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Investing

The advantages of planning
If you don’t already have a plan, start developing a personal retirement strategy. As a first step, you might outline your desires for this chapter of your life. Then, consider how much income you’ll need to achieve your goals. (It may be helpful to think of your target income as a percentage of your current annual income; generally, you’ll need between 60% and 80% of your annual income to maintain your lifestyle in retirement.) Finally, think about how you’ll reach these goals, bearing in mind your current situation and the various potential sources of future income from government and employment sources, as well as your personal retirement savings.

Mutual Fund Investment Strategies
Since mutual funds are essentially pools of money managed by a professional money manager, there are many different mutual fund investment strategies. Potential mutual fund investment strategies are only limited by regulatory issues, the ability of money managers, the desire of a sponsor to establish such a fund and the demand from investors for that type of fund.


Equity Associates is only in the business of Mutual Funds.*

Sector and Theme Funds
Sector funds are based on specific areas or "sectors" within a broader asset class or mutual fund grouping.

"High yield" or "junk bond” funds are bond funds which invest in lower quality "junk" or "less than investment grade" bonds. "Resource" equity funds invest in the equities of companies in the resource industry.

Theme funds invest according to a particular investment philosophy or
"theme". Traditional "growth" and "value" equity funds are based on interpretations of these investment philosophies.

More recently, funds have been created that reflect a particular "investment theme". "New Economy" Equity Fund in Canada which invests in companies identified as in the "New Economy" in the belief that these companies will outperform traditionally based industries.
Environmental funds invest in companies which have "environmentally friendly" policies.

"Emerging market" funds reflect the investment theme that emerging country economies will grow faster than the more established economies.

Why Funds are Established
There would seem to be little constraint on the type of fund that could be created. In reality, most funds are established by marketing imperative. A fund sponsor will only establish a type of fund if there is the sufficient prospect of assembling enough assets to provide a profitable return. This means that new types of funds usually gurgle up from the well of "investor fashion".

For example, take the mania that developed over international investing in 1993. Studies showing the higher returns and decreased risk of international diversification had been around for years. Successful international managers like the Templeton group had long offered international mutual funds.

The fall of the "Iron Curtain", the establishment of the North American Free Trade Area and the strong economies of the Asian "Tigers" combined to capture investors' imaginations and make a very attractive and easy "sales pitch". A very liquid financial market and strong historical performance numbers translated into greed and plenty of money available for investment. Mutual fund companies rushed to create foreign and international funds. The money flowing into small foreign markets caused these markets to surge higher in price, producing stellar investment returns for foreign and international funds. This strong performance caused even more funds to be created, further fuelling the surging prices of foreign markets.

This cycle continued until the Federal Reserve tightened monetary policy in January, 1994. The combination of the Fed tightening and the collapse of the Mexican peso and stock market caused a major setback for most international funds. Some of the funds created at this time have lagged the returns of the domestic U.S. and Canadian markets ever since!

By establishing your goals, understanding concepts like asset allocation, dollar cost averaging, compounding, and diversification, you can approach your investments with a strategy that will help you increase your wealth while you protect your portfolio.

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Consulting

At Dalla Rosa Financial Inc., our industry experience, broad capabilities and deep alliances mean we can help you maximize opportunities and avoid unnecessary risk.

As the global marketplace continues to expand and shift, the complexities of managing and building a business are growing. A spectrum of resources and strategies are available, but orchestrating the most effective combination takes specialized experience in the field. That's something few financial and management consultants can provide.

Our professionals provide creative financing and management solutions to help organizations grow and compete more effectively. Our promise is simple. We help clients create more value.

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Employee Profit Sharing Plan

What is an Employee Profit Sharing Plan (EPSP)?

An Employee Profit Sharing Plan is a mechanism available under the Income Tax Act that allows you to suspend contributions to the Canada Pension Plan (CPP) without affecting your benefits at retirement (some restrictions may apply).

