If the individual pension plan is an RRSP on steroids, then the retirement compensation arrangement might be an RRSP-turned- gymnast: well-toned and nimble.
Like IPPs, RCAs offer a tax-effective way for your business to fund your retirement savings. Half of all contributions are held in a trust account and typically invested to accrue value. The other half goes to a refundable tax account held by the CRA. The contributions are tax-deductible to your business, and you pay no personal tax until you withdraw the funds (half of the withdrawal comes from the trust, half from the tax account). Any borrowing costs to fund the RCA are tax-deductible as well.
While every entrepreneur craves double tax savings, RCAs have other mouth-watering traits. Unlike IPPs, RCAs allow your company to make contributions at any time and invest them in anything (pension plans must avoid high-risk investments). Contributions can be of any size, provided the RCA doesn’t grow so big that it pays an unreasonably high level of retirement income relative to your earnings history. This means your company could plug millions into your RCA just before you retire Ã¢Ã¢¬Ã¢¬ perfect for entrepreneurs who forgot to put “save for retirement” on their life’s to-do list. In some scenarios, the holdings in your RCA can collateralize loans to your business: the “leveraged RCA.” Unless pledged as collateral, RCAs are creditor proof.
The catch: Half of all earnings made by your trust go to the CRA account as well. What happens to all the money in that account? Absolutely nothing. So half of your RCA isn’t going to make you any money. The cost? As high as $30,000 for set-up and $1,500 for annual compliance work, although some actuaries charge as little as $1,500 and $350, respectively.
Turbo tip: Leave Canada — seriously. (Or at least move to a province with lower taxes than yours.) Ottawa applies a withholding tax of up to 25% when a non-resident withdraws RCA funds, unless you live in a country covered by a tax treaty with Canada. Move to the States, for instance, and you’ll pay just 15%. Move to Ireland, and the tax could be nil. Doesn’t everyone dream of tax-free income?
© 2004 Caroline Cakebread