Changes to Budget 2024 regarding capital gains taxes have left small business owners, including Pharmacy owners, wondering what the most efficient ways are to invest their hard-earned money. Here are some ways to continue to build your wealth tax-free as well as the benefits they can provide.
Ways to Invest Your Money
The best ways to invest your money ultimately depend on your specific goals. It’s also important to do thorough research and to seek help from tax professionals to diversify your investments, minimize risk and maximize your returns.
Permanent Life Insurance
Many business owners do not realize that permanent life insurance has an investment component built into it. It is the only investment vehicle on planet earth that has unlimited contribution room, your contributions grow inside the policy tax free, and are paid out tax free.
This type of life insurance provides coverage for the entirety of your life, as long as the premiums are paid. Unlike term life insurance, which only provides coverage for a set period, permanent life insurance offers lifelong protection. Permanent life insurance is often used as a way to provide financial security for loved ones or as a way to supplement retirement income. This type of insurance offers peace of mind knowing that coverage will be in place for the rest of your life. Its other benefits include:
- Cash Value Growth: Permanent life insurance policies include a cash value component that grows over time. This cash value can be borrowed against or withdrawn for various purposes such as paying for college tuition, supplementing retirement income, or covering unexpected expenses.
- Tax-Free Death Benefit: The death benefit paid out to beneficiaries upon your passing is typically tax-free, providing a substantial financial benefit to the beneficiaries. This can help ensure that the beneficiaries can support themselves even after your death.
- Policy Customization: Permanent life insurance policies often allow for flexibility and customization to meet your needs and the needs of your beneficiaries. You can choose the amount of coverage, premium payment schedule, and investment options that best suit your circumstances.
- Guaranteed Protection: Unlike other investment options that may be subject to market fluctuations, permanent life insurance policies provide a guaranteed death benefit and cash value growth. This can provide you with peace of mind to policyholders knowing that your loved ones will be financially protected no matter what happens in the market.
Individual Pension Plan
An Individual Pension Plan (IPP) is a retirement savings vehicle designed for those who own an incorporated business and pay themselves a salary of at least $100,000 per year. It is a type of defined benefit pension plan that is set up and administered by the corporation on behalf of the individual. There are several benefits, including:
- Larger Contributions: With an IPP, you can make larger tax-deferred contributions to your retirement savings compared to other retirement savings options such as RRSPs or TFSAs. This is particularly an advantage for high-income earners who are looking to maximize their retirement savings while minimizing their tax liabilities.
- Tax deductions for your business: all contributions are paid for by your business and are considered tax deductions, lowering your corporate tax bill every year
- Guaranteed Retirement Income: An IPP provides you with a guaranteed income stream during retirement from the pharmacy business. The amount of pension benefits that’ll receive upon retirement is predetermined and based on a formula that takes into account factors such as your age, salary, and years of service. This provides you with greater financial security and peace of mind in retirement.
- Creditor Protection: Assets held within the plan are generally protected from creditors in the event of bankruptcy or insolvency. This can provide added security for pharmacy owners who may be at a higher risk of facing financial difficulties in the future.
Tax-Free Savings Account (TFSA)
Contributions made to a TFSA account are not tax-deductible, therefore, they are completely tax-free so you can save your investments without having to pay taxes on the growth or withdrawals. This type of account’s main benefits include:
- Flexibility: Unlike other accounts such as an RRSP, TFSAs allow for more flexibility in terms of withdrawals and contributions. You are free to withdraw money from your TFSA at any time without incurring penalties, and any unused contribution room can be carried forward to future years.
- Retirement Savings: TFSAs can be used as a tax-efficient way to save for retirement. While RRSPs are designed to provide a tax break on contributions but are taxable upon withdrawal, TFSAs offer tax-free withdrawals in retirement. This can provide you with a source of tax-free income to supplement your retirement savings.
- Goal-Based Savings: TFSAs are a great tool for saving for short-term goals such as a vacation, a down payment on a home, or an emergency fund. Because withdrawals are tax-free, you can access your savings when you need them most without having to worry about the tax consequences.
First-Home Savings Account (FHSA)
Even if you’re not planning on buying a home, starting an FHSA allows you the opportunity to save up to $40,000 that you can then transfer to your RRSP on a tax-free basis.
The annual maximum amount you can contribute to your FHSA is $8,000 and are tax deductions on your personal tax return, helping you save money on taxes.
An FHSA can remain open for up to 15 years or until the end of the year when you turn 71. Its main benefits include:
- Access Funds Without Penalty: While traditional retirement savings accounts typically have restrictions and penalties for withdrawing funds early, an FHSA allows you to withdraw money tax-free to buy a house. This can make it easier for you to access the funds you need to make a down payment without jeopardizing your long-term savings goals.
- No Repayment Necessary: When you withdraw the funds to buy a home, you are not required to pay back those funds, unlike the RRSP Home Buyers Plan, which you must pay back over 15 years
- Transfer Tax Free to RRSP: If you do not buy a home, you can transfer the funds in your FHSA to your RRSP on a tax free basis. In my opinion, every Canadian who has not bought a home should open an FHSA to get an extra $40,000 of personal tax deductions. In the future, shutdown the FHSA and transfer the funds to your RRSP to be used for your retirement in the future.
Your Investments Can Still be Thoroughly Protected
Rest assured knowing that your investments can be thoroughly protected in various ways. These types of accounts and insurance plans not only can protect your hard-earned money as a pharmacy owner, but also help you reach your goals. Ultimately, the best way to set yourself up for success and tax shelter your money is to work with a tax professional such as PharmaTax to ensure you’re provided with the best financial solutions for you.
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