As a business owner in Ontario looking ahead to retirement, it’s vital to understand the various avenues for accessing your hard-earned funds from your RRSP, RRIF and retained earnings of your private company during this new phase of life. Decisions you make will significantly impact your tax obligations. Here, we present a straightforward breakdown of your options:
Registered Retirement Income Fund (RRIF)
- You must convert your RRSP to a RRIF by the end of the calendar year in which you turn 71;
- Minimum RRIF withdrawals are mandatory each year based on your age, although you can opt for your spouse’s younger age (if applicable), which will require lower annual withdrawals;
- All RRIF withdrawals are taxable as regular business income;
- There are no withholding tax requirements on RRIF withdrawals unless you withdraw more than the minimum; there’s no maximum annual withdrawal limit;
- Your first taxation year following RRIF withdrawal might necessitate personal income tax installment payments;
- If you’re over 65, you can split up to 50% of your RRIF income with your spouse; your spouse must jointly elect to do so;
- Unlike RRSPs, RRIFs are eligible for pension splitting. You can convert your RRSP to a RRIF earlier than the mandatory age of 71 to take advantage of pension splitting at age 65;
- Upon your death, your RRIF can be transferred tax-deferred to your spouse if they’re the named beneficiary. On the death of your spouse, the remaining RRIF will be taxable in the year of death based on the fair market value at the date of death;
- If there’s a named beneficiary (not the estate), the RRIF avoids probate in Ontario.
Dividends/Share Redemptions from a Canadian Controlled Private Corporation (CCPC)
- Withdrawing funds from your company provides you with the flexibility to choose when and how much to withdraw.
- Income withdrawn from the retained earnings of your company will be taxable as dividends at different rates:
- Non-taxable capital dividends (subject to the company’s Capital Dividend Account);
- Taxable eligible dividends at preferential rates;
- Taxable non-eligible dividends at regular dividend tax rates.
- All dividend tax rates are lower than regular business income tax rates, but taxable eligible and non-eligible dividends involve grossing-up the income and an offsetting tax credit.
- If your spouse is also a shareholder, you can potentially split dividend income after 65, or even earlier if your spouse was active in the business.
- As with RRIF income, taxable dividends may lead to personal income tax installment requirements in the following year.
- Upon your death, shares of the private corporation can be transferred tax-deferred to your spouse.
- Upon the death of your spouse, the shares will be taxed based on their fair market value at the date of death
- By using dual wills, you can avoid probate on shares and loans from the private corporation in Ontario.
Key Considerations
- In Ontario, the top marginal personal tax rate applies when taxable income exceeds $235,675.
- The current top marginal personal tax rates in Ontario are:
- 53.53% for RRIF income;
- 39.34% for eligible dividends;
- 47.74% for non-eligible dividends.
- The rate differences persist across all personal tax brackets.
You may consider aiming for an annual taxable income of up to $235,675 to utilize all personal marginal tax brackets up to the top bracket.
Strategies for Minimizing Personal Taxes
If minimizing personal income taxes during your lifetime is your goal, you should prioritize accessing funds in the following order:
- Shareholder loan repayments;
- Capital dividends;
- Eligible dividends;
- Non-eligible dividends;
- Excess annual RRIF withdrawals.
Strategies for Minimizing Estate Tax
If minimizing your ultimate estate tax on death is your goal, prioritize accessing funds in the following order:
- Excess annual RRIF withdrawals;
- Non-eligible dividends;
- Eligible dividends;
- Capital dividends.
- Shareholder loan repayments
If your company holds Eligible and Non-Eligible Refundable Dividend Tax Pools, the decision between eligible and non-eligible dividends may be influenced by the pool balances.
Benefits of an Asset Freeze
Implementing a strategy to freeze the value of your private corporation’s shares and redeeming them over time can be beneficial. This strategy results in deemed dividends, which can be distributed as non-taxable capital dividends, taxable eligible dividends, or non-eligible dividends, while also reducing estate
tax liabilities upon death.
Understanding these retirement fund options can help you make informed financial decisions. Your GGFL tax advisor will work with you to create a tailored strategy that meets your unique goals and circumstances.
Your Guide to Estate Planning
This guide provides an overview of the things you should consider when making an estate plan including tax strategies and dual wills for business owners.
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