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Individual Pension Plans
Right for you if:
- You want greater tax deferred contributions
- You want a specific monthly pension that is promised at retirement
- A defined pension plan that provides greater tax deferred contributions
- Subject to the provisions of the Income Tax Act which govern defined benefit pension plans
- Provides for an annual pension that is equal to a percentage of an employee's T4 (or T4PS) income times years of employment to a maximum defined amount
- Employer contributions to fund the pension are determined by an actuary
For someone over the age of 40, maximum IPP contributions will exceed those of RRSPs. It is also possible to fund for previous year's pension benefits going back as far as 1991. Funding of these past service benefits can result in significant deductible contributions for the employer.
Larger annual contributions than RRSPs
Benefits are creditor protected
Suited for Business Owners & Incorporated Professionals
Who is an IPP candidate?
Business owners or incorporated professionals earning around $100,000 or more, and who are over 40 (ideally 45 or more), will find an IPP attractive. The candidate must have T4 income to generate pensions benefits. Dividend income, income from a sole proprietorship or partnership does not qualify.
What are the IPP advantages?
- Annual contribution amounts are larger than RRSP contributions
- Can be made retroactive back to 1991 with past-service contributions
- Contributions are tax deductible for employer
- Employer contributions exempt from CPP/QPP, and other payroll taxes
- Possibility of additional deductible contributions if returns are lower then expected
- Possibility of making additional contributions for early retirement benefits
- Employees are not taxed until withdrawals from plan are made
- Pension benefits are creditor protected under pension legislation
And what about any disadvantages?
- Significant regulatory compliance requirements
- Set-up and annual maintenance costs can be as much as $3,000, and may increase if past service benefits are provided
- Assets may be "locked-in" by provincial pension legislation
- Required annual employer contributions
- Surplus may reduce future contributions
What are the current year contributions?
- Once an IPP is established, the employer must make ongoing contributions to keep the plan funded.
- In order to determine the contribution amount, an actuarial valuation is required when an IPP is opened, and every three years thereafter
- Future RRSP contributions by the individual will likely be impossible due to the size of the pension adjustment reported on the IPP benefits earned
- Contributions made within 120 days of the corporate year-end are deductible in the immediately preceding corporate year
- An IPP may be established after the corporate year-end, but must be submitted for registration before the calendar year end
What do you mean by past service?
When past service is funded, the Income Tax Act requires that RRSP contributions made for that period of time either be withdrawn or transferred to the IPP in order to offset the cost of past service. The amount is called a Past Service Pension Adjustment. It is the sum of the Pension Adjustments that would have arisen during those years had the pension plan been in place. The transfer of RRSP assets to the IPP is tax-free.
Most people choose to transfer existing RRSP assets to the IPP to satisfy the PSPA. A transfer can only be completed once the IPP has been accepted for registration by CRA. In many cases, ScotiaMcLeod is able to facilitate this as an in-kind transfer. Once the RRSP assets are transferred into the IPP account they cease to be treated as RRSP money and form part of the IPP.
The remaining deductible past service costs are either paid by the company in a lump sum, or amortized over a specified period up to a maximum of 15 years.
To implement an IPP, you will need the services of an actuarial firm to register the plan with the proper authorities and handle ongoing administration. It is important to note that ScotiaMcLeod does not offer actuarial or administrative services for IPP's. There are a number of qualified IPP actuaries/administrators throughout Canada.
What are the steps to setting up an IPP?
- Choose an actuary. The actuary will ask for the following:
- T4 or pensionable earnings for as far back as 1990 or as long as you have employment history with your company
- Date of birth
- Current RRSP balance
- Actuary produces all plan documents and sends for signature
- On return, actuary files plan documents with CRA and provincial pension authorities where applicable
- Generally within six weeks, CRA sends acknowledgement letter with initial registration number
- Investment account for IPP fund can now be opened at ScotiaMcLeod
- Account opening takes about one week - contributions can now be deposited into the account
- The Past Service contribution but not the RRSP transfer can also be made at this time
- Final registration is usually received about six weeks after the initial registration.
ScotiaMcLeod has all of the account documents needed to ensure that you have an investment fund in place for your IPP.
The information contained on this website is for use by persons resident in Canada only.