Retirement Compensation Arrangements. Overview Advantages Disadvantages Retirement Options Plan Administration Chart Summary of RRSPs, IPPs & RCAs

Transcription

1 Retirement Compensation Arrangements Overview Advantages Disadvantages Retirement Options Plan Administration Chart Summary of RRSPs, IPPs & RCAs Prepared by William Kennedy January

2 What is an Retirement Compensation Arrangement? Sponsored and funded by an employer The Company establishes a defined benefit pension promise not registered federally or provincially Funding levels are then calculated by an actuary based on Age, Income, Interest rates and inflation All employer are deductible. Contributions much larger than IPPs (from 1 to 10 times IPP ) One-half of all are deposited into RCA trust and the other half remitted to CRA who credit the amount to a Refundable Tax Account ( RTA ) Restrictions RCAs are essentially not regulated by CRA as long as they are reasonable and not camouflaged Salary Deferral Arrangements. Any pension promise of under 80% of pre-retirement earnings is reasonable. Assets cannot be lent back to any member of the RCA or the Plan Sponsor nor any company that is not at arms length of the Plan Sponsor. Advantages of RCAs All, plan fees as well as any interest on funds borrowed to fund the plan are deductible by the Employer Retirement planning freedom the maximum annual pension payable from an IPP is $2, per year of service in Maximum RCA pension could be 70% to 80% of pre-retirement earnings. Once defined benefit pension committed to, absolutely no requirement to fund all or any of the commitment Assets are creditor proof 2

3 Downside protection-in the event that the plan suffers lower than expected returns, an RCA has the ability to make additional tax-deductible to adequately fund the plan. Zero restrictions on investments of the trust No requirements on when the pension must start. IPPs and RRSP must start pension by end of the year in which turn 71, RCA has no requirement. Participation in the RCA does not generate a pension adjustment nor does it effect or reduce RRSP room. Disadvantages/Risks 50% of all and 50% of all realized income has to be remitted to CRA and held in a Refundable Tax Account, to be repaid to the RCA trust when benefits are paid from the trust CRA does not credit the Refundable Tax Account with any interest Some Annual Compliance the trust has to file an annual tax return and some extra contribution remittance filings How Does the RCA Trust Work? The essence of a trust is the separation of the legal ownership of the trust property and the beneficial ownership of it. A trust is not in itself a legal entity but a legal arrangement by which one person (the Settlor) transfers legal title to property to another person or institution (the Trustee) with instructions as to how it is to be managed for the benefit of persons or institutions named in the trust deed, (the Beneficiaries). The Trustee holds the legal title subject to the trust deed that names the beneficiaries and sets out the terms upon which the property is to be held. In an RCA trust, the Settlor is the Company that contributes the funds to the trust. A trust document is prepared in which a trustee is appointed to administer the funds for the benefit of the beneficiary, who is the employee. The trust deed sets out the terms on which the property is to be managed, how it is to be invested, when and to whom it is to be distributed etc. The Trustee's duties include receiving the funds, record keeping, 3

4 making payments to the plan members and ensuring that tax is withheld from those payments. Unlike other inter vivos trusts, there is no 21-year rule deeming the disposition of the assets held in an RCA trust. There is no tax paid until you withdraw the money, or the beneficiaries of your estate withdraw the money in the future. There are no set payouts Are the Assets of the RCA Trust Creditor Proof Provided that the funds have not been contributed to the RCA in contravention of the Fraudulent Conveyance Act or the Bankruptcy and Insolvency Act, they will not be subject to attack by creditors of the company. The chief issue is the timing of the transfer of the funds to the RCA trust. If the company is already in default of its obligations, or on the verge of defaulting, the transfer may be considered a fraudulent conveyance and subject to creditors' claims. It should also be noted that it is imperative that any professional advisor not be perceived to have participated in a fraud on creditors. Extreme care must be taken to ensure that the company is able to meet its current obligations when establishing an RCA. Investment Options There are no restrictions on Investments but you have to be careful to whom you lend the assets to. Retirement Compensation Arrangement Administration Implementation of Plan The following documents are required Pension plan document Board resolution to adopt pension plan CRA Forms T733- Application for an RCA Account number Trust Agreement Actuarial Valuation Report 4

