Depending on where you get your information from, I am considered a Millennial or a Xennial. In my career, I have not experienced what I would consider to be extreme changes to the way various income is taxed. Sure, there have been increases in personal tax rates, decreases in corporate rates, various tax credits being enhanced or taken away and so on… but nothing as jolting as the proposals on changes to the taxation of CCPCs that we saw in July, 2017. To date (December 1st), there is still a lot of uncertainty around what the final outcome will look like, which means most of us are still wondering how to take income, where to save income, whether or not past plans will need to be reversed and so on.
There is a lot of talk about how we will proceed with financial plans in the future and what vehicles we will use. Will individual pension plans (IPPs) and Retirement Compensation Agreements (RCAs) become more popular? What mix of salary and dividends will make sense with the changing tax rates? Will corporate owned life insurance be impacted in any way?
I have spoken to many clients over the past 6 months and undoubtedly this conversation comes up. Prior to the proposals, each client had made different decisions on how to take income from their professional corporations and where to save their money. They all have valid reasons for why they have done things they have done…dividend income at one point saved a bit of tax versus salary, contributing to the Canada Pension Plan negated the value of salary (especially for the younger skeptics who don’t believe it will exist at their retirement), even with a 20% grant in an RESP the corporation was a better investment vehicle for their child’s education, and so on. And they’re all correct! WE can crunch the numbers to prove every single statement. But with these proposals on the table and change on the horizon, will these plans hold up?
Despite my past suggestions to clients that the more diversified they are in the buckets in which they save their money(e.g. RRSP, TFSA, RESP, Life Insurance, Corporation, etc.), the better hedged against future tax changes they will be, I have never had reality slap me in the face so hard to prove a point. Some of us have 5 years to retirement whereas others have 30 years. We will see tax changes come and go. The more buckets we have, the more flexibility we have to manoeuvre and make sure we continue down the path to our financial goals in the most efficient way. Just like with investments, you don’t want all of your eggs in one savings vehicle. Diversification goes beyond investments to investment vehicles in order to hedge against changing tax rules.
Now let’s keep our fingers crossed for the 2018 Federal Budget…