In a recent blog post, I discussed the pros and cons of setting up a corporation if you’re a high-income professional such as a doctor, dentist or lawyer.
One advantage I didn’t cover in that article because of a lack of space is the possibility of using your corporation to create an Individual Pension Plan (IPP). An IPP can be attractive for incorporated professionals and other business owners because it provides tax benefits now and greater potential retirement savings down the road.
How does it work?
An IPP is typically set up for a single person (but may include a spouse and/or children as plan members) by registering it with the Canada Revenue Agency and conforming to Income Tax Act and provincial pension regulations.
When you draw a salary from your corporation as an employee, you create contribution space in the IPP to fund a pension when you retire. Starting at age 40, the maximum annual contribution to an IPP by your corporation is greater than what you would be allowed to contribute to your personal RRSP, and the IPP maximum grows as you get older.
This means you can not only save more, but also defer more taxes until your retirement when you start withdrawing money, presumably at a lower top marginal tax rate. What’s more, your corporation can deduct all contributions it makes to the IPP as well as the associated actuarial and investment fees.
Maximum yearly contributions1
| Age | IPP Contribution | RRSP Contribution | IPP Contribution Advantage |
| 40 | $33,030 | $33,780 | $2,250 |
| 45 | $36,280 | $33,780 | $5,500 |
| 50 | $39,850 | $33,780 | $9,070 |
| 55 | $43,770 | $33,780 | $12,990 |
| 60 | $48,080 | $33,780 | $17,300 |
| 65 | $50,700 | $33,780 | $19,920 |
As a defined benefit pension plan, your corporation makes annual contributions to the plan to fund the increasing actuarial cost of eventually paying you a lifetime pension at retirement. Besides these regular contributions, you can also make the following tax-deductible lump-sum contributions.
- Past service contributions—Once your IPP is approved by CRA, you can make a lump sum transfer from your RRSP to the IPP in recognition of the years of employment income you’ve taken from your corporation before the IPP was set up. Additional employer contributions are also allowed to cover the initial actuarial deficit created by the recognition of past service.
- Top-up contributions—An actuarial evaluation to determine the funding status of your IPP must be carried out every three years. If the IPP is found to be underfunded because of poor investment returns (versus a prescribed annual rate of return averaging 7.5%), your corporation can make additional contributions to top up the assets. Besides allowing you to shelter more income, this feature also makes the eventual size of your retirement nest egg more predictable than if you were saving inside an RRSP. On the other hand, the evaluation may find the plan has a surplus and the corporation’s IPP contributions temporarily reduced or suspended.
- Additional contributions at retirement—If you choose to draw a pension from your IPP, your corporation can make additional contributions to fund ancillary pension benefits at the time of your retirement.
What happens when I retire?
When you decide to retire there are several options open to you for taking money out of your IPP. You can choose to:
- Receive a regular annual or monthly pension from the plan
- Roll your IPP into a registered life income fund or locked in retirement income fund
- Buy an annuity from a life insurance company
The rules for when you must start taking money from your IPP are similar to an RRSP. You must start receiving income from the plan in the year after you turn 71. When you die, any remaining money goes to your surviving spouse or to your estate.
Other benefits
Among the other benefits of an IPP are:
- Pension income can be split up to 50% with a spouse for income tax purposes starting at age of 50 as opposed to 65 for an RRSP, when converted to a RRIF
- Money in an IPP is protected from creditors
Disadvantages of an IPP
There are certain disadvantages to opening an IPP as opposed to saving for retirement with an RRSP. They include the following:
- You give up most of your future RRSP contribution space as well as your eligibility to contribute to a spousal RRSP.
- There are additional expenses and complexity to set up and maintain an IPP, notably to make annual filings to the government and have an actuarial evaluation of the plan conducted every three years. There are also mandatory funding requirements your corporation will have to respect and have sufficient money to fulfill.
- Once contributed to an IPP, money and growth from investments is locked in, meaning it can’t be used for purposes other than to fund retirement benefits.
An opportunity for professionals
If you are an incorporated high-income professional over the age of 40, an IPP can be an excellent vehicle to both manage your tax situation and save for retirement.
Obviously, this is not a DIY project. You will need expert advice. We have helped many professionals manage their IPPs and we are here to help if wish to discuss your situation.
1Source : Times Colonist