Posted under: Business Owners, IPP
Anywhere you look, you’ll likely see a franchise. From the rest stops on the highway, to nearly every small town and large city. There are over 75,000 franchise locations in Canada in over 50 sectors including food, retail, healthcare, automotive, and even professional services such as accounting. Up to 1,300 different franchise companies drive this growth, and collectively, they generate over $96 billion in annual revenue for the Canadian economy. With this many franchisees and franchisors contributing to Canadian prosperity through economic growth and job creation, shouldn’t a better retirement planning option exist for them? This article will discuss Individual Pension Plans for franchises.
Different Parent Companies have different rules around the sale of the locations, but with the majority of Franchises, an asset sale is the typical transaction. Unlike small independent businesses, where a share sale is the pot of gold at the end of the rainbow, these Franchise Owners create the bulk of their wealth from running the business, so there is no lifetime capital gains exemption available. The use of Individual Pension Plans (IPPs) to manage profits and offset proceeds of an asset sale should be considered.
With an asset sale, the proceeds are received by the company, which are treated as taxable income; and the once operating company will become a holding company. The IPP is a great tool to offset that income spike and safeguard assets for retirement through its past service and current year contribution room.
IPPs, which many franchisees have taken advantage of, have existed for decades. The IPP, which is funded through pre-tax corporate dollars, offers an array of benefits over and above traditional savings plans such as the RRSP, including:
It is a prudent part of any franchise or franchisee’s retirement planning process to consider the IPP as a piece of the planning puzzle. Individual Pension Plans for franchises make sense.
Consider the example of Mark and Jessica Jones, 50-year-old Franchisees with two Buddy’s Burgers locations in Ontario. They have ran the locations for 15 years, drawing T4 of $125,000 each from 2010-2020, and increased them to $150,000 for the last five years. They have each saved $250,000 in RSPs and both have $500,000 of unused RSP room. They are looking at selling both locations in the next three years, anticipating the sale proceeds for both locations totally $1,500,000.
Utilizing the unused room, they would have $1,368,800 of past service funding room in addition to the $81,100 of current years room. As funding is not enforced, they will be able to deploy the past service room at the point of sale and use the current year contribution to offset active business income. Once the assets are sold, the IPP would not be required to fund the plan further.
In the past, the major opposition by Accountants and Advisors to the IPP were a lack of flexibility assuming a requirement to fund the plan, and due to complexity. However, most provinces have relaxed funding rules, with Ontario for example, passing Bill 213 in 2020, which exempts Ontario IPPs for Professionals from provincial funding rules and administrative requirements. In Ontario in particular, funding is no longer required, administration is streamlined, and in retirement there no longer are any locking-in rules if the plan is terminated.
For many Francise Owners, the usage of IPPs to reduce corporate and personal taxes and manage passive income in light of changes to tax policy, should be considered. The IPP will provide increased funding, creditor protection, and diversification to their financial plan, along with corporate tax deductions on contributions.
If you are a franchise owner, association, or franchisee, reach out to your GBL representative to learn more.
Fraser Lang, CLU, CFP, CHS, is a Senior Vice President of Sales and Business Development with GBL; leading its sales and service in Eastern Canada.
Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners across Canada, and corporate pension administration and consulting. With offices in Calgary and Toronto, we have served 7,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs and RCAs, and have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at info@gblinc.ca or 403.249.1820 and follow us to learn how we can help Build Your Future. www.gblinc.ca
