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Retirement savings strategies for small business owners need to evolve with the changing tax landscape. The 2018 federal budget may have significant impacts on the corporate tax rate charged to businesses with a new claw back rule on the small business deduction (SBD). However, there is a strategy that is sheltered from the new punitive rules.
Canadian Controlled Private Corporations (CCPCs) pay a corporate tax rate of 11% in Alberta on the first $500,000 of taxable active business income. Passive income including rents, interest, dividends, royalties and other non-active business income will now affect the tax rate charged on active business income. The $500,000 limit will now be clawed back by $5 for each $1 in excess of $50,000. The result is there will be no SBD once passive income reaches $150,000. The general tax rate for corporations that do not qualify for the SBD is 23% in Alberta. As such, the tax rate in the corporation would move from 11% to 23%. This could result in up to an additional $60,000 in tax paid at the corporate level.
| Additional Tax|
Paid on Excess
|$ 50,000||$ 500,000||$ –|
|$ 75,000||$ 375,000||$ 15,000|
|$ 100,000||$ 250,000||$ 30,000|
|$ 125,000||$ 125,000||$ 45,000|
|$ 150,000||$ –||$ 60,000|
The Solution Using Life Insurance
The new rules penalize corporations for using traditional corporate savings approaches. A strategy to shelter these savings from the claw back rules is to utilize a corporately owned exempt life insurance policy. Premiums invested by the corporation should be paid with after-tax corporate dollars into the policy cash value account. Passive income earned inside the cash value account are considered tax-exempt and are not subject to either high passive income tax rates and also do not reduce access to the SBD.
The accumulated investments can be used to fund the owner’s retirement with the added benefit of preserving estate values. The retirement savings strategy allows the owner to withdraw funds from the policy throughout retirement, declining the value inside the corporation. The corporate owned policy pays a tax-free death benefit to the corporation which may replenish the majority of retirement income used, resulting in a preservation of the estate.
Shajani CPA takes pride in its tax and retirement strategies and would be happy to help you implement this plan.
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.