Individual Pension Plans
Overview
An
Individual Pension Plan (IPP) is a pension plan established for a
single individual who is interested in maximizing his or her
tax-assisted retirement savings. An IPP may allow a small business
owner, owner-manager or senior executive to benefit from the retirement
savings and tax deferral advantages of a registered pension plan. A
typical IPP provides what is called a defined benefit; the amount of
pension is determined at retirement by reference to a formula. This is
different from an RRSP or a defined contribution pension plan, where
only the account balance itself is available to provide benefits at
retirement.
Pension plans registered under the Income Tax Act
permit the deferral of taxation on employee compensation. Employer
contributions are tax deductible, and are not subject to employee
withholding taxes. Employee contributions are also tax deductible.
Investments earnings on these contributions grow tax-free until they are
used to pay benefits under the plan.
Wile flexible in terms of
its settlement options, the basic purpose of an IPP is to provide a
retirement pension to the plan participant. In the right circumstances,
an IPP permits much larger tax deductible contributions than an RRSP. An
IPP also normally offer the plan member a greater degree of creditor
protection than an RRSP. With an IPP, a member will no longer be able to
contribute to an RRSP in future years.
Features
An
IPP is a registered defined benefit pension plan typically established
for the benefit of a single participant. A defined benefit pension plan
is designed to provide a lifetime pension starting at a certain age. The
amount of the pension is determined by formula, and the contribution
equals the cost of providing that pension (as calculated by an actuary).
If the same or a related company employs the spouse, the spouse may be added to the IPP.
Suitable
candidates for an IPP are: small business owners, professionals (e.g.
doctors, lawyers, dentists, and accountants) in provinces where they are
allowed to incorporate, and executives with the support of their
company’s management.
To qualify, the IPP plan member
must be an employee receiving T4 income, and be serious about planning
for retirement. The company sponsor must have the financial resources to
fund the IPP on an ongoing basis.
Canada Revenue Agency
requires a transfer from the plan member's RRSP to offset the
contribution generated for past service (i.e. years 1991 to present).
The Qualifying Transfer is determined by calculating the Pension
Adjustment that would have been applied in each year of past service
assuming that the individual had been in a defined benefit pension plan
during those years. The total of the Pension Adjustments for those years
less $8,000 and any unused RRSP contribution room equals the Qualifying
Transfer.
The former $8,000 RRSP over contribution is still available under an IPP and is deductible immediately.
Contributions to an IPP are tax deductible to the employer.
Expenses
of the IPP (including actuarial consulting fees, interest on funds
borrowed for contributions, and investment related fees) are tax
deductible when paid directly by the company sponsor.
Contributions made within 120 days of the end of the fiscal year are deductible within that fiscal year.
The
IPP assets may be invested by a trust company, under a Trusteed
self-directed vehicle, or under a life insurance company contract.
Generally,
if an investment is allowed under an RRSP, it is acceptable for an IPP.
There is a 10% investment concentration limit designed to ensure broad
diversification of plan assets.
Except in certain provinces, IPP assets are locked-in and may not be withdrawn in cash until retirement.
Same Termination, Retirement and Death Benefits as other Defined Benefit Plans.
Benefits
For individuals over age 40, an IPP allows for higher tax deductible contributions than an RRSP
Assets within an IPP can be protected from creditors
In most cases, significant lump-sum past service contributions can be made when first establishing an IPP
Higher tax deductible ongoing contributions …the older the member, the greater the contribution
IPP contributions may be topped up if investment returns are insufficient
Tax-deductible lump sum contributions at the time of actual retirement are possible in most circumstances
Allows small business owners to defer taxes and plan for retirement.
