize capital gains exemption

15. Estate Freeze – Crucial Questions  When to freeze – will owner have enough value to live on in the future?  How do you protect children’s shares from matrimonial claims?

16. What If I Am Already Incorporated?  Family members can buy existing shares from you  Taxable capital gain  File articles of amendment  Authorize new class of common shares for future appreciation

17. Disadvantages of Incorporation 1.Incorporation costs 2.Taxation of investment income 3. Ontario Health Tax

18. Retirement Planning  RRSP  Corporate Sponsored Plan  Capital Dividend Account  Capital Class

19. Corporate Investment Plan  Discuss with financial advisor  Integrate your corporate investment plan into an overall investment plan  Invest in a tax-preferred manner (Corporate Class mutual funds)  Retained earnings  Move to holding company?

20. Individual Pension Plans  Who?  Key people aged 40+  Owner or key executive  T4 income of at least $100,000

21. Individual Pension Plans  What is it?  Registered Pension Plan  Subject to same limits as Defined Benefit Registered Pension Plans  Designed to maximize contributions permitted by CRA  Why?  RRSP rules have not kept pace with society  Can be inadequate for high income earners

22. 2006 contributions – IPP vs RRSP Age at Plan Entry in 2005 IPP StrategyRRSP StrategyIPP Advantage 40$564,900$18,000$546,900 45$320,600$18,000$302,600 50$352,200$18,000$334,200 55$386,900$18,000$368,900 60$425,000$18,000$407,000 65$473,400$18,000$455,400 Note: IPPs may be implemented for ages up to 69

23. IPP contributions (next 2 years) Age in 2006 Contribution Year Age 40 Age 45 Age 50 Age 55 Age 60 Age 62 Age 65 2006 $18,900$20,700$22,800$25,000$27,500$28,500$30,600 2007 $20,300$22,300$24,500$26,900$29,600$30,700$34,700 2008 $21,800$24,000$26,300$28,900$31,800$33,000$39,100 Note: IPPs may be implemented for ages up to 69

24. Case Study  Bill is a 52 year-old entrepreneur  Business has been incorporated for 15 years  Benefits backdated to 1991  Total first year contribution:  RRSP rollover (assumed) of $231,600  Past Service Additional Contributions of $110,400  Current Service Contribution of $23,700 Source: GBL Inc.

25. Case Study - continued  Plan Assets at Age 69  Plan Service + RRSP rollover of $342,000  Total current service to 69 of $888,000  7.5% per annum compounded to 69  TOTAL PLAN ASSETS: $2,816,637  Compare to RRSP only strategy:  Existing RRSP $231,600  2006 contribution to RRSP of $18,000  7.5% compounded to age 69  TOTAL PLAN ASSETS: $1,825,083

26. Other Considerations with IPPs  Creditor-protection  Indexation  Market risk  Estate planning

27. Mackenzie Capital Class Funds  Reduces difference between after-tax and pre-tax compounding  No gain on switches  Over 46 funds to select from

28. Tax-Efficient Investing and Compounding Returns Tax-Efficient Investing  Over time the after-tax differences between the different types of returns are more pronounced  Unrealized capital gains attract no taxation until the investment is sold – this type of investment provides the highest after-tax cash flow Years Accrued capital gains: $685,453 Capital gains: $531,693 Dividends: $447,815 Interest income: $324,657 After-Tax Value of $100,000 invested at a 9% compound return

29. Capital Dividend Account  Private corporations  50% of capital gain is untaxed  Accumulates in CDA  Amounts in the capital dividend account may be paid out entirely tax-free to shareholders  Maximizes retirement income

30. Estate Planning  Succession Planning  Timing  “Fair versus Equal”  Will Planning  Probate consideration  Insurance

31. Next Steps  Analyze your own situation  Talk to your financial advisor  Introduction to specialists