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Individual Pension Plan: Core Planning for Business Owners and Incorporated Professions

Posted under: Business Owners, IPP

Individual Pension Plans have been in existence for decades. An Individual Pension Plan (IPP) is an alternative to RRSPs where business owners, incorporated professionals, and their family members who are employees, can participate in a self-directed defined benefit pension plan akin to what public sector employees receive. An IPP allows for significantly higher funding than RRSPs where the company funds the plan using pre-tax corporate dollars, as opposed to the RRSP that is funded with after corporate tax personal dollars.

There are many advantages to utilizing an IPP as an alternative to traditional registered plans. These advantages include large deductions to the business as a result of the increased tax-deductible contribution room (up to 65% more than an RRSP), creditor protection, deductibility of investment and administrative fees, and the option to top up the plan if the investments fail to return a benchmark return (net of fees).

Despite these advantages only a relatively small number of business owners and incorporated professionals have implemented IPPs. Given the changes in tax policy and legislation around IPPs, it is paramount that this strategy be revisited by business owners, incorporated professionals, and their advisors and accountants.

Since 2018, tax policy has shifted corporate tax planning, and as a result, dividend strategies have been muted in terms of effectiveness.  In many cases, generating income via dividends versus T4 will generate the same amount of tax payable, without the benefit of tax deferred growth through an IPP or RRSP. Retaining too much within your corporation can also have adverse tax consequences including a reduction of your small business deduction, and the ability to split income with family members via dividends is more limited than in the past.

When one door closes, another opens. These tax policy changes have sparked a rethink of how business owners compensate themselves through minimizing the usage of dividends and taking more T4 salary. Funding for IPPs is based on T4 income. The change in compensation puts the IPP at the forefront of personal and corporate tax planning.

The other shoe to drop, creating the perfect time to revisit the IPP, are the legislative changes with respect to the Individual Pension Plan. When revenues and cash flow are strong, the IPP is a compelling planning tool, but what happens if the plan is in a deficit and cash flows dry up? Concerns of required funding when times are difficult was a significant, and valid, deterrent to the IPP, but this has changed significantly over the years. IPP funding rules are based on provincial legislation, and over the last decade, we have seen the majority of provinces relax the funding obligations for IPPs.  

For example, in 2020 Ontario enacted Bill 213, which allowed owner manager IPPs to be exempt from their provincial funding rules. Companies can now opt to not make a contribution or top up and there is no requirement to ever make up the funding.  This is helpful if the company sponsor lacks the means to do so. Another benefit was less administrative red tape and upon termination, the majority of the IPP assets now flow to an unlocked RRSP.

These changes remove the final hurdle if a business or professional corporation has the excess cash flow, has T4 close to $180,500 where IPP funding maxes out, and is over the age of 40. The combination of tax policy and lessening of red tape has created ideal conditions to explore the IPP and it is prudent planning for Advisors and Accountants to present this strategy as an option to their clients.

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.