5 Annual Administration Actuarial reviews (can be every few years) Annual benefit statement CRA filings o Contribution Remittance Summaries (T737-RCA & T737-RCA Summary) o RCA Income Tax Return (T3RCA) Comparison of RRSP, IPP and RCA FEATURES RRSP IPP RCA Eligibility All individuals with earned income who are under the age of 72 Same as RRSP s except not available to sole proprietors/partners in unincorporated firms Same as IPP except there is no age 72 restriction Employer contribution requirement Employer are simply salary increases and employee then contributes to RRSP. Salary increase is subject to payroll taxes Annual requirement unless suspend plan. Employer contribution is not T4 d to employee Employer can fund from 0% to 100% of the past service + future service liability. Employer contribution is not T4 d to employee Deduction to employer of employer contribution Yes, but deducted as income paid to employee Yes limited to actuarial calculated amount. Yes but should be supported by actuarial calculations Maximum $23,820 for 2013 based on top salary of $132,333 Deposits are deducted by the individual Contributions are based on age and top salary of $134,833. For 2013: Age 50 $30,738 Age 55 $33,764 Age 60 $37,088 Age 64 $39,982 For a 50 year old earning $500,000 per year & 20 years of past service a lump sum contribution of over $4 million could be made 5

6 Employee contribution requirement Employees make all Max about $24K per year Deductible Optional but most IPPs are employer pay all Deductible if made Yes but employee contribution must be condition of employment and cannot exceed employer contribution Deductible if made Trust Fund & Tax Sheltering of Assets No trust fund & all assets are tax sheltered while in RRSP and 100% taxable when paid out Is a pension trust fund & all assets are tax sheltered while in RRSP and 100% taxable when paid out 50% of all go into RCA Trust fund with other 50% going to CRA deposited into Refundable Tax Account ( RTA ). 50% of all realized income in the trust fund must be remitted to the RTA with CRA on an annual basis. The RTA is NOT credited with interest. Borrow against Funds No Yes but only on a very limited & short term basis Up to 100% of RCA Trust portion of assets & Up to 90% of RTA Past Service Not available if you have maximized your RRSP since A one-time contribution allowed in the year the plan is established (or after). The allowable past service amount is based on age, salary, RRSP contribution history as well as years of service dating back to Contributions and fees are deductible by the company in the Past service is not restricted in any way as long as pension payable is reasonable. Paying your recently hired CEO at age 50 a pension of 50% of earnings at age 60 is reasonable. 6

7 year they are made. Investment Options Securities, Mutual funds, GICs Same as RRSP s with some additional restrictions, e.g. no one security can comprise more than 10% of fund s book value. Unlimited Creditor Proof Retirement Income Options Complexity May not be Yes Yes as long as employer is in a financially sound position Pension can start at any time but no later than by end of the year in which turn age 71. Various types of annuities, RRIFs, or all funds can be cashed out and fully taxed Simple with many available issuers of plans Cost Minimal $100- $250 per year Pension can start no earlier than age 55 and no later then by end of the year in which turn age 71.Various annuities, LIFs, no option for lump-sum withdrawal Defined benefit plan subject to pension legislation, actuarial valuations and annual filings Initial set up costs of $1,500-$4,000 and annual costs of $1,500-$3,000 No age restrictions on when pension can start. As early as you wish or never. Pay pension out of trust, or cashout the RCA and pay tax. Not as complex as IPP but should have regular actuarial reviews to justify reasonableness and has some annual filings Initial set up costs of $2,000 and annual costs of 2,000 Summary of Pros Low cost 100% of funds invested, larger than RRSP, past service, Flexibility of and withdrawls, Significant win if become resident of lower tax 7

8 full creditor protection jurisdiction, full creditor protection Summary of Cons Limitation of Higher administration costs. Not as Flexible as RRSP or RCA 50% RTA, and setup and administration costs 8