Law firm strategies to save money: Individual pension plans, incorporation, works in progress

Offsetting taxes, incorporation could help with wealth management

Law firm strategies to save money: Individual pension plans, incorporation, works in progress

Tax planning is one way to help lawyers streamline their finances in the post-pandemic economy, through setting up corporations, deferring expenses or using individual pension plans, says one wealth manager.

Mariska Loeppky, director of tax and estate planning at IG Wealth Management, works with professional clients, including lawyers, on their business and personal finances. She says lawyers may be reconsidering how to plan their saving and spending as they expect less income this year.

“Say you're working for a big law firm, and you know that you might not get as big of a bonus this year. But the law firm quickly recovers and you get a really big bonus next year. You're going to be at a higher tax bracket next year, so maybe push expenses towards next year, when you have more taxable income to offset,” she says.

She says travel, marketing and replacing computers are examples of discretionary expenses that could be pushed.

“The best tax planning that you can do is to spread your taxable income over as many years as possible as evenly as possible,” she says.

“A lot of our conversations right now with business owners is, ‘My income is down this year. What should I do?’ You might want to trigger gains this year. Because you're in the lower income year. . . . if you've got a bigger conference that you need to go to, maybe don't go this year — go in a year where you know that you're going to have a bigger tax bill.”

This kind of tax planning is particularly important to professionals like lawyers because of changes that will begin in 2021 around files in progress, says Loeppky.

“It used to be that some professionals, including lawyers, didn't have to pull into income or include in their income, their work in progress. At the end of the year, if you had any files that weren't billed, you didn't have to include that into income. But in 2017, the CRA announced that that work in progress would now have to be included in income and they gave you five years to do that,” says Loeppky.

“[If] this year you have very little income, what I would do by the end of the year, is make sure all of the work-in-progress files are finalized as much as possible — and billed out as much as possible. That work in progress next year will have to get pulled into income, so if you have a choice between pulling it into income this year versus next year, you're better off pulling it into income this year, because you're going to be in a lower tax bracket.”

Loeppky says that lawyers who currently have less work and more time could take the opportunity to look into setting up a corporation.

“If you earn your income in a corporation versus personally, you can defer that second level of tax until you're in a lower tax bracket,” she says.

“We know that investment income that is earned into a corporation is actually taxed less favourably than if you were to earn it personally. And so you would do anything you can to try to extract money from the corporation — to the extent that it can be tax free — so that you can invest it personally. But if you can't, then you would focus on investment income that is taxed at more preferential rates inside the corporation, then you would personally. So for example, interest income is taxed more inside the corporation than personally. So focus your investments that you own personally on generating interest income, and focus investment income inside the corporation on non-interest bearing investments that generate gains and dividends.”

She also said TFSAs and individual pension plans are sometimes overlooked by professionals.

“Most of the professionals that come to us have accumulated some wealth in other corporations. They're approaching retirement, but they really don't know how that is going to be funded. And so one of those strategies that we talk to them about is, if you aren't already doing so, maximize your TFSA. When the TFSA was first introduced, I thought, ‘Oh, $5,000 not a big deal. You can put that in your TFSA, but it won't really make a difference for my high net worth clients.’ But now that TFSA has been in existence for some time, you can put away a lot more money,” she says.

“If clients haven't incorporated yet, we talked to them about incorporating. People in their mid 40s to early 50s, we talk to them about potentially using some of their RRSP money and some of their corporate profits to fund an individual pension plan. I've seen some professionals really benefit from that kind of planning.”

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