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The Individual Pension Plan - Part II


The IPP has many practical applications to reward key personnel and shareholder-managers. Let's assume that the first year contribution, which may include past service, was calculated by an actuary to be $175,000 for a 45-year-old individual.

Earnings in Excess of Small Business Deduction Limit
If the business has income in excess of the small business deduction, an IPP contribution could be expensed against high-rate corporate income. The income may result from operations or from recapture on a sale of assets. If a bonus were paid to the shareholder, it would result in taxes at the individual level, and the investments would be made with after tax dollars.

If the corporation created an IPP for the benefit of the shareholder, the corporation would receive a deduction of $175,000. This would not be a taxable benefit to the shareholder. The earnings within the IPP would compound tax-free, resulting in larger growth than a non-registered account. On an annual basis, the corporation would continue to make deductible payments to the IPP. These payments are often larger than the RRSP contributions that could be made in absence of the IPP.

Shareholder is eager to save for retirement
Where there is a shareholder who wants to invest large sums of money for retirement, an IPP is the logical choice.
In the absence of an IPP, the shareholder would take cash from the company to fund retirement. Assuming the shareholder has maxed out RRSPs, the after-tax personal cash would be invested in non-registered accounts, and the earnings would not compound free of tax.

In comparison, an IPP could be created. In the initial year, the corporation would receive a deduction of $175,000 for funding the IPP. The contributions and the growth would accumulate tax free within the IPP. Because of this, the IPP will result in a higher pension value at retirement.

IPP to motivate and keep key employees
The IPP can be a valuable tool when motivating a key employee. It should be considered along with other remuneration plans. The IPP is a flexible tool with which to motivate the key employee and encourage them to stay with the employer until retirement.

IPP in lieu of RRSPs
The RRSP deduction limits are often lower than the IPP limits for individuals over 40. This difference is marginal at 40, but grows every year. Because of the increased funding of an IPP, the IPP may result in a higher pension value at retirement compared to an RRSP.

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

Please feel free to contact me or your local MNP advisor if you are interested in setting up an IPP or for other corporate tax questions.