The Truth about IPPs

First RSPs, then TFSAs… I bet you thought you were done with sheltering savings? Well it turns out there’s another little known strategy in Canada that’s worth talking about.

If you own your business, are 40 years of age or older, and have an income over $100,000 per year, you’ll want to learn about what’s been called the “supercharged RSP”. The Individual Pension Plan or IPP is a company-provided plan that replaces RSP savings with bigger tax sheltered benefits. Best of all, its fully sanctioned by the CRA. 

IPPs enable business owners to have a personal pension plan that pays a predetermined retirement income based on income earned and years of employment. Once setup, the corporation contributes yearly to the IPP based on a pre-determined formula that potentially shelters more assets than a traditional RSP over time. The sooner an IPP is setup (after age 40), the better. IPPs further allow contributions for years of prior service, even before the IPP was established.

All eligible employer contributions are tax-deductible for the corporation, and won’t be taxable to the employee until the employee receives the income. This builds a strong case for IPPs as a tax deferral vehicle. 

Another strong advantage is that IPPs are creditor proof (if set up in good faith). If claims materialize against the business or the business is forced into bankruptcy, IPP assets remain protected.

A key advantage to IPPs is that the business owner owns the “actuarial surplus”. “Actuarial surplus” is the cumulative gains in the plan over and above what is needed to fund the income during retirement. This surplus can be used to increase pension income, or passed on to the business owner’s estate tax-free. Speaking of estates, eligible spouses can receive 66.66% of the pension income benefit in the event of the plan member’s death.  

Finally, IPPs allow for “terminal funding”. At retirement, the IPP can be amended to provide the most advantageous terms possible for the plan member. Very few tax shelter opportunities in life allow for such flexibility.

The downside consists of increased complexity and operating costs. To setup an IPP you’ll need full cooperation within your circle of trust, including your accountant, portfolio manager, actuary, and possibly a tax lawyer ensuring compliance. These are not structures for the uncoordinated.

If you’re interested in more information please be in touch. 

Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.