Retirement Plan Options for Small-Business Owners

As a self-employed individual or small-business owner, you have to take care of your own retirement needs. Luckily, there is a range of retirement accounts you can use, and the Canada Revenue Agency (CRA) offers tax deductions and credits to help making saving even easier.

Canada Pension Plan (CPP)

The Canada Pension Plan is an obligatory retirement plan to which every working Canadian must contribute.

If you have employees for your small business, you must contribute to the CPP on their behalf if they are between ages 18 and 70, and earn over $3,500 per year.

When you contribute to the CPP for employees, you send the CRA 5.1% of your employee’s earnings.

You can do this online using the CRA’s My Business Account service. You must also deduct an additional 5.1% from your employee’s paycheck and submit those funds to the CRA as well. As of 2019, you do not have to pay into the CPP on earnings over $57,400.

In addition to covering half of your employees’ CPP contributions, you must pay all of your own CPP contributions.

As of 2019, that equates to 10.2% of all of your earnings over $3,500 and under $57,400.

As a small business owner, when you file your taxes, you must list all of your business income and subtract qualifying expenses from that amount. The total will be your income for the year, but you only have to pay a portion of that to the CPP.

Regardless of your annual earnings, if you have earned over the maximum threshold of $53,600 to calculate your annual payment, subtract $3,500 from $53,600 and multiply the result by .099 to get your CPP owed of $4,959. If you earn less than the maximum threshold, simply subtract $3,500 and multiply the result by .099.

Registered Retirement Savings Plans

An RRSP is an account that you can set up yourself that is registered with the CRA.

  • You can opt for an RRSP in which investment stocks and bonds are chosen by a plan administrator. Or,
  • If you desire more control over your investments, you may opt for a self-directed RRSP.

Regardless of which option you select, you can contribute to this fund without paying income taxes on the money contributed.

As of 2019, the CRA allows taxpayers, whether they are employees or business owners, to contribute up to 18 percent of their employment income up to a threshold of $26,500 per year.

However, if you do not make all of your allowed contributions one year, they will carry over into the following year. To see how much you are allowed to contribute in any given year, you can wait for the CRA to mail you an assessment, or you may check online using the My Account service.

Group Registered Retirement Savings Plans

If you want to help your employees save for their retirements, a group RRSP is a useful tool. You may set up a group RRSP through a mutual fund company or any other qualified administrator.

  • You can help interested employees save by taking their RRSP deposits directly out of their payroll cheques.
  • You can encourage saving by matching some of their contributions.
  • Both their contributions and yours are tax deductible on your respective tax returns.

Keep in mind there are many specifics to consider, including closing employees’ RRSP accounts when they stop working for you. In most cases, your ex-employees may opt to use the money to buy an annuity, take it as cash, or transfer the funds to another RRSP or an Registered Retirement Income Fund.

Registered Retirement Income Funds

A Registered Retirement Income Fund can be described as the second part to an RRSP.

The Canadian government requires RRSP holders to transfer all of the funds out of their retirement accounts by the year they turn 71, and most people opt to transfer them to an RRIF. You may also transfer savings from stocks, bonds or even cash into these accounts.

You don’t have to wait until you are 71 to set up your RRIF, but you are required to begin withdrawing from it as soon as you set it up. Your annual required withdrawal is a percentage of the total value of the account. The younger you are, the lower the percentage will be. Even if you are still working, the RRIF can be a useful way to augment your income.

Tax-Free Savings Accounts

If you need an additional savings tool to help prepare for retirement, tax-free savings accounts are an option to consider. The annual contribution limit for tax year 2019 is $6,000. You do not have to declare any interest or capital gains you earn on these accounts as income.