An Individual Pension Plan (IPP) is a defined benefit pension plan designed for business owners of incorporated companies. An IPP allows a business owner (age 40 and over earning $100,000+) to increase their retirement savings and establish long-term financial security through tax-deductible contributions.
IPP contributions are determined by a series of actuarial valuation reports in order to ensure your client has sufficient assets at the time of his/her retirement. Annual income at retirement age is calculated using:
Contributions are graduated by age, so the older your client, the more their company can contribute. IPP contributions first exceed RRSP contributions around age 40. The annual contributions compounded at a 7.5% net annual rate of return will ensure your client’s plan has adequate assets to provide for their retirement benefits.
Once your client retires, they have a choice of retirement vehicles. These include a monthly pension from the plan, an annuity, a Life Income Fund (LIF), or a Locked-In Retirement Income Fund (LRIF).
If your client decides to purchase an annuity, as the financial advisor, you should obtain a market comparison and choose the insurer. The plan will then transfer funds from the IPP to the life insurance company to purchase the annuity. Annuities can be either single life, covering the life of the plan member only or, if married at date of retirement, a joint & survivor (J&S), with payments that may reduce on the death of the member. The J&S option usually includes a minimum guaranteed period of 5 years and subsequent payments to the surviving spouse in full or reduced by a percentage selected at the time of retirement.
Complete our confidential IPP questionnaire: download the PDF. Your GBL representative will prepare a custom IPP quote at no cost within 1-2 business days.
Upon receipt of your IPP quote, please contact your GBL representative who is available for consultation to answer any questions that may arise.
Once your client decides to set up an IPP, you & your client will receive our IPP registration package. Forms can be completed and returned by mail, email or fax to your GBL representative. Please allow 5-10 business days to receive your IPP documentation for signing.
Your GBL representative is available to assist in the signing process and to answer any last minute questions. Upon final execution of the IPP agreements, GBL will register the plan with Canada Revenue Agency (CRA) and the provincial authority (if applicable).
Upon CRA approval, you and your client will identify investment objectives to ensure assets are invested according your client’s preferences and CRA funding regulations.
The administration process is completed in 3 parts – please take note of any deadlines. Visit our resources section for additional information, downloads and links. If you have any questions related to this process, contact us.
Deadline is March 1
The annual summary form is sent to the Advisor (or in some cases the Accountant) in January of each year. This form requests the following information:
Deadline is prior to issuing a T4 Slip for Plan Member(s)
A pension adjustment (PA) form is mailed in January to the Plan Sponsor.
A pension adjustment and the plan’s registration number are required to be included on each active IPP member’s T4 slip. Reported pension adjustments are used by CRA to adjust personal RSP room and are not equal to the annual IPP contribution. To obtain pension adjustment information prior to the corporate T4 filing deadline of February 28th, the sponsoring company can complete the PA form and submit to our office by e-mail, fax or mail and GBL will calculate and confirm the IPP information to be included on the plan member’s T4 slip.
Mailed to the Sponsoring Company in January of each year, this letter requests information from the sponsoring company required to complete the annual administration requirements for an IPP.
CRA allows retirement income to commence as early as age 50.
IPP maximum benefits for the current year are reached at $134,834 of employment earnings for 2013. If the member earns over this amount, CRA does not permit the excess to be factored into the calculations of the benefits and contributions.
The company or Professional Corporation sponsors the plan. The trustees hold the assets on behalf of the members and their beneficiaries.
Every three years there is a valuation completed by the actuary. This analysis of the plan will indicate its funded status. In the event a 7.5% per annum compound rate of return was not earned by the assets of the fund, the sponsoring company must make additional tax-deductible contributions to bring the fund back on track. This is not a penalty It is simply to ensure that the pension plan is properly funded. In fact, this gives a distinct advantage over defined contribution pension plans and RRSPs. These contributions can be amortized over a period, generally, of up to 5 years. If the fund earns more than 7.5%, the surplus can be retained in the pension plan to grow to a certain point and may create a contribution holiday.
Your RRSP room will be adjusted once you set up a pension plan. This adjustment is called a Pension Adjustment or (PA).
A lump sum additional contribution can be made at the time of retirement to increase the indexation of the pension by an additional 1% per annum compound over that previously assumed by the actuary.
In an IPP, no more than 10% of the portfolio can be held in any one stock. With respect to mortgages, the maximum overall holdings are 25% of book value with no more than 5% invested in any single mortgage.
Pension contributions must normally be made each year unless pensionable service is suspended. The plan sponsor may borrow to fund the plan. If this is not an option the plan sponsor can elect to wind up the plan and turn it into a Locked-in Retirement Account (LIRA) or purchase an annuity from the assets of the fund.
Provincial laws require pension plan assets to be treated, in a manner similar to RRSP assets, as matrimonial assets to be divided between the member and spouse.
CRA allows pension plans registered today to capture past service as if the member was in the pension plan as far back as January 1, 1991. Past service can only be captured for service when the company was incorporated and the member was an employee receiving income from that incorporated company.
In addition, the member will be required to rollover a specified portion of RRSP assets. The plan sponsor will be permitted to make past service contributions to the IPP in addition to current service contributions.
A single plan works best with family members such as parents and children. The member has the ability to “succession plan” where family members are working in the business.
Where siblings own a business it is advisable to establish multiple plans. It is best to discuss these types of situations with your GBL Representative.
Upon retirement, plan sponsors are permitted to make a tax-deductible lump sum payment into the pension plan. This amount is calculated by the actuary to create the additional benefits available at retirement which would include unreduced early retirement benefits, bridging benefits (replacement for OAS and CPP to age 65) and full CPI indexing.
For more information please visit CRA’s website for T4084 pension adjustment Guide CRA.
CRA regulations for Individual Pension Plans require a corporate plan sponsor. Professionals may create a Professional Corporation (PC) to act as plan sponsor however past service benefits do not apply prior to the establishment of the PC.
The pension plan will be registered by GBL Inc. All annual administration is also performed by GBL Inc. with the help of the Financial Advisor and/or the client’s Accountant.
The investments are the responsibility of the member (who is generally appointed Investment Manager) who in turn arranges for his Financial Advisor to place the plan assets into suitable investments.