Individual Pension Plans Provide Additional Contributions,

Higher Pensions for Taxpayers

For higher-income individuals who want to contribute more to a tax-sheltered pension plan than their RRSP limits allow them to, or for those who wish to creditor-proof their retirement assets, setting up an individual pension plan (IPP) may be the answer to their prayers.

An IPP is a defined benefit pension plan, registered with the Canada Revenue Agency. In an RRSP, contribution limits are determined by an arbitrary percentage of eligible earnings (currently 18%). In an IPP, contributions are determined by actuaries, based on the pension that is required to be paid upon the individual’s retirement. Typically this means that the amount of contributions are greater than they would be under the RRSP limits, providing not only a greater pool of pension assets for the individual, but also additional tax deductions for the payer corporation.

In order to be eligible for an IPP, a person must:

• Be an employee of an incorporated company that is taxable under the Income Tax Act of Canada;
• Have employment income of at least $75,000 from the company ($50,000 if it is the sole source of taxable income of the individual)
• Be at least age 40

Family members may be added to the plan if they also draw salary from the corporation.

In addition to higher tax-deductible contributions to the plan as mentioned above, other benefits of an IPP are:

• All associated fees and interest are also tax-deductible
• Ability to fund past-service contributions
• Ability to top up contributions if investment returns are insufficient to fund required payouts
• Ability to deduct contributions made up to 120 days after corporation year end
• Guaranteed, predictable lifetime income
• All assets are available for transfer to spouse, another beneficiary or the estate of the plan member
• Transfer to spouse can be done on a tax-free basis
• Assets may be managed on a self-directed basis
• Assets within the plan are creditor proof

This latter point can be extremely important to anyone involved in high-risk corporate activities, or in any situation where there is concern about creditors. Note that RRSPs are generally not creditor-proof, unless the assets are invested through an insurance contract.

On the minus side, there are several factors that need to be considered before entering into an IPP contract, including:

• Funds are locked in and can only be used to fund retirement (as opposed to RRSPs, where funds may be withdrawn for any reason, subject to tax, of course)
• Set up and maintenance costs are typically higher than for RRSPs, although the fees are tax deductible
• Annual contributions are required according to actuarial calculations, regardless of the corporations profitability or ability to pay.

Restrictions on investments within the IPP include a limit that no one equity may represent more than 10% of the plans assets at time of investment, and a foreign content limit of 25%.

While IPPs are not for everyone, they may be an attractive alternative for anyone wishing to creditor proof their retirement assets, or anyone owning a corporation that has a reliable income stream and wants to be able to shelter more of their money.

The tax professionals at Van Wensem, Eakins and George would be pleased to discuss your retirement needs and options with you, and will ensure that you are referred to reliable professionals if you wish to set up an IPP or other retirement plan.