An individuals' income at retirement typically includes income from investments, government pensions, inheritances and, most commonly, RRSPs. In certain cases, however, an Individual Pension Plan (IPP) can be a useful alternative to the more widely accepted RRSPs.
An IPP is a single-member registered defined benefit pension plan that allows the member the opportunity to accrue pension income on a tax-deferred basis. IPPs are designed to maximize contributions under the Income Tax Act and under the right conditions.
IPPs are structured similarly to larger entity defined pension plans. Each IPP is sponsored by an active corporation, its member is an employee having T4 income, and it must specify the structure of the benefit to be paid to the plan member. Investments held within the plan are restricted. Benefits paid out of the IPP are taxed upon receipt.
Restrictions on the investments held within an IPP include:
-
investments should not be made in the securities of the pension plan sponsor;
-
margin accounts are not permitted; and
-
individual securities may not exceed 10% of the book value of the fund at the time the security is acquired.
IPP contributions must be calculated by an actuary based on defined actuarial formulas.
The amount of each contribution depends on the member's age and salary, and is subject to certain legislative restrictions. Typically, if the member is over the age of 40, the annual contribution will normally exceed the maximum RRSP limit. When an IPP is established, a onetime past service adjustment is included in the calculation. This adjustment can be significant in some cases.
Good candidates for IPPs include incorporated business owners, incorporated professionals, and senior executives in the age range of 40-71 years who have consistently drawn an annual salary of $100,000 or more over several years. Typically, these individuals have past service with the corporation dating back to 1991.
The reasons to establish an IPP can include the following:
-
to diversify a retirement strategy;
-
to significantly increase retirement savings over a relatively short time frame;
-
to deduct the contributions in a corporation; and
-
to have a plan that is creditor-proof.
An IPP may also provide a tax-efficient method of transferring value in succession planning or on the sale of a business.
The primary differences and similarities between IPPs and RRSPs are summarized in this chart.
IPPs are complex, but can be used effectively in any estate plan.
Contact your Collins Barrow advisor to discuss the advantages and disadvantages of an IPP in the context of your financial circumstances.
Andrea Pontoni, CA CBV, is a Partner in the Windsor office of Collins Barrow.
Related content
