New rules in Ontario make IPPs even more attractive for owners to use for retirement savings
An individual pension plan (IPP) is one of the most tax-efficient retirement savings plans available to business owners and incorporated professionals—such as lawyers, physicians, dentists and accountants—in Canada today. It’s a registered, defined-benefit (DB) pension plan sponsored by a company for an individual, usually the business owner (and potentially their spouse).
The IPP may now be even more attractive in Ontario after the province recently amended legislation to exempt IPPs from requirements under its Pension Benefits Act (PBA).
Who is an ideal candidate for an IPP?
An IPP provides enhanced retirement benefits and tax advantages for high-income business owners and incorporated professionals over the age of 40 who earn T4 income and who are seeking enhanced, tax-advantaged retirement benefits.
IPPs are similar to RRSPs, in that the assets grow on a tax-deferred basis. However, IPPs can provide for larger retirement savings as contribution limits are calculated and certified by an actuary to ensure the plan complies with legislative requirements. RRSP contributions, on the other hand, are limited to 18% of the prior year’s earned income, up to a yearly maximum.
“It gives you an opportunity for tax deferral on a larger amount of savings than you could otherwise accumulate in an RRSP,” says Tiffany Harding, vice-president and head of wealth planning at Gluskin Sheff.
Another benefit with IPPs is plan members may be able to make contributions from past years of service with the incorporated company and lump-sum contributions at retirement.
“You may have the opportunity with an IPP to top up the plan to fill any gaps,” Harding says. “This is a tremendous benefit that goes above and beyond an RRSP.”
Also, with IPPs, contributions, actuarial costs, administrative costs (e.g., costs of setting up and monitoring the plan) and investment management fees paid directly by the corporation are generally tax-deductible.
A spouse or adult child employed in the incorporated business and earning T4 income is also eligible to become an IPP member. While an IPP is limited to three or fewer members, there is no limit to the number of IPPs a corporation can sponsor.
What happens with an IPP at retirement or if the business is sold?
When an IPP plan member retires, they can choose to:
– receive a monthly pension from the plan
– transfer the plan to a registered product
– use the plan assets to purchase an annuity
Similar to an RRSP, plan members must start receiving income from their IPP by the end of the year they turn 71. However, an IPP can start paying a pension as early as age 50.
If the company sponsoring the plan is sold, the IPP may be continued or terminated by the new owners. On termination, the plan can be transferred to another registered plan, subject to transfer limits, with the excess being received as taxable income to the plan member.
What happens with an IPP on the death of the plan member?
What happens to an IPP at death depends on the status of the plan. If the plan member has retired and is receiving benefits, IPPs provide for survivor pensions and guarantee periods. If the plan member dies before the guarantee period expires, the full amount of the pension will be paid to a spouse or other designated beneficiary for the duration of the period.
After the guarantee period, continuation payments can be made to a surviving spouse. On the death of the surviving spouse, or if the plan member dies before benefit payments have commenced, the assets in the plan will be paid to the plan member’s beneficiaries and taxed in their hands.
Is an IPP right for you?
Despite the numerous benefits, an IPP is not suitable for all business owners.
“IPPs are best suited to higher-income earning business owners who have a consistent cash flow,” says Mark Skeggs, vice-president of wealth planning at Gluskin Sheff.
“You want to make sure there is a significant contribution advantage, which is generally when you’re in your 40s and older,” Skeggs says. “It doesn’t work as well if you’re younger or have been taking dividends instead of salary from your corporation.”
Skeggs recommends business owners and incorporated professionals work with an advisor to determine if an IPP is the right solution. Advisors will work with an actuary to crunch the numbers. Together, the professionals can also determine how to make the most efficient tax-deductible, lump-sum contributions including “past service” and “retirement” funding.
Changes in Ontario
IPPs are now even more beneficial for certain business owners in Ontario after the provincial government passed Bill 213, The Better for People, Smarter for Business Act, 2020, which provides exemption from the Ontario PBA and simplifies the regulatory approval process while also reducing administration and costs.
A significant change is that funding of the IPP is now optional, which means business owners have freedom to determine when and what amount to contribute to the plan; the Income Tax Act will still establish the maximum actuarially determined amount that can be contributed in a year, but there will be no minimum contribution amount.
When an IPP participant retires, the plan sponsor can contribute between 15% and 40% of the IPP assets, depending on the participant’s age and earnings. The IPP funds will not be locked-in and can be transferred to an RRSP or registered retirement income fund (RRIF).
“The changes in Ontario will make IPPs more cost effective and easier to maintain,” Harding says, adding that Gluskin Sheff is already hearing more interest from clients and potential clients about this type of retirement plan. “It’s still early in the year, but there’s definitely some excitement about these changes.”
Ontario’s changes are aligned with existing legislation in provinces such as Alberta, British Columbia, Manitoba and Quebec, which already exempt plans for connected persons from pension legislation.
“The new Ontario legislation reduces the regulatory burden for IPP plans,” Skeggs adds. “It levels the playing field in Ontario with a number of other provinces.”
IPPs are a tax-efficient way for high-income incorporated professionals, business owners and some of their key employees to save for retirement. However, the plans are complex and often require professional guidance to be implemented and used properly and in line with a broader wealth management plan, Skeggs says.
“The IPP can be a viable solution,” he says, “but there are some people for whom it works better than others.”
* Please note there are references to employees who are no longer with the firm, but were as of the date of publication.