IPP FAQs

Frequently Asked Questions regarding IPPs

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An IPP is a defined benefit pension plan established by a company for one individual (sometimes two, if the participants are spouses). The IPP was developed to offer the maximum benefits permitted by the Canada Revenue Agency.

As the name indicates, it is a pension plan where the benefits (or the amount of annuities or payments) are defined in advance. The amount of contributions required to fund the promised benefits must therefore be calculated based on a set of assumptions.

An actuary must certify that the IPP contribution calculation complies with legal requirements.

Like all pension plans, an IPP must be established by a company. An individual who wants an IPP must first convince the company that he/she works for to establish the IPP.

For participants meeting certain criteria, IPPs allow for much higher tax-deductible contribution amounts than the maximum permitted for RSPs.

IPPs are most advantageous for an individual who is 40 years of age or older, and who wants to contribute more money on a tax-sheltered basis than the maximum permitted for RSPs. There are no specific criteria related to the salary of the individual; however, the financial advantages of IPPs increase in relation to the individual’s salary.

GENERAL INFORMATION ABOUT INDIVIDUAL PENSION PLANS

Incorporated business owners that meet the criteria outlined above are ideal candidates to establish IPPs for themselves, since a company must establish an IPP and these individuals have the authority to make these types of decisions on behalf of their companies.

A “connected person” is a person who directly or indirectly (spouse, brother, sister, child, grandchild, father, mother) holds at least 10% of a company’s shares or the shares of any other corporations linked to the company.

– Annual contributions: always greater than the maximum permitted by an RSP for an individual that meets the criteria described above.

– Past service contributions: it is possible to purchase additional years of service in an IPP. It may be necessary to transfer an amount from the participant’s RSP to his/her IPP for the company to contribute the balance of the cost of the past service.

– An additional contribution at retirement and/or at age 65: certain benefits cannot be pre-funded due to limitations imposed by the Income Tax Act.

– An additional contribution when terminating the IPP, if annuities are purchased: it is possible to purchase the benefits payable from an IPP from an insurer, in which case, an additional contribution is required to capitalize the part of the indexing that cannot be capitalized in advance. Furthermore, an additional contribution will be payable if annuity interest rates are less than 7.5%.

No. Contributions to an IPP cannot be withdrawn for any reason other than for the payment of benefits. When the IPP is terminated, the amount can be transferred to another registered retirement savings product or used to purchase an annuity.

Yes – generally, these contributions are locked-in and cannot be used for any other purpose other than providing a lifetime retirement income to the participant. IPPs in Prince Edward Island and for connected persons in the province of Quebec are exempt from these requirements.

Generally, no. If the individual’s contributions in the past have always been to a spousal RSP, it is unlikely there will be enough room to have the past service certified by CRA. Normally, an individual who has maximized their RSP contributions can only receive past service benefits by transferring RSP assets to the IPP or by making a withdrawal. Because the spousal RSP will not be in the individual’s name, a transfer or a withdrawal would not be possible. Any unused RSP room or personal RSP funds could be used to credit some past service.

You may have to withdraw a part of your RSP contribution, without penalty or withholding tax.

This RSP room may be used to increase IPP funding for past service.

In certain provinces, once the IPP is established, there is an ongoing obligation to make contributions. However, in the event of cash flow difficulties, it may be possible to suspend contributions. When conditions improve, contributions may be resumed. If necessary, the IPP may be wound up at any time. If the IPP is not required to be registered provincially, there are no minimum funding requirements and therefore contributions do not have to be made.

QUESTIONS ON THE FISCAL ASPECTS OF IPPs

Yes, contributions made to an IPP are tax deductible for the employer, or for the participant, if he/she contributes directly to the IPP. In addition, contributions made to an IPP are not subject to payroll taxes.

In addition to deducting company contributions, an employer can deduct administrative costs related to an IPP, as well as the interest on any amounts that the employer has to borrow to make the company contributions to the IPP.

