A retirement strategy for owner/managers

RRSPs and employer-sponsored pension plans are the most universally available means of saving for retirement available to Canadians. However, there are a few lesser-known retirement strategies that make sense for people in certain circumstances. As a small-business owner, for example, you may be ploughing profits back into building the business year after year, with little left over for topping up your retirement savings plan. Even when the company is making money, there are incentives to reduce this income by paying out bonuses: Payouts could allow you to reduce your company’s income and claim the small-business deduction. However, since bonuses are considered taxable income even when paid to yourself, you could end up losing half to the government.

A retirement compensation arrangement (RCA) can work as a supplement or alternative to an RRSP or registered pension plan. For a small-business owner who must choose between building your business or your retirement savings, an RCA offers a potential solution. Here’s how it works:

The company/employer makes a contribution (which could represent your annual bonus) to an RCA in a given year. The amount idetermined by how long you’ve worked for the company and how much you earn. This contribution garners a tax deduction for the company and, although the contribution and any earnings are taxed at 50 percent, this tax is refundable-it’s paid back to the plan when you retire and start drawing from the RCA. As well, the RCA contribution has no effect on your RRSP contribution room.