by Jackie McCann-Scott
The resilience, creativity, and business savvy of the women entrepreneurs in this province were on full display at the annual NLOWE conference this past April. Following a tough couple of years, the business community has emerged bolder, braver, and more brilliant than ever. If this recovery means you have (or anticipate having) excess cash on your balance sheet this year, here are a few strategies to put those retained earnings to good use.
Wage loss replacement plan
I am a strong believer that our ability to earn an income is one of our greatest assets. Setting up a traditional group Long Term Disability (LTD) plan is a common way to protect your income and that of your team. However, this type of income protection strategy has limited features, and claims experience within the group can drive up premiums annually.
Alternatively, if your company has at least two people, you can purchase individual disability insurance policies for a group of employees (or a specific class of employees). This structure allows for the income protection plans to be fully customizable to the employee (as opposed to the one-size-fits-all approach of a traditional group LTD), ensures the premiums will never increase (regardless of individual claims within the group), and allows the insureds to take over the policies personally should they ever leave the company. The premiums are paid for by the corporation, are fully deductible, and are not considered a taxable benefit to the employee. If an employee were to suffer an injury or illness and become eligible for benefits, only then would that disability income be taxable to them. In this highly competitive hiring climate, customized income protection could give you the edge you need to attract those superstars to your team.
Private health spending account
Another fully tax deductible, customizable alternative to traditional group plans is the Private Health Spending Account (PHSA). To meet the requirements of the CRA, you must be incorporated to establish a PHSA; you must extend the benefit to all full-time employees, and the amount of the health spending limit assigned to each employee segment must be considered “reasonable.” Coverage for part-time employees is optional, and contractors are excluded. Each employee within a subset is assigned an annual health spending limit that they can use however they wish on an exhaustive list of health-care expenses. The employee pays for the health-related expense out of pocket and is then reimbursed by the company up to the limit established. The benefit is 100 percent tax free to the employee and 100 percent tax deductible for the employer. Plans are easy and inexpensive to set up and must be administered through one of several qualified third-party providers.
Essentially, these guidelines exist because CRA does not want single owner/single shareholder companies using their PHSA for tax avoidance purposes. It comes down to establishing that the benefit is bestowed upon you in your capacity as an employee of your business and not as a shareholder, which could involve demonstrating these aspects of the work relationship:
§ receiving T4 income (being paid as an employee)
§ being actively engaged in day-to-day business operations as an employee
§ having an employment contract in place for yourself that includes the details of the PHSA
§ having a plan that cannot be changed at the discretion of the shareholder to accommodate their needs
Group RRSP
BMO’s thirteenth Annual Retirement Study indicated that Canadians feel they will need $1.7 million to retire. Yet that same study showed the average amount held in RRSPs nationally is $144,613, with an even lower average in Atlantic Canada, at less than $128,000. Furthermore, FP Canada’s 2022 Financial Stress Index confirmed that money is the biggest stressor for 38 percent of Canadians, outranking personal health (21 percent), work (19 percent), and relationships (18 percent). It is quite likely that your team is feeling a strain on their finances because of the pandemic. Helping them bridge the gap between where they are and where they would like to be can go a long way toward alleviating that stress. It also improves their feeling of well-being and their job performance and productivity. A group RRSP—with or without matching—can ensure that they are actively taking steps toward that financial freedom. Group RRSP members benefit from lower fees, ease of administration, and access to online resources and advisors that can help them understand how to make the most of their plan and their financial futures.
Putting it all together
As entrepreneurs, we have the chance to build businesses that not only improve the lives of the clients we serve but—with a little financial creativity—can also enhance financial outcomes for ourselves and our team. Now that is truly bold, brave, and brilliant!
Jackie is a certified financial planner (CFP) and a certified health insurance specialist (CHS), with more than twenty years’ experience in financial services. She has built a fresh and forward-thinking financial planning practice that aims to educate and empower the clients it serves. Jackie recently led an initiative to help improve the financial literacy of the province’s youth and is a regular guest on local radio, where she helps people gain clarity on a wide array of financial topics. She also wrote a financial column for the Telegram, “The Invested Mama Minute,” for three years and is a past contributor to The Advisor.
She can be reached via jackie@lupinplanninggroup.ca or by calling 709-781-3526.