An EPSP allows an employer to deposit money into a Company Trust that would normally be paid as income to an employee who is part of the plan (a “participating employee”). This exempts both the employer and the employee from CPP payroll deductions as well as other related tax levies, e.g.Employment Insurance.

Would I still be entitled to receive Canada Pension Plan benefits upon retirement?
Yes. You may suspend contributions to CPP for up to seven years during your working career without affecting your CPP benefits. (An analysis of your situation is required.)

Any CPP you are currently entitled to will remain yours.

What about my entitlement to Employment Insurance?
An employee would become ineligible for Employment Insurance, and would choose to suspend these contributions only when the circumstances warrant. For example, an employee who may be planning a family will need an uninterrupted twelve-month contributory period prior to claiming maternity benefits; however, a long- term employee/owner might expect an exit package upon termination that would make them ineligible for EI benefits.

Is there a particular type of employee who would be best suited for an Employee Profit Sharing Plan?
Yes. Business owners and executive management can gain substantially from participating in an EPSP.

If they opt out of paying into the Canada Pension Plan for seven years, the money that would otherwise have gone to CPP deductions can instead be contributed to their RRSP, or any savings products that would capitalize on the power of compounding over the years.

If I’m the employer, how can I make sure I take the best advantage of this option for both my company and the employee-participants?
Employers should consider paying bonuses into an EPSP. Usually, when employers pay a bonus to an owner or an employee, the employer must pay payroll taxes and the employee’s bonus is subject to CPP contributions, Employment Insurance contributions, and withholding taxes.

Can you give me an example of how much I could save if I didn’t contribute to the CPP or Employment Insurance?
For the year 2003, the annual CPP and EI contributions for employees earning $40,000 and over would be as follows:

Contributing Party CPP EI Total
Employee Contributions $1,802 $818 $2,620
Employer Contributions $1,802 $1,147 $2,949
Total Contributions $3,604 $1,965 $5,569

If you are an employer-participant, it can translate into accumulated savings of $38,983 over 7 years. And remember, this money can grow even more in an investment of your choice, or could be used to pay down a mortgage or used in any other way you choose.

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Individual Pension Plans

What is an Individual Pension Plan?
An Individual Pension Plan (IPP) is a registered plan, sponsored by the employer of a corporation, that provides the maximum defined benefits permitted by the Canada Customs and Revenue Agency (CCRA).
As an alternative to a Registered Retirement Savings Plan (RRSP), an IPP permits employees, including connected persons (10%+ share ownership), to make annual tax-sheltered contributions greater than those permitted by an RRSP. Membership in the plan is limited to an individual and his or her spouse.

Special rules govern contributions and investments and each IPP must be registered with the Canada Customs and Revenue Agency and the appropriate provincial pension authority.

What are the advantages of an IPP?

Contributions are greater
The maximum annual tax-deductible employer contributions to an IPP/RRSP combination are substantially higher (25% to 70%) than the maximum allowable RRSP contributions alone.

IPPs are creditor-proof
IPPs are regulated by both CCRA and applicable provincial laws so as to be creditor-proof. Recent RRSP court decisions have cast doubt regarding the creditor-proof status of RRSPs.

Surpluses revert to the plan member’s spouse or estate
In an employer-sponsored group pension plan, any surplus remaining after the termination of the member by death, retirement, etc. stays in the general pension pool. However, on termination of an IPP, all plan assets, including any surplus, are returned to the plan member’s spouse or estate.

Expenses are deductible
All contributions made, and any expenses incurred to establish and maintain an IPP, are tax deductible to the employer. The expenses may also be paid from the IPP fund.

Top-ups are allowable to meet specified benefits
An IPP guarantees a certain level of pension benefits at retirement. Because of this, IPPs unlike RRSPs, permit additional contributions if the plan assets earn less than 7.5%. In addition, should the plan member retire before age 65, an additional contribution to the IPP is available, which can total up to 50% of the then accumulated IPP assets.

