The article “Why Business Owners Shouldn’t Bother With An RRSP” was originally published on The Financial Post on February 9, 2016.
Although RRSPs are the most popular choice for Canadians and their retirement savings, they may not be the best choice — especially for business owners. Like many financial decisions, beware the one-size-fits-all advice that may not be right for you after all.
Incorporated business owners have a few more arrows in their quiver than employees because they can control their compensation and where they retain their corporate income. If corporate income is not needed for personal living expenses, for example, it can be retained in a corporation to defer income taxes.
According to Paul McVean, a tax partner at Anklesaria McVean Professional Corporation: “Our calculations and projections often show that the tax benefits of withdrawing dividends from the corporation in retirement result in business owners being able to spend more, have a larger estate or a combination of both. This is because the tax cost of withdrawing dividends (in retirement) could be significantly lower than the tax cost of withdrawing RRSP or RRIF dollars, which would be fully taxable.”
As a result, the default advice to take a salary and make RRSP contributions for a business owner may not be the best advice. Instead, retaining savings in a corporation to invest corporately may provide a higher retirement income.
Furthermore, corporations can be more flexible than RRSPs. In particular, corporate savings:
- Do not have minimum withdrawals like RRSPs
- Can be paid out to other family members to accomplish income splitting, unlike RRSPs (although RRIF withdrawals after the age of 65 can be split with your spouse)
- Can be invested directly in real estate, private companies and other investments not otherwise eligible for RRSPs
- Allow for more sophisticated estate planning strategies
JP Laporte, CEO of INTEGRIS Pension Management says that “the RRSP is ill-suited to business owners who want a true pension plan for themselves — a plan that replicates what teachers and civil servants in Canada have come to depend on for retirement security. For that, they would need to set up a Personal Pension Plan.”
INTEGRIS offers Personal Pension Plans (PPPs) that are similar to the Individual Pension Plans (IPPs) that have been available to incorporated business owners since 1991. The key differences relative to a plain old RRSP are:
- Higher contributions limits ($42,000+ at age 64 versus the $25,370 RRSP maximum for 2016)
- The ability to make additional tax deductible contributions if investment returns are less than 7.5 per cent annually
- Full creditor protection only available to RRSPs invested in segregated funds offered by insurance companies
- Tax deductibility of investment fees and interest on money borrowed to make contributions, not available for RRSPs
The point is that the RRSP is not the be all and end all for retirement savings. This is now the case for all Canadians, thanks to the 2009 introduction of the tax-free savings account (TFSA). But business owners have even more choices available to them, with options like corporate investing and Personal Pension Plans and Individual Pension Plans.
If you are a business owner, it may be advisable to avoid RRSPs in lieu of alternatives not otherwise available to employees. Despite the many great features of RRSPs, like all financial choices, sometimes there are better opportunities available for you.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.
