Revisiting individual pension plans
With potential changes to corporate taxation being proposed by the federal government, and incorporated business owners and professionals looking for ways to minimize taxes within their corporations, there is a resurgence of interest in Individual Pension Plans, also known as an IPP. As a business owner or professional in Canada there are tools available to be able to build a “pension” that can compete with public sector pensions and maximize the ability to save for retirement, as well as create other corporate deductions and tax benefits.
An IPP can be thought of as a replacement for your retirement savings plan (RSP) if you are a business owner, a professional, or a key employee. Contributions grow in the IPP on a tax-deferred basis, just like an RSP. With an IPP, rather than you making annual contributions to an RSP, your business or employer makes annual contributions to the IPP. Note that once an IPP is established, it will impact your ability to make future RSP contributions of any significant level.
As a defined benefit pension plan, the amount of retirement benefit that you are intended to receive from the IPP is generally “defined” or predetermined to be a fixed amount per year. The IPP provides you with the opportunity to achieve the maximum retirement benefits permitted by Canada Revenue Agency (CRA) from a registered plan. As IPPs are recognized as registered pension plans by CRA, they must be created and administered according to CRA rules and federal or provincial pension legislation.
Some of the main advantages of the IPP compared to the RSP as a retirement savings vehicle are as follows: contributions are generally higher than to an RSP, the business or employer gets a significant tax deduction, administration costs and management costs are an expense to the business, creditor protection if the business runs into trouble, the ability to make up for poor investment returns and pension income splitting with a spouse.
Things to consider when setting up an IPP are that the funds are locked-in like a pension, there are annual administration fees and there is a minimum funding formula that determines the amount of mandatory contributions. Many business owners and professionals are looking at this structure more and more in light of proposed changes to corporate taxation.
These are more complex structures than an RSP so speak with your accountant or financial advisor to see if an IPP may be applicable in your situation.
A. Craig Elder, CFP, FCSI, CLU, CHS, TEP is Branch Manager with RBC Wealth Management Dominion Securities Inc. in Medicine Hat. RBC Dominion Securities is part of the RBC Financial Group, member CIPF. For more information on this and other wealth management strategies contact one of our advisors @ (403) 504-2700.