Past Service Pension Adjustment
The option to include as far back as 1991 may present a substantial adjustment allowing an extra contribution to your retirement in the neighbourhood of $85,000 which would be tax deductible to the corporation.

Investments
Allowable investments for an IPP are similar to those permitted for RRSPs. The IPP "fundholder" may be a Life Insurance Company or a Trust administered by three individual Trustees. As with RRSPs, the plan member, through the Trustees or Life Insurance Company, may make the investment decisions or delegate them to a professional fund manager.

Termination
If circumstances change, the Plan can be terminated at any time. The Plan assets are then transferred to the member's "locked-in" RRSP. If the member is less than 65, and the Plan has a surplus, additional pension income in the form of term certain annuities payable to age 65 may be purchased. In addition, there could be substantial additional funding room available at that time. Should any surplus remain, it will be paid to the member as taxable income. Should this surplus be significant, the Plan may be maintained in effect without the plan member continuing to accrue additional pension credits.

Retirement
An IPP provides for retirement at age 65, but retirement is permitted as early as age 55 on a very favourable basis. In most cases, significant additional tax-deductible contributions may be made if all pre-65 benefits are purchased. Retirement may also be extended to the end of the year the member attains age 69, with contributions and benefits continuing to accrue.

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Retirement Compensation Arrangement

What is a Retirement Compensation Arrangement?
A Retirement Compensation Arrangement (RCA) is defined in Section 248(1) of the Income Tax Act (Canada). The important wording is set out in the preamble, to the effect that contributions may be made to an RCA by an employer or former employer of a taxpayer "in connection with benefits that are to be or may be received or enjoyed after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of a taxpayer or the loss of an office or employment of the taxpayer."

Are contributions to an RCA tax-deductible?
The Canada Customs and Revenue Agency (CCRA) permits tax-deductible contributions to an RCA by the employer, or by the taxpayer where such contributions are required under an employment agreement and are not greater than those contributed by the employer to the benefit of the taxpayer. To ensure that CCRA cannot attack an RCA as providing unreasonable benefits, an Actuarial Certificate should be provided to the Employer certifying the benefits produced by accumulated RCA contributions to be reasonable.

What are the tax rules relating to RCAs?

  1. RCA Contributions are tax-deductible.
  2. There is a 50% refundable tax on such contributions.

Taxable investment income is made up of dividends, interest and realized capital gains but excludes unrealized capital gains and the investment income of exempt life insurance policies.

How are the taxpayer’s benefits from an RCA taxed?
Income received by a taxpayer from an RCA is treated in the same manner as pension income and is subject to tax in the normal manner. However, should the recipient no longer be a Canadian taxpayer as the result of emigration from Canada, lower tax rates may apply depending on the applicable Tax Treaty.

Are there any restrictions to assets that can be held in an RCA for investment purposes?
There are no rules or restrictions regarding RCA assets other than the fact they must comprise bona fide investments. Suitable third-party assets which will serve to mitigate the 50% Refundable Tax on investment income include:

  • Universal Life Insurance Policies
  • Index Equity Funds
  • Specific Hedge Funds
  • Special RCA Investment Funds that are structured on a buy-and-hold basis and that invest in Canadian, U.S. and Foreign Equities

Other suitable investments could include mortgages against the property of the taxpayer or employer and loans with adequate security on a non-arm’s length basis.

Which Closely Held Companies should establish RCAs?
Company owners may want to consider establishing an RCA when one or all of the following apply:

  1. The company’s earnings typically exceed the small business tax limit after paying adequate remuneration to the owners.
  2. The company’s principals wish to increase the amount of corporate dollars available for retirement.
  3. The company’s principals are considering selling at retirement and possibly emigrating from Canada.

Click here to contact Dalla Rosa Financial for more information about Retirement Compensation Arrangements.


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* Mutual Funds are provided by Equity Associates Inc. a Mutual Fund Dealer. All other products or services offered by Dalla Rosa Financial are not the business of Dealer and are not monitored or supervised by Equity Associates Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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