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Preventing Retirement Income Decay Like You Prevent Tooth Decay: The Personal Pension Plan

March 1, 2019
by Jean-Pierre A. Laporte, BA, MA, JD; Yaron Orgil, CIMA®, FCSI®


The business community, including dental professionals and other incorporated professionals were shocked by the tax measures introduced on July 18, 2017 by the Federal Government. The package of reforms aimed at closing perceived loopholes relating to Canadian Controlled Private Corporations (CCPCs) shocked the business community and led to a relatively successful lobbying campaign to dilute the impact of these “Morneau Tax Measures” as they became known within tax policy circles.

Two measures did however survive: the tax on split income (“TOSI”) and the tax on passive income (“TOPI”). Combined, they are designed to dissuade professionals from using their professional corporation, such as dental professional corporations (“DPC”), as de facto retirement savings account. TOSI can make paying income (dividends or salary) to any family members costlier from a tax point of view. TOPI makes keeping passive investments inside of the DPC or any associated companies (read, Holdcos) more expensive. This is due to the fact that for every 1$ of passive income generated above $50,000 annually, 5$ of the $500,000 small business allowance is clawed back, exposing income earned by the PC to a higher corporate tax rate.

Faced with this new fiscal reality dental professionals, their financial advisors and accountants had to find other ways to optimize their tax planning. One strategy that has existed for approximately 5 years is a Personal Pension Plan or PPP. These registered pension plans are designed for the business owner, the dental professional (not his or her staff) and is funded by the DPC. Contributions to the PPPs are corporate expenses and therefore fully tax deductible, thereby reducing the amount of passive assets retained within the DPC.

Highest Tax Deductions under tax laws

PPPs benefit from multiple tax deductions that are not available to those who save money within their DPCs or even those who prefer RRSPs: (i) past service can be purchased [typical deduction – $100,000], (ii) special payments when assets return less than 7.5% annually, (iii) interest paid, (iv) investment management fees, (v) terminal funding and the ability to claim the benefit of pension income splitting as early as age 50 (plus the $4,000 per couple annual pension amount deduction).

The PPP’s superior contribution limits do add up over time. Let’s look at the following case study; a 50-year-old dentist who previously never received a salary from their DPC. Starting in 2019, they choose to take a salary of $140,000 annually (with an annual 5.5% increase). This salary will continue until age 65. Assuming both the PPP and the RRSP earn 7.5% annually (PPP’s require a prescribed rate of return of 7.5% annually). That dentist can expect to save an additional $488,443 by age 70 over the maximum that could be accumulated in an RRSP.

Perhaps more interestingly, is that the level of corporate tax deductions permitted to the DPC will also translate into less corporate taxes payable along the way. The PPP is more flexible than Individual Pension Plans or IPPs, it also gives DPCs even more deductions, making it the most tax efficient retirement savings solution under the Income Tax Act (Canada).

Ability to mimic the sophisticated investments of large pension funds

The ability to defer taxes in excess of what is achievable using RRSPs is one important benefit of the PPP. The other, and often unknown characteristic is the PPP’s ability to invest in highly sophisticated asset classes generally not eligible in a traditional RRSP. Some examples of these opportunities include but are not limited to private equity, real estate, mortgages, and other non-correlated investment alternatives. Many top pension and endowment funds including the Yale Foundation, Canada Pension Plan Investment Board (CPPIB), Ontario Teacher Pension Plan, and many others employ a diversified portfolio of non-correlated assets classes to generate a more efficient risk-adjusted return.

Historically, pension funds and other institutional investors relied on a 60% equity, 40% fixed income investment portfolio. This was considered both conservative and diversified. However, over the last number of years these sophisticated institutions have been increasing their allocations to alternative asset classes. As you can see in the chart below, the CPPIB has increased their allocation in Private Market Investing Programs by a significant amount, from 4.3% in 2005 to 50% in 2018.

This trend of allocating a portion of the investment portfolio to alternative assets classes has not filtered down to non-institutional investors in a significant manner. As pension funds see the value of including these asset classes in their portfolios, it is prudent that dental professionals take advantage of the PPP’s structure to diversify their investments to achieve an enhanced tax-optimized risk-adjusted portfolio.

In an era where tax-optimized risk-adjusted returns are more important than ever and are becoming more and more difficult, dental professionals and their advisors must look for fiscally efficient solutions such as PPPs, both to minimize the tax drag facing DPCs, and to ensure the contributions are being used effectively to grow and maintain the retirement pool.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.


About the Authors
Jean-Pierre A. Laporte, BA, MA, JD, Chief Executive Officer, INTEGRIS Pension Management Corp. Jean-Pierre is by training a pension lawyer specializing in employee benefits and retirement plans. He has often appeared as an expert witness before Standing Committees of the House of Commons.

 

Yaron Orgil, CIMA®, FCSI®, Director, Wealth Management, Wealth Advisor, The Orgil Wealth Management Group, Richardson GMP Ltd. Yaron and his team work with professionals constructing and managing diversified, tax-optimized investment portfolios helping their clients achieve their long-term financial objectives.


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2 Comments » for Preventing Retirement Income Decay Like You Prevent Tooth Decay: The Personal Pension Plan
  1. Andrew Rowe says:

    What are the associated costs with the PPP?

  2. Depends on platform used.
    Costs vary from $1,000 to $2,800 annually.

    However, the various additional tax refunds and savings that the PPP offers pay for the annual fees many times over.

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