Canada’s economic prosperity has been built by the ingenuity of its entrepreneurs and their families, who create and grow their business and employ millions of Canadians. Whether it be a corner store, restaurant, a potato farm, or a brewery; the family business represents a massive form of employment and growth for our economy.
According to Statistics Canada, in 2020, family-owned businesses accounted for 48.9% of Canada’s GDP, employing 6.9 million people. In family businesses, the entire family will often work in the business and participate in the successes and in the tough times.
For these businesses, the need for a clear, tax efficient succession plan is important, while taking care of those who founded the business as they transition it to the next generation. In many cases, their retirement plan is expected to be funded from their business assets. They may have RSPs, but a common concern is what happens if they pass away and there is a substantial amount of value in their RSPs. These would be taxed most likely at the highest tax bracket, and only after that, can be paid out to an Estate. It is due to this concerns that registered plans are often neglected.
IPP+ – Individual Pension Plan for Owners and the Next Generation
An Individual Pension Plan (IPP) is a company-sponsored pension plan set up for owners, their spouses, and can include adult children if they are receiving T4 from the company and will continue to do so. One of the IPP advantages is that the plan is funded with pre-tax corporate dollars, compared to RSPs which are funded with post-tax personal dollars. As with an RSP, the IPP is not taxed until retirement. If children are members of the plan and will continue to operate the business, the IPP can allow a tax-deferred rollover to them from their parent’s portion of the plan if they were to pass away prematurely.
To illustrate, we will consider the Carlos Family. George and Mary Carlos, both aged 69 in 2021, have run a successful Company over the past 40 years, where they have paid themselves T4 income back to 1991 of $125,000 for George and $75,000 for Mary. They have two adult children: John, age 38 and Jennifer, age 36, who are transitioning to take over the business and have both earned T4 from the company over the past 10 years. George are Mary are considering an IPP.
The IPP provides the following funding room, combined for both spouses, for George and Mary:
Past Service: $1,699,700
RSP Transfer: $1,030,200
By the time that George and Mary retire in 2024, the IPP will have accumulated $3,785,000 in retirement assets, providing an annual indexed pension starting at $165,100 for George and $115,200 for Mary, which can be income split, providing income security in retirement.
Their Investment Advisor charges a flat fee account of 1%. As the fees in the IPP are deductible to the corporation, unlike an RSP, in year 1 alone they can write off the 1% fee on $2,783,000  which represents an additional $27,830 deduction to the company and offsets any Administration costs.
The one issue that causes anxiety for George and Mary is what happens to their IPP assets if they were to die prematurely. This is where the IPP family plan comes into play.
Since John and Jennifer have each drawn T4 from the company each year and are now running the business, the impact of death on the parents’ IPP assets would depend on whether or not John and Jennifer are members of the IPP. If they are not members of the IPP, then the parents’ assets upon death would pass through the estate. If they are members of the IPP, the assets would not flow through the estate.
If George and Mary were to pass away in 2029, there would be an estimated amount of $3,615,900 remaining in the plan that upon disposition would attract 53.41% in taxes for a total tax paid of $1,931,300 and net proceeds to John and Jennifer of $1,684,600, undoing a lot of the planning that was put in place due to the tax liability.
However, if we add John and Jennifer to the IPP, the remaining $3,615,900 would stay in the IPP and flow down to them, creating a large surplus and essentially a prepaid pension for both of them, potentially deferring almost $2 million in taxes. There are few opportunities that remain that offer estate planning that is this powerful.
Note, the above figures use CRA mandated assumptions including a rate of return of 7.5% per year, salary increase of 5.5% per year and post retirement indexing of 4.0% per year.
By simply adding the next generation to the IPP, GBL and its advisors have been able to solve many of the succession concerns in a tax efficient, creditor protected plan. Contact your GBL representative to learn more.
By Fraser Lang CLU, CFP, CHS, Senior Vice President, GBL Inc.
Founded in 1995, GBL is a leading provider of retirement and health solutions for business owners across Canada. For more information on our services and strategies contact: [email protected] or 403.249.1820 and follow us to learn how we can help Build Your Future.
 Assumes fully funding the past service.
 RSP Transfer of $1,030,200 + Past Service of $1,699,700 + 2021 Contribution of $53,100.