Using corporate money to fund your retirement

Tax Managed Strategy 26

Many individuals have built up significant cash or liquid assets within their corporation but the tax cost of withdrawing those funds is often prohibitive, resulting in the corporation itself looking to purchase the investments directly.¹

How Manulife RetirementPlus can help

Manulife RetirementPlus may be an appropriate investment, particularly where a corporation wants to have a guaranteed income stream, either now or in the future — for example, where an individual intends to use corporate assets to help fund retirement income. Manulife RetirementPlus may be especially attractive to owners sensitive to protecting their assets and who are currently invested in fixed-income investments, such as GICs2 or bonds.

The guarantees offered by Manulife RetirementPlus help make sure an owner can never outlive a lifetime income. In addition, it provides the opportunity to invest in the market and take advantage of tax deferral and more tax-efficient income when saving for retirement, as well as the potential for greater investment growth.3

Meet Christine

Christine, 45, is a successful businesswoman with $3 million in her corporation and plans to retire in 20 years, when she’s 65. She doesn’t have a pension plan, and although she has maximized her registered retirement savings plan (RRSP) contributions, she needs the corporation’s assets to supplement her retirement income.

Christine has taken a conservative approach to investing the assets of her corporation and is invested exclusively in GICs, bonds, and high-interest savings accounts. Now, she’s looking for higher potential returns; moreover, she’s not happy that half of the growth is being lost to taxes.

Let’s assume she uses $1 million of that $3 million to purchase Manulife RetirementPlus, deferring income for 20 years. Compare that with investing $1 million in a GIC or bond for 20 years, assuming no withdrawals.

Christine’s portfolio after 20 years

After 20 years, assuming a five per cent rate of return (ROR) on her investment in Manulife RetirementPlus, she would have approximately $815,000 more than if she invested in a GIC/bond (assuming a three per cent ROR). The corporation would have paid approximately $60,000 more in taxes; however, this includes approximately $301,000 of taxes paid on capital gains at the time of transition.4 While this transition does realize taxes upfront, it also creates a significant increase to the capital dividend account (CDA) of almost $590,000. Consequently, the corporation has a balance of $779,654 that it can pay out to Christine tax free as a capital dividend.5

Furthermore, starting in year 21 (when Christine is 65), with Manulife RetirementPlus, the corporation is guaranteed to receive an annual income of $124,318 a year for every year that Christine is alive.6 With the GIC, the same amount of gross income is being withdrawn, however, this includes a return of capital (ROC) component to make up the interest income shortfall.

Accumulation stage — snapshot after 20 years

 

GIC/bond 3.0% ROR ($)

Manulife RetirementPlus 5.0% ROR⁷ ($)

Fair market value

1,789,249

2,685,739

Income credits transitioned⁸

0

681,669

Amount added to CDA

0

779,654

Tax paid years 1‒20

402,517

462,103

 

*For illustration purposes only 

Christine’s after-tax income in years 21-46

Starting in year 21, when she needs the income from her corporation to fund her retirement, Christine’s after-tax income with Manulife RetirementPlus, assuming a two per cent ROR, is substantially higher than with the GIC/bond. In fact, Christine receives 1.7 times more after-tax income between the ages of 65 and 90 from Manulife RetirementPlus compared to a GIC.

This is because when the GIC’s market value is depleted at year 40, it can no longer pay any more ROC or interest income.

After-tax income to Christine⁹

 

GIC/bond 3.0% ROR ($)

Fair market value ($)

Manulife RetirementPlus 2.0% ROR ($)

Fair market value ($)

Year 21 (age 65)

58,165

1,718,608

111,361

2,561,421

Year 26 (age 70)

98,884

1,332,317

105,746

2,181,060

Year 31 (age 75)

71,515

884,499

105,717

1,761,110

Year 36 (age 80)

73,441

365,356

73,419

1,297,452

Year 41 (age 85)

0

0

74,301

785,536

Year 46 (age 90)

0

0

75,091

220,340

Total (years 21-46)

1,549,011

0

2,644,282

0

 

*For illustration purposes only 

The advantage of Manulife RetirementPlus

With Manulife RetirementPlus, the benefit is its ability to provide a guaranteed lifetime income to help manage longevity risk. Even if the market value were to become depleted, the investment enters the guaranteed payment phase10 and would continue to pay Christine a guaranteed income stream.

