Are you a business owner or incorporated professional, over the age of 40? Do you want to pay less tax every year? Do you want to accumulate 50% more to your retirement savings? Do you like the idea of having your corporation funding 100% of your retirement? Do you want a creditor-proof retirement account? How about never having to worry about outliving your savings in retirement?
If you answered yes to any of those questions, the Individual Pension Plan may be right for you.
The IPP is the most tax-efficient retirement savings plan on the market today. Simply, it works like an RRSP (tax-sheltered) with annual limits that are much higher allowing you to accumulate far greater savings during your working years.
This strategy is especially timely today with the recent changes to the passive income rules for small business as well as the potential changes to the capital gains inclusion rate.
Here is some more information below, and an article for further reading.
What is it?
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An Individual Pension Plan (IPP) is a defined benefit pension plan established by an incorporated company to provide enhanced retirement benefits and important tax advantages for business owners and incorporated professionals.
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Designed to maximize contributions and corporate deductions, permitted by the Income Tax Act, registered with Canada Revenue Agency (CRA).
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For individuals who wish to maintain their pre-retirement lifestyle when retired. IPPs are effective way to accumulate tax-sheltered funds quicker than with an RRSP—resulting in a greater and more predictable accumulation of retirement capital.
Who can use it?
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Incorporated business owners, incorporated professionals (medical professionals, lawyers, architects, accountants), senior executives and key employees. Including “connected” family members who own 10% or more of the company shares (spouse, adult children).
Who should and shouldn’t use it?
Ideal candidate
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Ideal candidate should be between 40-71 years old
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Earn T4/T4PS income of at least $100,000
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Historically maximized RRSPs/pension contributions
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Have been in business since 1991
Not so ideal candidate
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Sole proprietors and partners of partnerships
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Business owners/individuals who rely on dividends and compensation other than T4
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Highly cyclical businesses
Benefits of the Individual Pension Plan
Greater accumulation of capital
Predictability
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Unlike the RRSP where there's no guarantee of capital or income, IPP pension income can be pre-determined due to the CRA prescribed growth rate (7.5%) and actuarial calculations. Picture a defined benefit pension plan (like OMERs, TEACHERS, HOOPP), and then designed bespoke for you and your family.
Flexibility
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Retire early without having to sell the business. Many business owners have their wealth tied up in the business with little savings elsewhere. Meaning, until that business is sold, they cannot realize or spend that money. With the IPP, you can retire as early as 50 and live on the pension income you've accumulated for life—all while keeping the business running until you are ready to sell.
Tax-efficiency
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All IPP contributions, actuarial and investment management fees paid on a member’s behalf are fully tax-deductible corporately. Even interest on any amounts that the employer has to borrow to make the company contributions to the IPP are deductible. For the individual, IPP contributions are a non-taxable benefit and investment growth is tax-deferred until withdrawal at retirement. Pension income can be split with spouse as soon as withdrawn. With RRSPs, you cannot deduct investment management expenses or any interest on loans for contributions.
Preservation of Small Business Deduction (SBD)
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IPPs are not only a great way to maximize your retirement savings but also to help lower your business income (via deductions and contributions), allowing you to maximize your small business deduction (lower tax rate) on the first $500,000 of active business income.
Greater control of investment returns
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CRA assumes that assets in an IPP will grow at a net annual rate of 7.5%. To the extent that fund does not attain this benchmark, the corporation can make a tax-deductible contribution to “bridge the gap” between the CRA prescribed rate and actual performance. In this manner, the individual can accumulate a predictable pool of capital reflecting a net return of 7.5% per annum, on a tax-assisted basis.
Security
Additional retirement contribution
Retirement options
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Typically, upon retirement, the company is sold, and most commonly, the IPP is wound up and transferred to another registered plan like a Life Income Fund (LIF), Locked-In RRSP (LIRA) or insured annuity. However, if the company is not sold, the IPP can remain intact and provide a retirement income stream for life, from as early as age 50, or as late as the year-end in which the individual turns 71.
Survivorship
Succession planning
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Spouse and adult children can be plan participants—allowing for transfer of registered assets to next generation on a tax-deferred basis. This means that upon death of both spouses, the remaining IPP assets can be transferred to children, who are members of the IPP, without triggering tax. RRSPs are fully taxed if left to adult children.
Sample scenario
Individual is 50 years old and has 10 years of prior service before starting an IPP. At 71, the IPP route would have delivered more than $2,000,000 over the RRSP, an increase of 56% in retirement savings!
Note: Before implementing any strategy mentioned here or elsewhere, you should speak to a legal and tax professional.
