Nineteen years ago we enjoyed and warm friendship with our next-door neighbours, he a dentist and she a dental hygienist. Our families had children the same age, we went to the same church, our wives were good friends, and all got along very well. The middle class neighbourhood we enjoyed was nothing posh. I was not far in to my banking career, and my friend had only recently graduated from dental school. The only slight sign of luxury my friend displayed was his determination to take Friday afternoons off each and every week.
After couple of years my family got transferred to another area -- right around the time he and his wife were getting serious about building a larger home on a small acreage on the edge of town.
After their new home had been completed, they invited us to come and stay with them for a few days over our summer break. We knew their new home would be nice; we had seen the plans before we left. But when we pulled in to the driveway we were more than a little impressed. There at the end of the lengthy curved approach stood a stately home, some 2500 square feet, cresting a hill overlooking a rolling meadow. Stunning.
We had our car filled with all seven children, and I couldn't help myself. Stopping the Suburban, I turned around, facing our offspring and simply said: "Okay. Listen up. See that house? Take a good look. Now, I have two words for you: Dental School."
To their credit, despite their considerable leap ahead of us economically for a time, they maintained their down-to-earth warmth, and we enjoyed a wonderful visit with them for a few days back then. We continue to count them among our treasured friends.
A Couple of Considerations for the Established Professional:
Implementing an Individual Pension Plan (IPP)
If you haven't already set up an IPP and you have been drawing a salary from your Professional Corporation (PC), now may be a good time to consider it. An IPP is a defined benefit pension plan that a PC can set up for a professional. It is usually set up for one individual member but the benefits can also be extended to your spouse, if he or she is employed your company. An IPP can provide greater annual contribution limits than an RRSP. Contributions made to an IPP are also deductible against the corporation's income. The program is ideally suited for professionals over the age of 40 with consistent taxable earnings of at least $125,000 per year.
In addition to annual contributions, your PC can potentially make a large contribution when the plan is initially set-up to cover your previous years of service (as far back as the later of 1991 or the year of incorporation). It's a good way to move cash out of the company in a tax-advantaged way.
One important consideration of an IPP is that the money you place therein literally becomes part of a pension, and is governed by specific pension legislation.
Corporate Owned Life Insurance
If you need life insurance, a corporate-owned, tax exempt insurance policy may be a solution. Life insurance premiums are generally not tax-deductible. However, it is usually less expensive to fund the policy using after-tax corporate dollars as opposed to after-tax personal dollars.
In the event of the death of the professional whose life is insured under the corporate life insurance policy, the non-taxable death benefit is paid to the corporation, which increases the corporation's capital dividend account by the amount of the insurance proceeds received in excess of the policy's adjusted cost basis. Here's the advantage: the balance in the capital dividend account may be paid tax-free to the surviving shareholders or ultimate beneficiaries.
There may be additional benefits where the corporation applies for a permanent insurance policy that allows it to invest deposits in excess of the costs of the life insurance. The addition of the investment component in a permanent life insurance policy allows the invested funds to grow on a tax-sheltered basis. The corporation has the ability to borrow against the investment component of the policy. Upon death, the total loan amount (including interest) is repaid to the bank; the remainder of the investments and the death benefit are paid to the corporation tax-free.
This article is for information purposes only and does not constitute individualized tax or legal advice. It is imperative that you obtain professional advice from qualified tax and legal advisors before acting on it.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, (member CIPF) and can be reached at [email protected].
