business owners can get ahead with a no-rrsp strategy

Business owners can get ahead with a no-RRSP strategy

file:///C|/Users/Cropo%20Home/Desktop/Business%20owners%20can%20get%20ahead%20with%20a%20no-RRSP%20strategy.htm[4/2/2012 9:11:47 AM]

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Business owners can get aheadwith a no-RRSP strategy

BY JENNY LEE, VANCOUVER SUN FEBRUARY 15,2012

Business lawyer Carl Jacobson used tocontribute to his registered retirement savingsplan like clockwork after all, it was thecareful, responsible thing to do, wasnt it?

Then one day, a clients offhand commentmade him stop in his tracks. He began torethink the contribution hed been makingfaithfully, every year, and ended up seekingmore tax and investment advice.

These days, Jacobson lets February come andgo with barely a murmur.

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VANCOUVER , BC: FEBRUARY 3, 2012 -- LawyerCarl Jacobson rides to work in Vancouver onMonday, February 3, 2012. ( Glenn Baglo / PNG ) (For Jenny Lee / VANCOUVER SUN ) [PNG MerlinArchive]Photograph by GLENN BAGLO, Vancouver Sun



Heres why:

The conventional wisdom is that RRSPs arethe best way to save for retirement, but formany business owners, that is simply not true,says David Sung, president of Nicola WealthManagement in Vancouver. Small businessowners and incorporated professionals shouldnot make RRSP contributions if they aremaking under $500,000 in after-expensecorporate profits, Sung said.

In fact, its probably best not to take a salary atall.

Instead, pay your small business corporatetaxes, take just enough dividend income to liveon, save and invest within your company with acarefully balanced asset mix to minimizeinvestment taxes, and income split with yourspouse if you have one, Sung said.

The result? Youll pay less tax today, and havemore cash to invest.

The combined federal and provincial tax rateon active business income is just 13.5 per cent,and you wont be paying tax at a high marginalrate to pull a salary. Whats more, no salarymeans no CPP contributions, so youll havemore money to invest.

You can reduce your taxes by anywhere fromtwo to 30 per cent, Sung said. Your businessis a wonderful tax deferral vehicle.

Youll also have more flexibility to manage yourinvestments, and be able to income split moreeffectively both now and in retirement. Freedomfrom RRSP restrictions means you can invest inreal estate and other vehicles. Income splittingthrough dividends is more efficient than payingyour spouse a salary.

When Jacobson was an employee, RRSPcontributions made perfect sense. But after heincorporated, the numbers told a different story.Even though investing within his companymeans possibly paying corporate tax oninvestment income of up to 44.7 per cent, witha careful asset mix, he can reduce that to 10per cent or less, Sung said.

The downside to having saved corporately isyou wont have the perfect tax deferral oninvestment income like the RRSP, Sung said,but the flip side is that during retirement, youwill have to withdraw much more money from



your RRSP than from your company to end upwith the same amount of spending money.

This strategy works as long as youre makingmore than you need to live on, Sung said.Those making more than $500,000 in after-expense corporate profits should take a salaryand make an RRSP contribution to offsethigher corporate taxes with lower personaltaxes. Fine-tuning includes adding a familytrust to split income with more family members,and keeping the investments in a holdingcompany for extra protection if your company issued.

With a family trust, you can pay up to $38,000to individuals and pay virtually no tax, Sungsaid.

Technically, the no-RRSP strategy does work,said Christine McCaffrey, a tax partner withKPMG Enterprise in Vancouver, but it requirespersonal discipline to save, constantknowledgeable monitoring, and additionalaccounting and legal fees.

The risks of going offside are high, she said.I dont have any clients who are pursuing thisapproach.

McCaffrey would rather most clients go theRRSP and CPP route. Investments held in acompany are too easy to draw out and spend.

I view CPP and RRSP as a safety net forretirement years, she said. In the no-RRSPscenario, youve got all your eggs in onebasket in the corporation.

More considerations: In a marital breakup,RRSPs are easily split through a provision inthe Income Tax Act. Splitting assets in acorporation may be more complex. Youll alsoneed to manage some fine details when yousell your company. At sale, more than 90 percent of the fair market value of the assets mustbe used in an active business. And two yearsbefore your sale, more than 50 per cent of thefair market value of the assets have to be usedin an active business.

Although savings can be achieved by the no-RRSP strategy, unwinding the structure is morecomplicated and legal and accounting fees arelikely to be higher, McCaffrey said. Its moreintricate. You have to be on top of a lot morethings and constantly managing and looking to



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the future.

The strategy would likely work well for ownersof mature businesses without debt, for a periodof time, McCaffrey said.

Im comfortable having my family nest egg inmy company because I saw the math and itmade sense, said Jacobson of SynergyBusiness Lawyers in Vancouver. Its justmath, he said, but warned its critical to haveadvisers who understand the intricacies of thetax system.

For me, personally, as long as I know Imgetting a little ahead every year, Im happy, hesaid. They ran me through the detail and Iforget most of it.

This years RRSP contribution deadline is Feb.29.

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