Hachey Group Wealth Management - Business Owners & Executives

Individual Pension Plans (IPPs)

Are you an incorporated business owner or professional receiving T4 income while contributing to an RRSP?

If so, you may want to consider an Individual Pension Plan (or IPP).

An IPP is a defined benefit pension plan your company can set up for you.

An IPP is ideal if you’re between the ages of 40 and 71, earning T4 income, and have owned your company for several years.

With an IPP, you can make higher annual contributions than an RRSP...

...and gain the ability for your company to make a large tax-deductible past- service contribution.

In addition, the company can make a top-up contribution if IPP assets fail to grow by 7.5% per year with adjustments.

Here’s a chart showing a comparison of IPP funds versus RRSP funds for someone who is 50 years old, with 23 years of past service.

As you can see, the ability to make a large past-service contribution, along with the increased annual IPP contributions, result in a higher registered plan balance.

While IPPs do involve more complexity and have higher annual fees than RRSPs, the fees are fully tax-deductible.

This video is provided by RBC Wealth Management for informational purposes only. The comments contained in this video are general in nature, and do not constitute legal, investment, trust, estate, accounting or tax advice. RBC Dominion Securities Inc.*, Royal Trust Corporation of Canada, The Royal Trust Company, RBC PH&N Investment Counsel Inc., RBC Wealth Management Financial Services Inc. are affiliated corporate entities and member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. *Member – Canadian Investor Protection Fund. Please visit www.rbc.com/legal/ for further information on the entities that are member companies of RBC Wealth Management. ®/TM Trademark(s) of Royal Bank of Canada. Used under license. © 2020 Royal Bank of Canada. All rights reserved.

For many business owners their business is often viewed as their pension in retirement. What many do not realizes is the business can fund the entrepreneur’s very own pension plan, similar to the gold plated pensions you hear public servants or teachers having. In some ways you can think of it as a corporate RRSP with significantly more contribution room relative to your RRSP.

The Individual Pension Plan (IPP)

When does it make sense?

Over the age of 40 as the contribution limit exceeds that available in an RRSP
Incorporated business professional and family members
Senior executives
Business has sufficient cash flow

Funding the IPP

Like an RRSP, the allowable contribution room is based off earned employment income that year
Past years of employment with the sponsoring company will allow you to contribute as if you had the plan in previous years
Additional contributions can be made to the plan at retirement

Who is eligible?

Controlling shareholder
Specified individual
- Connected individual
  - They or in combination with someone they are related to owns 10% or more of the corporation's shares
  - Family members can be included if they work for the company
- Non-connected individual
  - Key employees who earn 2.5 times the yearly maximum pensionable earnings
Maximum of 3 plan members

Retirement Options

Sponsoring company remains active
- A plan member can start receiving the pension benefits at any age before the end of the calendar year in which age 71 is attained
Sponsoring company is sold
- The IPP winds-up with the commuted value transferred out to another registered plan such as an RRSP, RRIF, Life Income Fund, or a Locked-in RRSP
- Any excess of funds are payable as a cash payment and subject to taxes
Member wants benefit pension to last a lifetime
- Purchase an annuity

Benefits

Greater accumulation of capital
Funds within grow tax deferred growth
Predictable income paid out
Tax efficiency as management fees become tax deductible unlike an RRSP & RRIF
Greater control of investment returns
Remove money out of the corporation at a tax deferred basis
IPPs are a separate legal entity
- Creditor protection
- Remove surplus assets out of the corporation

What to consider

Complexity of the plan since the use of an actuary is needed
Ongoing fees and cost
Mandatory funding requirements