By shifting part of the corporation’s portfolio from fixed-income investments to Manulife RetirementPlus, the total after-tax income Christine receives from her corporation during the income phase may be significantly higher, leaving her feeling much better about her retirement plans.11

Ideal candidates

Individuals:

  • with cash in their corporation that they’re looking to invest
  • with corporate assets currently invested in fixed-income investments
  • who’ll rely on corporate assets to help fund their retirement income
  • who are looking for tax deferral, more tax-efficient income, and a guaranteed income stream

Take action

To take advantage of the tax savings associated with in-kind corporate donating:

  • Determine the amount of guaranteed income you’re looking for from these corporate assets.
  • Consider using Manulife RetirementPlus to fund part or all of that guaranteed income stream. 

Investment options with Manulife

Manulife and its subsidiaries provide a range of investments and services.

Manulife Investment Management segregated fund contracts combine the growth potential offered by a broad range of investment funds with the unique wealth protection features of an insurance contract. With segregated fund contracts, investors can help minimize their exposure to risk through income, death and maturity guarantees, potential creditor protection features, and estate planning benefits — all from a single product or insurance contract. 

1 This piece assumes the corporation is a Canadian-controlled private corporation (CCPC). 2 For this article, GIC refers to both insurance company issued guaranteed interest contracts as well as guaranteed investment certificates issued by other financial institutions. 3 For a more detailed explanation, see “Tax treatment of Manulife RetirementPlus” (advisor login required). 4 The process of moving market value and accumulated income credits from the savings phase to the preservation or income phases in a Manulife RetirementPlus contract 5 The CDA is a notional account that includes the non-taxable 50% of all capital gains. Corporations can elect to pay a capital dividend up to the balance in the CDA and the shareholders receive the dividend tax free. 6 Assumes Christine is the annuitant and, at age 65, has elected the total income amount at a 3.71% income rate and no excess withdrawals are made. For current rates, visit the Manulife RetirementPlus™ web page7 Assumptions during the savings phase include a 30% taxable portion on the fund return (75% capital gains and 25% interest) and a 2.06% income credit rate. The corporate tax rate is 51% (25.5% on capital gains). 8 Income credits aren’t cash deposits; they increase the basis for calculating future guaranteed income. The income credit rate is subject to change. For the current rate, visit the Manulife RetirementPlus™ web page or speak with your advisor. 9 Assumes a corporate tax rate of 51%, as well as year-end allocations equal to 80% of fund return comprised of 90% interest and 10% capital gains. The taxable dividends paid to Christine are non-eligible dividends taxed at 40%. Considers and maximizes the use of the refundable dividend tax on hand (RDTOH) account and CDA where possible. Based on a single life payout option. 10 The guaranteed payment phase (GPP) occurs when the fair market value is $0 but there’s a positive total income amount or eligible total income amount. The taxation of these payments isn’t certain at this time. Consult your tax advisor for further information. We’ll report any payments during the GPP based on our understanding of tax legislation and Canada Revenue Agency (CRA) assessing practices at that time. The policyowner is responsible for any tax liabilities arising from any change in law, interpretation, or CRA assessing practices. 11 Investing within a corporation can be complex. A thorough review of all the issues is beyond the scope of this piece. Consult with your tax advisor about the applicability of such a strategy.

This publication does not provide all features and fees offered by Manulife RetirementPlus. Please read the Information Folder, Contract and Fund Facts for more details. The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. The Manufacturers Life Insurance Company is the issuer of the Manulife RetirementPlus insurance contract and the guarantor of any guarantee provisions therein. The Maturity and Death Benefit Guarantees are reduced proportionally by withdrawals. Exceeding withdrawal thresholds and/or withdrawals taken prior to the Election of Income may have a negative impact on future income payments. Age restrictions and other conditions may apply. Income Credits are not cash deposits, they increase the basis for calculating future guaranteed income. The Income Credit Rate is subject to change. For the current rate please visit manulife.ca/investments or speak with your advisor. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

MK2940E 06/21

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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