Individual Pension Plans (2014)

If you are a business owner, an executive or an incorporated professional who has experienced success and your earnings are stable, you are probably beginning to think about wealth planning and how to create your own retirement income stream to replace business income. For many, a successful business also means a large amount of taxes and the desire for solutions to reduce corporate and personal tax.

In response to growing demands from business owners, executives and incorporated professionals for adequate retirement income, in 1991 the Canadian government passed legislation to allow for the creation of Individual Pension Plans (IPP). An IPP levels the playing field for the self employed, allowing these individuals to set up benefit plans to fund their retirement lifestyle using corporate pre-tax capital. Some have called the IPP a "Super RRSP."

An IPP provides many benefits for the right person who is in the right position to take advantage of such a structure. The IPP can provide additional tax deductions and deferrals, increased income during retirement, estate planning opportunities and deductible expenses. Along with the benefits, however, are the shortcomings, like the cost, complexity and inflexibility of this structure which we will also discuss.

IPP Benefits

➥ Tax Deductions - All costs and contributions of an IPP are fully deductible for the sponsoring corporation and are not included in an employee or owner's income.  In simple terms this means that the deduction and contributions to an IPP can be compared with contributions and deductions to an RRSP. Remember, as you get over the age of 40, the deductions from an IPP become much larger than an RRSP if you have an income over $134,834 (see Table 1).

TABLE 1 (for illustrative purposes only)

IPP Maximum Allowable Contributions 2008

Amounts certified by actuary to fund defined benefits

Assumptions:

• Maximum earnings of $134,834 and full past service (Jan. 1, 1991 or earlier).

• Contributions are determined by the actuary,

• Based on maximum earnings updated to $134,834 per annum, and

• Assumed maximum earnings from Jan. 1, 1991 with RRSP qualifying transfer of $305,400 for past service

Note - The past service contribution does not have to be made in one year. It can be funded over a period of 15 years, but must be fully funded by retirement or termination of the plan.

Source: Gordon B. Lang & Associates

➥ Past Service Deductions - An IPP allows you to go back to 1991 and deposit a tax-deductible catch-up payment or payments to your IPP, which could be in the sum of $300,000+ depending on your current age and history of income with the corporation. This catch-up payment can be made in a lump sum or over a series of contributions lasting up to 15 years. This Past Service Deduction can create large tax savings and deferral for the sponsoring corporation.

➥ Increased Annual Amounts - Annual deposits to your IPP can be upwards of $35,000 per year to reflect your income and pension requirements during retirement.  As well, capital in the plan lost during down-markets can be replenished by the sponsoring corporation, meaning market volatility will most likely never reduce expected income. This will most surely result in a much larger tax-deferred pool of money for your retirement, hence a larger income to fund your retirement lifestyle.

You need to earn T4 or equivalent earnings of at least $134,834 dollars to qualify for full benefits within an IPP.  Contributions are graduated by age, and the older you are, the more you can contribute. IPP contributions first exceed RRSP contributions around age 38. Above this age your IPP contribution room will be higher than your RRSP contribution room, as shown in Table 1.

➥ Family Wealth Planning – A spouse and children employed by the sponsoring corporation can be added to the IPP, leaving options open for estate planning with money in the plan. This can result in enormous tax savings for your estate and can be a large benefit for your successor as the IPP could potentially provide them with a retirement pension.

➥ Income Splitting - During your retirement, income from an IPP can be split with a lower-income spouse, potentially resulting in major tax savings.

➥ Tax-Free Compounding - Just like an RRSP, your money within the plan compounds on a tax-free basis.  If a return of 7.5% is not achieved, top-ups can be made by the sponsoring corporation. This means that if your pension plan is not performing at a "reasonable rate of return" this could allow for additional contributions.

➥ Creditor Proof - All assets within the IPP are completely creditor proof, meaning that capital within the IPP does not have to be transferred out of an operating company to be protected from creditors.

IPP Shortcomings

➥ Complexity - You must have consistent cash flow from your corporation to fund an IPP. Once it is set up, the Pension Act guidelines state that your corporation has to fund your IPP each year to the specified amount except for in certain exempt provinces. If your corporation does not have sufficient cash flow to fund the pension, the money must be borrowed.

➥ Cost - $800+ annually. Actuarial calculations can be $1,000 every three years; these are required by legislation.  (These expenses are all deductible by the sponsoring corporation.)

➥ Inflexibility - The guidelines for IPPs fall under pension legislation. So, the money is not as liquid as an RRSP. Only a certain amount may be withdrawn each year during retirement, as long as it falls between the minimum and maximums set by the province.

To find out if an individual pension plan is right for you, consult with a specialist on IPPs, as well as an accountant and /or an actuarial company specializing in individual pension plans. Quotes are available at no cost so you can weigh the pros and cons and make certain that implementing this strategy is the right decision for you.

Aaron Migie, FMA, CFP, Financial Advisor, Assante Capital

Management Ltd., Winnipeg, MB (204) 977-8045, (800)

296-8060, amigie@assante.com

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.