The Individual Pension Plan (IPP)

What is an IPP?

An IPP is a registered pension plan which provides the maximum defined benefits permitted by Canada Revenue Agency.  As a retirement savings alternative to an RRSP, the IPP permits employees, including connected persons (10% + share ownership), to accumulate, a larger retirement fund.  This is due to the fact that annual tax-sheltered contributions are greater than those permitted by an RRSP.

The IPP

An IPP is a registered defined benefit pension plan sponsored by the employer with membership limited to an individual and spouse.  Special rules govern contributions and investments and each IPP must be registered with Canada Revenue Agency and the appropriate provincial authority.

Advantages of an IPP

There are a number of significant advantages to an IPP plan not limited to the following:

Contributions

Maximum annual tax deductible employer contributions to the IPP/RRSP combination are substantially, 25% to 70%, higher than maximum RRSP contributions alone.

Creditor-proofing

The IPP is regulated by both Canada Revenue Agency and Provincial Law so as to be creditor-proof.  Recent RRSP court decisions have cast doubt regarding their creditor-proof status.

Surplus

In an employer sponsored group pension plan, any surplus remaining after the termination of the member by death, retirement, etc. stays in the general pension pool.  On termination of an IPP, however, all plan assets, including surplus, are returned to the plan member, spouse or estate.

Expenses

All contributions made and expenses incurred to establish and maintain the IPP are tax deductible to the employer.  The expenses may also be paid from the IPP fund.

Top-ups

The IPP guarantees a certain level of pension benefits at retirement.  Because of this, the IPP, unlike the RRSP, permits additional contributions if the plan assets earn less than 7%.  In addition, should the plan member retire before age 65, additional terminal fund of IPP is available, this can amount up to 50% of the then accumulated IPP assets.

Past Service before 1991

Pre-1991 benefits for connected employees may only be provided where corresponding benefits were provided to non-connected employees through an employee pension plan, contributions to a Union plan or purchase of pre-91 pension benefits for non-connected employees.  When permitted, pre-91 benefits may create significant extra contributions in the range of $10,000 for each year of pre-1991 service.

Past Service after 1990

Past service may be established for years after 1990 without a corresponding plan for non-connected employees.  This feature can provide additional tax sheltered contributions.

RRSP Transfer

When post-90 past service benefits are provided, the value of these benefits, called a Past Service Pension Adjustment (PSPA), is imposed upon the member’s RRSP by Canada Revenue Agency. The PSPA is then eliminated by withdrawing RRSP assets or transferring them to the IPP.  The total amount of RRSP’s transferred may be equal to $8,000 less than the PSPA.

Investments

Allowable investments for an IPP are similar to those permitted for RRSP’s.  The IPP “fundholder” may be a Life Insurance Company or a Trust administered by three individual Trustees.  As with RRSP’s, the plan member, through the Trustees or Life Insurance Company, may make the investment decisions or delegate them to a professional fund manager.

Termination

If circumstances change, the Plan can be terminated at any time.  The Plan assets are then transferred to the member’s “locked-in” RRSP.  If the member is less than 65, and the Plan has a surplus, additional pension income in the form of term certain annuities payable to age 65 may be purchased.  In addition, there could be substantial additional funding room available at that time. Should any surplus remain this will be paid to the member as taxable income.  Should this surplus be significant, the Plan may be maintained in effect without the plan member continuing to accrue additional pension credits.

Retirement

The IPP provides for retirement at 65 but retirement is permitted as early as 55 on a very favourable basis.  In most cases, significant additional tax deductible contributions may be made if all pre-65 benefits are purchased.  Retirement may also be extended to the end of the year the member attains age 69, with contributions and benefits continuing to accrue.

Disadvantages

Some of the disadvantages include:

Locking-in

The funds accumulated in the IPP must be used to provide a lifetime retirement pension.  They cannot be de-registered or used to purchase a conventional RRIF or term certain annuity unless the plan member is in ill health or leaves Canada.

Pension assets may be applied to provide a lifetime retirement pension in one of three ways:

  1. A guaranteed life annuity may be purchased from a Life Insurance Company.  The form of lifetime pension can be tailored to the individual circumstances including providing guarantee a minimum of payments after death, joint payment with your spouse and indexing payments to inflation of up to 4% per year.
  2. The assets may be transferred to a Life Income Fund (LIF) or a Life RRIF.  These options are similar to a normal RRIF with annual income withdrawals subject to a prescribed minimum and maximum.  As with a normal RRIF, the investments remain under the control of the member and any assets remaining at death are passed to the spouse, whom failing, the estate.
  3. The plan assets may be used to pay the pension from the plan with any assets remaining at death passed to the spouse, whom failing to the estate.

Spousal RRSP

Spousal RRSP’s, which may be used to achieve income splitting after retirement, are not permitted under an IPP, except for the additional RRSP contribution permitted with the IPP/RRSP combination.  If the spouse is an employee of the Company, he or she can be enrolled in the IPP.

Contribution Flexibility

Contributions to the IPP are required annually and there is no “carry forward” option as with RRSP’s.  The contributions can be expressed as a percentage of compensation so funding requirements are reduced in years of low earnings.  If necessary, a deductible business loan may be used to make contributions.

Expense and Understanding

IPP’s are somewhat more complex than RRSP’s and the possibility of misunderstanding is higher with the IPP.  The IPP has start-up costs associated with establishing the Plan and Trust documents and meeting registration requirements.  The IPP also has to comply with pension laws, including triennial valuations and annual filing requirements.  However the additional tax savings that flow from the IPP quickly outweigh the start-up and maintenance costs of an IPP.

If you should any questions with respect to the above, please do not hesitate in calling me at 905-528-0234 or email Joe at joetruscott@josephtruscott.com.