Individual Pension Plan

Individual Pension Plans

What is an IPP?

An Individual Pension Plan (IPP) is an alternative to RRSPs for many high income business owners because it offers:

  • Guaranteed Pension
  • Creditor Protection
  • Succession and Estate Planning

An IPP offers both maximum tax relief and a maximum retirement pension to guarantee lifetime income. Any surplus in the plan belongs to the client. Normally a tax liability is imposed on the death of the second spouse for registered assets in the estate, but an IPP can be an effective way to maintain a family business by passing on registered assets to the second generation on a tax deferred basis.

Some key features of an Individual Pension Plan are:

  • All contribution amounts paid by the company are tax deductible
  • Creditor Protection, most RRSP’s are not creditor proof which is of great importance to business owners
  • Fees associated with setting up an Individual Pension Plan are tax deductible
  • Guaranteed Pension Amount
  • Succession/Estate Planning Tool
  • The IPP is professionally managed and subject to stricter investment disciplines than RRSPs.
  • A targeted rate of return of 7.5% and can increase contribution room if that return is not achieved
  • If a company borrows to put in an Individual Pension Plan tax on the interest is deductible whereas borrowing for an RRSP is not

Do you think an IPP would help your financial planning? Contact Us!

Investment Selections and Due Diligence

Investment Selections

An IPP can have investment flexibility similar to a self-directed RRSP. Its restrictions include holding only qualifying investments as per the Income Tax Act and strict diversification standards.   The IPP funds can be invested in stocks, bonds, mutual funds, pooled funds, GICs, term deposits, etc.

Investment and Due Diligence Rules

The assets held within the plan does may not include:

(i) a prohibited investment under subsection 8514(1) of the Income Tax Regulations,

(ii) at any time that the plan is subject to the Pension Benefits Standards Act, 1985 (Canada) or a similar law of a province, an investment that is not permitted at that time under laws as apply to the plan, or

(iii) at any time other than a time referred to in subparagraph (ii), an investment that would not be permitted were the plan subject to the Pension Benefits Standards Act, 1985 (Canada).The permitted investments under Pension Benefits Standards Act, 1985 (Canada) are outlined in Schedule III of the Pension Benefits Standards Regulations, 1985.

For provinces where provincial registration of IPP is required, there may be additional requirements imposed by the provincial pension legislation.

The key requirements, in brief, are:

  • Should follow prudent-man standards with respect to quality and diversification in investment of trust funds;
  • Investments should not be in securities of the pension plan sponsor (participating employer) or related corporations unless the company is publicly traded;
  • If the investment is in individual securities (e.g. stocks or bonds), each security cannot be more than 10% of the fund on a book value basis at the time the investment is acquired.

Who is a Potential Candidate

The Ideal Candidate: An owner, incorporated professional, or executive, age 50 and over, and earning over $140,000 in T4 or T4PS income, is the ideal candidate.

IPP contribution limits increase with age, therefore an IPP may also be established for candidates with lower earnings. This is a defined benefit pension plan registered with the government and must conform to the rules and regulations affecting all registered pensions plans.

For this reason, it is set up by an actuary, registered with CRA. Funds are held in a trust, which must be audited by an actuarial firm every three years. At that age and income level, the potential IPP contribution levels outstrip those that can be made through an RRSP