Adapting Retirement Savings Strategies for Small Business Owners: Navigating the Tax Landscape

The evolving tax environment, particularly post the 2018 federal budget, necessitates strategic adjustments in retirement savings for small business owners. As a tax professional with a Trust and Estate Practitioner (TEP) designation, I emphasize the importance of adapting to these changes, especially concerning the taxation of Canadian Controlled Private Corporations (CCPCs).

The Challenge with Passive Income and SBD:

Increased Tax Rates for CCPCs: In Alberta, CCPCs traditionally benefit from a lower corporate tax rate of 11% on the first $500,000 of active business income. However, new rules have altered this landscape. Passive income – encompassing rents, interest, dividends, royalties, and other non-active business income – now impacts the small business deduction (SBD).

Clawback Rule: The $500,000 SBD limit is reduced by $5 for every $1 of passive income over $50,000. This means the SBD is completely phased out once passive income hits $150,000, elevating the tax rate to the general rate of 23% in Alberta. This shift could result in up to an additional $60,000 in corporate taxes.

Passive Income and SBD Available:

As passive income increases, the available SBD decreases, leading to higher tax liabilities for the corporation. This table illustrates the progressive impact:

The Solution Using Life Insurance  

Innovative Solution: Life Insurance Strategy

Using Exempt Life Insurance Policies: A viable strategy to circumvent the punitive effects of the new rules is through corporately owned exempt life insurance policies. Premiums for these policies are paid with after-tax corporate dollars and accumulate in a cash value account.

Tax-Exempt Status: The passive income generated within the policy’s cash value is exempt from high passive income tax rates and does not affect the SBD eligibility.

Retirement and Estate Planning Benefits: The funds accumulated can be strategically used to support the business owner’s retirement while also preserving estate values. Withdrawals from the policy during retirement decrease the corporation’s value, but the tax-free death benefit paid to the corporation upon the owner’s passing can significantly replenish used retirement funds.

Conclusion and Consultation Offer: At Shajani CPA, we specialize in tailoring tax-efficient retirement strategies that align with the latest regulatory changes. Our expertise in both tax and estate planning ensures that your retirement strategy not only secures your future but also preserves your legacy. We invite you to consult with us to explore how this life insurance strategy can be effectively implemented in your financial plan for 2024 and beyond.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2023 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.