Get MORe From Your CORe

As a way of saying thanks and Happy Holidays to my friends at Sun Life, I thought I’d pass along a few tips on how to make Commission On Release (“CORe”) payments go a bit further.  I will leave to those of you who are actually interested to get the precise formula for how CORe is calculated from head office.  You will also need to talk to head office or one of the other company experts on all the various issues that apply to CORe or if you incorporate your business. On a similar note, I have no intention of talking about triggering CORe on only part of a block or determining that sweet spot in time when your CORe is likely as high as ever will be.  For a change, I would like to keep things simple.  Today, I just want to focus on single advisor corporations, unincorporated advisors, CORe and taxes.

CORe-related Tax Problems

One of the things distressed me in my Sun Life days (right up there with third world famine and war in the Middle East) was watching retired advisors paying too much tax on the fruits of their many years of hard work.  This is not rant against our tax system.  Rather, this is a cautionary tale regarding what can happen if an advisor doesn’t take the time many years before retirement to put a plan in place to get the most out CORe.  In some cases, the time to take steps may be 10 years or more before you plan on triggering CORe; delaying beyond that point may be leaving things too late.

The biggest problem I have seen involves a failure to coordinate how to integrate CORe, OAS, CPP, additional employment income and RRIF payments.   On the bright side, many successful advisors look forward to 10 years of huge CORe payments when they finally pull the plug.  As is also common, many of these successful advisors don’t trigger CORe until their mid 60’s or later.  I have seen CORe payments as large as $10,000 per month or more.  Unfortunately, unless this successful advisor had done some careful planning in advance, these same CORe payments would also result in the clawback of 100% of his OAS pension and would also ensure that any RRIF money taxed in his hands during the CORe years will be taxed at the highest B.C. rate of 43.7%.   In other words, although his CORe may generate $10,000 a month in income, the actual spend from this money is substantially less that it could have been.

What can you do to avoid this from happening?  Fortunately, there are a few options that can at least ease the pain, such as:

INCORPORATING AT LEAST 10 YEARS PRE-RETIREMENT

The potential benefits of incorporating your business during your working life may also save you money after happy day when you trigger your CORe.  These benefits include potential income-splitting and the ability to use your company as piggy bank to save for later years.  In some case, you may even decide to incorporate during your working life solely because of CORe concerns.  In any event, if your company is going to help you keep more of your CORe, you are best off having your company own your CORe at least 10 years before retirement, assuming that your personally owned CORe has vested by that point.  As I will describe below, this will allow your company enough time to pay off the CORe assign payments prior to your retirement.

To start the ball rolling,  f you decide to incorporate while you’re still working but after your CORe has vested, you will trigger your CORe personally at that time.  In other words, you will start earning CORe payments even though you are still working your block through your company.  If this sounds too good to be true, you are right – there is a catch.  At the same time as you are receiving your CORe payments personally, your business will need to make matching CORe assign payments.  Put another way, you will be robbing Peter (your company) in order to pay Paul (yourself).  Although it is my recollection that your one advisor company will still qualify for business life insurance on the value of your CORe, you will need to confirm this before proceeding, in the event that there has been a change in policy or my recollection is merely wishful thinking.

Logistics of how CORe works when incorporating aside, how does incorporating save you taxes and government benefits during retirement?  As hinted at previously, your company can be used as retirement savings vehicle.  This is because the low tax rates earned on active business income, which includes CORe, is taxed entirely at 13.5% rather than at the escalating rates you will face if you received it all personally.  You could decide each year how much of the CORe or other savings you would pay out of your company each and invest the rest inside the company for later years and rainy days.

Although your company will still receive CORe over 10 years, this strategy will allow you to spread out when these payments are taxed in your hands.  As a result, by spreading out when your company pays you on your CORe, you can receive more of it at lower tax rates and with less impact on your OAS pension.  Although there income tax to be paid corporately, you will get credit for this when you later receive dividends from your company.  As a result, the combined corporate and personal taxes you pay on your CORe income will likely be less if you spread out the dividend payments over 15 or 20 years rather than having it taxed over 10 years.

If you decide to proceed with this strategy, you might also consider picking investments that produce primarily deferred capital gains, like corporate class mutual funds.  This may make sense for two reasons.  First, investment income doesn’t qualify for the sweetheart 13.5% tax rate.   Instead our tax system charges a tax rate of 44.7% on interest and the taxable 50% of any capital gain (and 33% on dividends) but provides your company as with a tax refund on a significant portion of these amounts when it pays out dividends to shareholders.  This is designed to encourage you to withdraw investment income from your company as soon as possible in order for your company to recoup part of the tax or to create a deduction to offset the tax bill.   Accordingly, by deferring your day of reckoning through corporate class mutual funds or similarly taxed investments, you won’t be placed in a position where the tax system encourages you to withdraw more investment income from your company than you actually need that year.

The second benefit of choosing capital gain producing investment is linked to that mysterious capital dividend account that allows clients to withdraw all or almost all of their life insurance death benefit on a tax-free basis.   This same account also applies to the non-taxable 50% of capital gains earned inside your company.   In order to level the playing field between personal investors and people who invest inside their companies, the government allows the non-taxable 50% of company capital gains in excess of capital losses to be paid out as a tax-free capital dividend.    As a result, this means that you will be able to get 50% of your capital gains out of your company absolutely free.

