Small business owners risk coming up short in retirement

I'm buying rrsp's for a tax break but the amount should be more than I am allowed. especially with a 1.5 return, It is smarter to put back in the business but there is just more tax to pay.

Also I wish there was a better policy for hiring new staff, I feel if the government wants more people
working they should give better tax breaks in this also., TOO much tax in Canada.

What are your thoughts?

I always max out my RRSP every year.. Carry no debt.. So I make sure I put away as much as I can so that I can do this. I also need it for the tax break. I am always juggling this issue. I make money but then have the issue of paying tax through the company. Or take it myself and having to pay the tax.
I think that the best RRSP is your home. Keep upgrading till you have a house that is paid for and worth $2-3M plus. Then when your ready, sell it off and have no income tax and use that money to retire. Plus what ever you put away.
Depending on your retirement plans you can always purchase a second place that you can retire so that you send up with a home to retire too.
It all comes down to your priorities. IF you want to put it away you can. Even a little is better than nothing.

Don't agree that the RRSP is necessarily best....despite what financial planners say. Why not just leave the funds in your company, build up assets there and take it out as needed after retirement? I have seen many who have built up RRSP's and then pay more tax when they take it out than they saved originally. If you've got a private company, build that up first.

Interesting question.....

As a little background I have 9 years of post secondary in txa and quite a few years of application(corporate tax planning) . Please note the below advice can potentially be different for different provinces and you should always consult a professional with your specific circumstanes and needs as this can drastically change the tax strategy.

Realistically if you can sell the shares of your company during a sale then initial investment into your company should be your priority. This means that the first 750K of growth (X number of shareholders which in a family unit is usually 2+) will be tax free (keeping in mind that alternative minimium tax might bite you but as long as you aren't leaving the country it should work out in the end). If you are a husband/wife that own a company that you plan to sell and the ne tcompany value increase goes above 1.5 million then consider a trust with your kids as beneficiaries. With that structure in you can use each of your children's capital gains deduction as well basically multiplying your tax break by 750,000 X number of children regards of the chidlren's ages (I know a smart coookie will likely try to point out that kiddie tax would kick in on the children if they are under age however as capital gains are inactive income no kiddie tax would be applicable).

Basic application:
Family of 5 with a trust in place. Company has earned 200K a year for the last 20 years. If the parents took the entire amount into personal income over the 20 years and spiked their RRSPs they would still end up with 80K each a year of income and a 20K contribution to RRSPs. This mean each would each pay around 28K a year in tax and they would have a future tax liability on the RRSPs as well. After 20 years they would have paid 1 million in tax and have RRSPS that were overdriven (over 500K each) meaning during the 10 years you pull them out they would cause a high tax rate resulting in likely another 200K of tax for each spouse. Basically the family would pay 1.4 million in tax and have 2.6 million left. Also keep in mind that these RRSPs would be locked and would not be available for the company to expand with or leverage.

Instead each parent takes a 30K dividend (tax free in Alberta) and the company pays 15% on the earnings. After 20 years the company will have paid about 600,000 in tax (avg. 15% rate) leaving 3.4 million in the company. The family could then take out the 1.2 million shareholder loan leaving 2.2 million in the company. Then using the 5 capital gains that remaining would not be taxable in a sale situation (would still even be 1.5 million of deduction room left). Net effect family only pays 600K in tax and not 1.4 million as above with the RRSPs.

So as you can see in some cases holding income within the corporation is much better than RRSPs. Cases where this gets more murky include when the corporation plans to dispose of assets not shares and where the company earns over 450K a year (corporate point where high rate tax kicks in). Also safe income calculations can have an effect as well.

@ Jeff

Maxing out your RRSPs every year can potentially be a mistake. RRSPs can be overdriven which is very counter productive. Essentially if a person's RRSP exceeds around 500K then you end up taking 80+ each year when you have to draw it out. At 80K you are likely going to attract similar tax to what you would otherwise have paid if you did put it into an RRSP (you can infact end up paying more in tax than if you didn't put it into RRSPs). Then you can lose doubly because items like capital gains and dividneds earned in RRSPs are taxed at 100% rate while outside of RRSPs are taxed at 50% and 66.6% (roughly).

I have seen people with 60K incomes (and top rates of 29%) get to retirement with a 1 million RRSP only to start paying 39% as they withdraw that RRSP. Very poor planning indeed.

So Jeff it doesn't come down to priorities. It comes down to what best fits the facts of each case. Also debt can be very healthy. Personally right now I have 1.6 million in debt but it net returns an extra150K of income each year above its service cost. I could sell assets and pay it off but then I would lose income.

The best advice is always anything in moderation, nothing in excess (including RRSPs)......

For entrepreneurs running and expanding their business is a hard challenge but it is also their key in order to get successful so they should only focus on their business goals and object if they want a big improvement on their business.

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