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Individual Pension Plans (IPPs) are increasingly popul ar, especially amongst business owners (including incorporated professionals) who own the corporations that employ them. This is no doubt because as tax- advantaged retirement savings vehicles, IPPs can often provide significant advantages over RRSPs.
IPPs are registered pension plans (RPPs) that are su bject to the requirements of both the Income Tax Act (ITA) and pension standards legislation. IPPs are typi cally defined benefit (DB) arrangements, although it is increasingly popular to have an additional defined c ontribution (DC) component,
or perhaps at earlier ages to implement them on a DC basis. Where the IPP is set up on a DB basis, it typically provides the maximum benefits that such a plan may offer. This drives up funding costs. Business owners find IPPs attractive because they provide enhanced retirement benefits on a tax-deductible basis to their corporation. While DB RPPs are more complex to administer than DC arrangements, many actuarial consulting firms see the IPP market as having considerable grow th and have thus developed standardized packages allowing for the establishment and on-going admini stration of these arrangem ents on a cost-effective basis.
Prior to 1991, it was very difficult for business owners to establish IPPs. When the ITA was amended to permit these arrangements, very specific rules were introduced for “connected” persons (in general terms, persons holding 10% or more of any class of shares on a direct or indirect basis, or persons who do not deal with the employer at arm’s length, or persons who are “specified shareholders”).
.Advantages Offered by IPPs
• IPPs offer the following advantages:
• IPPs can provide the “richest” pension benefits that the ITA permits a RPP to provide, thus
• providing the member with enhanced retirement income
• A source of income qualifying for pension splitting
• Potential larger annual tax-deductible contributions than would be permitted to an RRSP
• Ability to make tax-deductible contributions for past-service
• Additional contributions available at retirement (terminal funding)
• Deductibility of interest charges where employer makes contribution with borrowed funds
• Deductibility of administration and other costs
• Ability to make additional tax-deductible contributions to the IPP if investment performance is poor
• Creditor protection
• Ability for member to own any surplus that may arise under the IPP
• Possible savings in payroll taxes
• Helping to preserve access to the $750,000 capital gains exemption