Posted under: Business Owners, IPP
Individual Pension Plans (IPPs) have a unique feature for family businesses and family planning unlike RRSPs. This feature is equally shared with IPPs that are marketed using alternative names such as the Personal Pension Plan, Family Pension Plan, and Canadian Physicians’ Pension Plan.
If the next generation are employees of the corporation and there is a clear succession plan, adding them to their parent’s IPP allows for residual assets upon death to remain in the pension plan and flow to the next generation. As a result, there is no deemed disposition on death and the assets earmarked for the parents can remain in the plan usually resulting in a large surplus position. For the strategy to be effective, the next generation would have to continue to operate the business and receive T4 to earn pension credits to access the assets in retirement and reduce the surplus that resulted from the roll down.
This can be a very effective planning tool, but it only works in a narrow number of situations. Recently, many clients have reached out questioning arbitrarily adding their children to the payroll in their small businesses or their professional corporations, as there has been marketing in the industry that this is the magic bullet to avoid the deemed disposition of the IPP assets on death. However, there are no unicorn solutions to estate planning and while this strategy can be very impactful in the right situation, it is not one size fits all. Trying to implement this strategy without considering your specific situation can be fraught with issues.
If the parent’s generation is still active and accruing a pension benefit, there is still a payout from the plan on death even if the next generation has been added to the IPP. It is only after the pension has begun to be paid from the plan, that the plan assets remain in the pension plan on death. Therefore, adding the second generation early into the plan does not provide the inter-generational benefits while incurring higher fees to have the additional members in the plan.
In the case of a professional corporation (PC), if the child is not a professional and thus not a co-member of the PC, the PC will become a holding company upon death of the practitioner. Access to the IPP funds would be limited to the lifetime T4 earnings the child earned from the PC and there could be an excessive surplus with no ability to earn pension credits going forward. CRA may also question the T4 income drawn from the PC if the child has no involvement in the company and could challenge the primary purpose of their membership in the IPP.
Finally, if the company is sold or wound up on death of the first generation, the parent’s pension assets would be a taxable lump sum that undoes the entire planning behind adding the second generation to the plan.
If this is the case, in the end, there is no benefit to the client, with only the firm charging additional fees to add the children to the plan benefiting. At GBL, we strive to implement effective solutions for our clients and keep fees as low as possible. The issues noted above equally apply to IPPs that are marketed using alternative and trademarked names such as the Personal Pension Plan, Family Pension Plan, and Canadian Physicians’ Pension Plan. All IPPs are required to follow the same rules in the Income Tax Act and any applicable provincial pension legislation, and business owners and incorporated professionals should discuss these potential issues before arbitrarily adding their children to the payroll.
Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners across Canada. With offices in Calgary and Toronto, we have served 6,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs and RCAs, and have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at [email protected] or 403.249.1820 and follow us to learn how we can help Build Your Future. www.gblinc.ca