The annual contribution can be made as soon as the documents required to register the IPP with the government have been submitted. A Past Service Pension Adjustment must be approved by the government, so it is more prudent to wait for such approval before making any contributions.

Contributions made during the 120 days after the end of a fiscal year, and which were payable over the course of the fiscal year, can be deducted for this fiscal year.

In order to deduct contributions for a given fiscal year, all of the documents required to register the IPP with government authorities must be submitted before the end of the fiscal year in question.

QUESTIONS ON THE LEGAL ASPECTS OF IPPs

– Canada Revenue Agency: defines the maximum benefit that can be granted within an IPP and, consequently, the maximum contributions that can be made to an IPP;

– Provincial laws on pension plans: define the rules governing minimum funding requirements;

– Regulations on pension plan investments: establish how IPP funds can be invested.

No. As long as the amounts are within the IPP, they are 100% protected from creditors. However, the benefits payable can be seized.

The new owners have the choice of terminating or continuing the IPP. An IPP may allow you to transfer significant amounts to the previous owners on a tax-sheltered basis. Determining what to do with the IPP should be discussed during the negotiations surrounding the sale.

QUESTIONS ON THE PROCESS OF ESTABLISHING AN IPP

After completing an IPP client information form, we will prepare a personalized illustration. The documents that you will receive will outline the main characteristics of IPPs and show the amount of contributions that could be made in your specific situation.

– Provide the necessary information to produce a personalized illustration

– Review the illustration, in particular the amounts that could be contributed to an IPP

– Complete an Engagement Form to hire the actuarial firm to set up an IPP

– Discuss the investment strategy for the IPP funds.

QUESTIONS ON THE ADVANTAGES AND CONSIDERATIONS OF IPPS

The main advantages for individuals meeting the criteria described above are as follows:

– Annual contributions greater than to an RSP

– Ability to make contributions for past service

– Additional contribution at age 65 and/or at retirement

– Potential for additional contribution if an annuity is purchased

– Ability to compensate for investment losses through additional contributions

– Complete protection against creditors

– Income splitting in the form of a spousal contribution is not allowed with an IPP

– High levels of surplus in the plan may limit future contributions, while a deficit in the plan may require additional funding

– IPPs are subject to pension legislation at both the federal and provincial levels, which will result in “locking in” requirements, except in certain provinces

– Expenses for the plan set up, administration and wind up are higher than those of an RSP

QUESTIONS ON THE MATURITY OPTIONS OF IPPs

The IPP funds are transferable to another registered product, but are subject to maximum transfer rules. Generally, any money in excess of the maximum transfer limit will be paid in cash to the member, and will be taxable. If you are eligible for early retirement, the same options are available as outlined in Question 29 below.

As a pension plan, the IPP must be used to finance a lifetime pension income. The IPP may be funded until the retirement date, or it may be terminated prior to retirement, in which case the pension payments may be deferred to a later date.

At retirement, one of the following three options are available:

– Pension payment from the plan

– Transfer the IPP to a registered product

– Purchase of an annuity from an insurance company

Yes, you can get your pension before you turn 65. An IPP may begin paying a pension as early as age 50, or as late as the year-end in which the individual turns 69.

The IPP provides for a survivor pension and for guarantee periods. Should you die before the end of the guarantee period, the full amount of the pension will continue to be paid to your spouse or other designated beneficiary for the remainder of that period. After the guarantee period, the normal form of pension provides for the continuation of the pension payments to an eligible surviving spouse at a rate of 66 2/3% of the IPP participant’s pension.

Anything left in the IPP fund is surplus that belongs to your estate and would be distributed in accordance with your beneficiary designation or your Will. The fund becomes entirely surplus, because all liabilities end when the last beneficiary of a pension promise under an IPP dies. Your beneficiaries will be subject to income tax when they receive their share of the surplus. Contrast this result with an RSP or RIF, where your estate is taxed, on your final income tax return, on the residual value, subject to limited deferral provisions. The IPP shifts the income tax burden on the residual funds to your beneficiaries, which may result in a lower level of income tax on those funds.

For more information about IPPs, please feel free to contact us.