Individual Pension Plan  

Individual pension plan (IPP) is a defined benefit pension plan established for one person. An individual pension plan is set up to achieve certain desired tax results. An individual pension plan is characterized as a “registered pension plans” for the purposes of the Income Tax Act of Canada (“Tax Act”). In order to obtain this registration, an individual pension plan must meet the “primary purpose” condition set out in paragraph 8502(a) of the Regulations to the Income Tax Act of Canada which requires that the plan’s primary purpose be “to provide periodic payments to individuals after retirement and until death in respect of their service as employees”.

In an individual pension plan (IPP) the employer is referred to as the plan sponsor and the employee or business owner is referred to as the plan member. The CRA’s view is that the “primary purpose” condition requires there be a legitimate employer employee relationship between the individual plan member and the corporate sponsor of the individual pension plan (IPP).

An individual pension plan (IPP) is a defined benefit pension plan. It provides senior executives and business owners with the opportunity to achieve maximum tax relief combined with a maximum retirement pension.

To qualify for an individual pension plan (IPP), a member must:

1. 1. have T4 income.

   2. be an employee of an incorporated company which is taxable under the Income Tax Act (ITA).

   3. be age 40 or more and earn a minimum of $75,000 from the company sponsoring the IPP.

The amount of tax-deductible contributions is determined by the following:

1. 1. age,

   2. length of service with the corporation,

   3. T-4 earnings.

1. Age

For business owners, incorporated professionals and executives an individual pension plan (IPP) becomes more attractive for ages 50 and older, they allow for more generous contributions than an RRSP. There is a specified maximum earnings level on which contributions are based on that increases steadily. Individual pension plan (IPP) contribution limits are set out by CRA just like RRSP limits.

2. Length of Service with the Corporation

An individual pension plan (IPP) can provide for benefits prior to the plans implementation date, this is referred to as past service. Contributions for past service can be made even if all eligible RRSP contributions have been made. To eliminate any doubling of benefits over this same period, a specific amount has to be transferred from the RRSP this is referred to as a Qualifying Transfer, or unused RRSP room is reduced for those who have elected not to make full RRSP contributions. You can claim past service benefits from 1991. Past service benefits prior to 1991 can also be recognized if certain conditions are met. Individual pension plan (IPP) contribution need not be made in one lump sum contribution they can be amortized over 15 years and allow for higher contribution limits than an RRSP.

3. T-4 Earnings

Individual pension plan (IPP) contributions are determined by the level of T-4 earnings paid to the plan member. Individual pension plan (IPP) benefits are paid in relation to T-4 earnings, dividends and other forms of income do not qualify. The higher the T-4 earnings the larger the past service benefits will be available. It is important to note even modest increases in T-4 earning will have a significant impact on the amount of the past service benefits that can be used and will increase the individual pension plan (IPP) contribution room.

How an Individual Pension Plan works:

An individual pension plan (IPP) is similar to an RRSP, once the plan is established and the contribution amounts are calculated by an actuary they are contributed to a trust and invested. Just like RRSP's the investment returns accumulate tax-deferred. The main benefit of an individual pension plan (IPP) versus an RRSP is the plan allows for higher contribution limits. The same investment options available for an RRSP are available for an individual pension plans (IPP) with a few exceptions. An individual pension plan (IPP) has to be invested in a diversified portfolio with no more than 10% concentration in any one individual stock. Individual pension plans are best suited for investments in a diversified portfolio of guaranteed investment funds.

At retirement there are several options available to wind down an Individual Pension Plan.

1. 1. Transfer the individual pension plan (IPP) investments to an insurance company to purchase an annuity. The annuity will provide income for life and can include survivorship benefits to the spouse. The individual pension plan (IPP) member must be of pensionable age to take advantage of this option.

   2. Transfer the investments to a prescribed RRSP. Assets can continue to accumulate tax-deferred until the end of the year the former individual pension plan (IPP) member turns age 71. At age 71 the investments in the plan must be converted either to an LRIF or RRIF depending on the locked-in requirements or to purchase an annuity. An individual pension plan (IPP) plan can be wound-up at any age after the plan is set-up.

   3. Continue the individual pension plan (IPP) and pay an accrued pension from the individual pension plan (IPP) trust. The underlying corporation must continue to sponsor the individual pension plan (IPP) and make additional lump sum contribution at retirement to enhance the member’s accrued pension benefit. Depending on the age at retirement the additional contributions can be worth hundreds of thousands of dollars.

Sponsor advantages

1. 1. Guaranteed lifetime income - the individual pension plan (IPP) offers a predictable retirement income.

   2. Tax advantages - all contributions and administration expenses payable and paid by the plan sponsor are tax deductible.

   3. Tax deductible contributions are often larger than under an RRSP.

   4. Past service funding - for executives and high earner, the individual pension plan (IPP) funding formula may, under certain circumstances, recognize past service and be more generous than an RRSP.

   5. Ownership of plan assets - depending on the plan rules and ITA restrictions, any actuarial surplus at retirement may be granted to the member.

How to Set Up an Individual Pension Plan and other Considerations

To summarize there are many benefits to individual pension plans (IPP's) however one must tread carefully when setting up the plan to ensure that the plan complies with CRA guidelines. Many plans that were not properly set up are being audited by CRA. Stone-Hedge Financial Group Inc. works closely with insurance companies who have specialists on staff to assist in proper set up and compliance with CRA.

It is recommended that one seeks advice from an accountant and lawyer prior to setting up an individual pension plan (IPP). Initial set up costs for an individual pension plan (IPP) can run anywhere from $3000 to $5,000. Insurance companies that offer individual pension plans can also be used for plan set up and to comply with CRA. Stone-Hedge Financial Group Inc. works with insurance companies that offer this service. An individual pension plan (IPP) is not a tax scheme it is a pension plan. Individual pension plans are suited to be invested in a diversified portfolio of guaranteed investment funds or an annuity to provide pension benefits at retirement.

Contact Us to Set Up or Review Your Individual Pension Plan

The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.