On a related note, you may also consider buying or transferring your life insurance to your company for the same reason.  You will be able to pay any additional premiums using corporate dollars, which means that you won’t need to withdraw as money from your company, which further reduces taxes.  As an added bonus, you may be able to receive a substantial tax-free payment from your company at the time the company purchases your policy from you if the “fair market value of the policy” is substantial, particularly if it is an older permanent policy with level premiums, a limited pay policy or if you are in poor health.  Although you will need to use an actuary to put a value on the policy, which doesn’t come cheap, the resulting ability to legal take money out of your policy on a tax-free basis is often a fraction of the resulting tax savings.

Changing direction slightly, even though single advisors may reap substantial benefits from incorporating their business well in advance of retirement, married advisors may reap even greater savings by taking advantage of income-splitting options.  While advisors who own their CORe personally cannot income-split it with their spouses, it’s a different game if you own your CORe corporately.  If your spouse (or even adult children) own non-voting shares (or they are owned through a family trusts) that are different from your shares, you can effectively income-split your CORe by deciding how many dividends to pay to each of the different classes of shares.  The result: a lower combined tax bill, less clawback of income-related government benefits and more money for hot tubs, whirlwind vacations and green fees.

In summary, there can be considerable tax advantages during retirement if you receive your CORe inside a company instead of personally.  There will be some drawbacks, of course, such as the cost of incorporating and increased annual costs.  It is also more complicated.   Of course, you would want to discuss your unique situation with your company, tax and legal advisors before proceeding as well.  In the end, however, the potential tax savings may be truly startling.

What If You Don’t Want to Incorporate

In some situations, it may not make sense to incorporate your business.  Fortunately, there are still some steps you can consider to mitigate the potential tax hit that can come from having 10 years of CORe payments taxed solely in your hands.

As promised earlier, I won’t get into the best time to trigger your CORe, although I will say that any CORe you receive before 65 (for now) won’t trigger OAS Clawback and that the more you get out before you have to make RRIF withdrawals, the more flexibility you will have.   On a related note, you now have the choice of delaying your OAS pension for up to 5 years (from 65, at this point) and receive an extra .6% per month to your monthly payments for every month you delay.  As a result, if you are going to lose most of your OAS pension to clawback anyway because of CORe payments, you might be better off delaying the start of your OAS pension.  Not only will you get to keep more of it, both because of less clawback and perhaps being in a lower tax rate, the increased monthly payments actually reward you for waiting. Of course, your health and financial situation will also influence your decision.

On a related note, you might be better off delaying the start of your CPP as well during your CORe years.  Although you can apply to split your CPP pension equally with your spouse once both of you are starting your pensions or your spouse is 60 if s/he isn’t entitled to one, you will still be taxed on the remaining 50%.  Although CPP is not subject to clawback, the benefits of starting your pension early (i.e. between 60 and 65) or at 65 might be vastly reduced if the 50% of the pension you pay tax on is taxed at 40.9% or higher.  When this fact is coupled with the penalties for starting your CPP prior to 65 and the increased incentives for delaying until as late as age 70, it might make sense to push back the start of your CPP until your CORe is tapped out or until as late as possible.  Again, of course, your health, life expectancy and overall financial picture will also influence this decision.

On a different note, you may want to plan ahead and make all of your future RRSP payments from this point on into a Spousal RRSP if your spouse will be in a lower tax bracket during your CORe years and, even better, if s/he is younger than you.  Although you can’t income split CORe payments, spousal RRSPs may allow you some of the same benefits.  Assuming the RRSP money has been inside the RRSP for long enough to qualify, 100% of the withdrawals will be taxed in your spouse’s name.  This means you can receive more of your CORe at lower tax rates, as 100% of the RRIF money withdrawn by your spouse from the Spousal RRSP will be taxed in his or her hands, which reduces your taxable income and, hopefully, the tax you would need to pay on your CORe.  Worried about taxes once your CORe payments have ceased?  Your spouse can allocate up to 50% of the RRIF income to you once s/he is 65 if it appears that s/he will be the one in the higher tax bracket after you’ve received all of your CORe rewards.

If your spouse is younger, there is an added benefit to spousal RRSP payments – you can wait longer before having to trigger your RRIF, which might be a blessing if you are still CORing out and don’t really need the RRIF income at that point.  As you know, it often makes sense to defer RRIf payments as long as possible or, at least, have more flexibility on how much and when to make RRSP withdrawals, which you would get by pushing out the date when you must set up your RRIF if your spouse is younger than you.  On a related note, if you still have RRSPs in your name, consider setting up the minimum withdrawal payment when you RRIF on your partner’s age rather than yours.  Although it won’t push back the deadline for when you have to RRIF, your minimum mandatory withdrawal will at least be lower.  Be careful, however, as you need to clarify which age you wish to use when you first set up your RRIF.

As a final thought, consider continuing contributions to a RRSP or Spousal RRSP when you are receiving your CORe.  As CORe payments are taxed as income, you will continue to earn new RRSP room the next year of 18% of your CORe payments that year.  When deciding between Spousal or regular RRSPs, the same considerations just discussed will apply – which spouse is younger and who will be in the higher tax bracket by the time you RRIF?  Are you older than 71?  You are still earning RRSP room and can contribute to a Spousal RRSP until the end of the year that your spouse reaches that magic age.

Conclusion

CORe payments represent a monetary reward recognizing your years of hard work helping your clients and building a successful business.  Although the size of your CORe is largely up to you, the size of the resulting tax bill can be the result of careful tax planning.  I suggest carefully working with experts inside of Sun Life to determine the best time and way to trigger your CORe from a business perspective.  On the other hand, you may also need to work with tax and legal experts inside or outside the company in order make your money go further.  We have been telling our clients for years of the benefits of planning ahead.  It is now time to take some of our own advice.