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The Individual Pension Plan - Part I

04/08/2009


Whenever I sit down with a client to discuss their business structures, a major concern that always pops up is post-retirement cash flow. Quite often our discussions will lead to the topic of individual pension plans (IPPs), as they are an invaluable tool to minimize corporate tax while planning for the owner-manager’s retirement.

An Overview of the IPP

  • RRSPs have limitations, and the IPP may be better suited for you and your business.
  • An IPP is a defined benefit registered pension plan. A defined benefit plan must be set up with an actuary to ensure the appropriate funds are available for retirement.
  • The contribution limits are formula based, dependent on salaries and number of years of employment. IPP contribution amounts are generally higher than the RRSP contribution limits.
  • The ideal candidates for an IPP are individuals 45 years of age and over earning more than $100,000 per year. 
  • When creating an IPP, the company can make a payment for the years of past service before the IPP was in place. This is a one-time payment made to the IPP, and is deductible to the company. Depending on the years of service and the history of income, this can be a significant amount.
  • The money cannot be withdrawn by the annuitant until retirement.
  • The IPP is not taxable to the annuitant until the funds are withdrawn in retirement.

Benefits of an IPP
The IPP has many benefits, some of which include:

  • For many people, the IPP will shelter more funds than an RRSP.
  • The maximum annual funding of an IPP is dependent on the age of the individual. As the individual ages, the maximum annual funding is increased. 
  • Because the IPP is a defined benefit plan, there is a guaranteed pension at retirement. There is no such guarantee with an RRSP. 
  • The funds within an IPP are protected from creditors. 
  • The corporation may have the ability to fund the past service in addition to the annual contribution for current service.
  • The corporation can deduct the interest on loans obtained to fund the IPP. This interest is not a taxable benefit to the shareholder.

How do you set up and maintain an IPP?
In order to create an IPP, there are a number of steps that must be completed. An actuarial valuation must be obtained, certain documents must be structured, the investment account must be opened and the plan must be filed with the regulators.

Because an IPP is a defined benefit pension plan, there is maintenance required on an on-going basis. There is a need for actuarial advice and tri-annual actuarial valuations. In addition, it is necessary to maintain adequate records of the members and the trust agreement. There are annual information returns to be filed with regulators in addition to annual regulatory fees.

The IPP is another valuable tool for retirement planning. Because of the IPP's complexity, it is advisable that this be discussed with your tax advisors in addition to seeking the advice and services of an actuarial firm.