If you’re a small business owner in BC, you’ve probably spent countless hours thinking about how to grow your business. But have you given the same attention to your retirement plans? Let’s talk about a retirement savings option that’s gaining traction among business owners and incorporated professionals: the Individual Pension Plan (IPP).

An Individual Pension Plan (IPP) is a defined benefit pension plan designed primarily to provide high-income-earning incorporated business owners or incorporated professionals, with the maximum amount of pension benefits allowed under the Income Tax Act (ITA). In doing so, an IPP will typically provide between $250,000 and $1,500,000 more deductible contributions than an RRSP over its lifetime. In many cases, this will significantly reduce your taxes and allow you to retain much more assets to invest for retirement. Let’s talk about some of the advantages with an IPP.

IPP Advantages

1. Increased Savings

IPPs offer enhanced asset accumulation potential compared to RRSPs, particularly for individuals aged 40 and older. At age 40, the difference in contribution room is modest, but increases significantly with age. By age 50, the annual contribution would be more than $10,000 higher and approximately $20,000 higher by age 65 for individuals with maximum pensionable earnings.

2. Increased Funding Based Upon Investment Performance

The Income Tax Act assumes that an IPP will have a net investment return of 7.5%. If the IPP does not achieve this rate of return, the plan sponsor can make additional top-up contributions to the IPP. Think of the 2008 market downturn where the S&P/TSX Composite Index fell near 35%. IPPs allow for additional funding opportunities by replenishing the investment loss with additional company contributions. These additional contributions are tax-deductible for the plan sponsor and increase the amount of tax-deferred assets held in the IPP.

3. Corporate Tax Advantages

All contributions to the IPP are tax-deductible for the plan sponsor. Additionally, all other costs related to the administration of the IPP are also tax deductible, including actuarial fees, regulatory filing fees and investment fees.

IPPs can also help with managing corporate taxes. Small businesses in Canada typically pay a lower tax rate on their first $500,000 of active business income. However, if a company earns too much passive investment income (over $50,000), it starts to lose this tax advantage. By using company funds to contribute to an IPP instead of generating passive income, businesses can potentially maintain their eligibility for the lower small business tax rate.

An IPP may also be able to assist with securing eligibility for the lifetime capital gains exemption that is available to residents of Canada who are selling the shares of a qualified small business corporation.

4. Creditor Protection

The assets held within an IPP are protected from creditors.

5. Succession Planning

An IPP provides the opportunity for multi-generational tax planning if the plan member’s children are involved in the business. If the children are earning T4 income, they could be added as members of the IPP and accrue pension benefits. A greater potential impact is that, because the children are now plan members, the IPP would not have to be wound-up on the death of the parent or their spouse (the original IPP member(s)). This could create a significant tax deferral depending upon the IPP assets at the time of death.

Additional Considerations for Individual Pension Plans (IPPs)

1. Complexity and Cost

Establishing and maintaining an IPP is a more complex process than investing in an RRSP. Actuarial valuations will be required and filings with the CRA (and, in some jurisdictions provincial pension regulators) are also necessary. The costs of the actuarial services and the filings are tax-deductible.

2. Reduced RRSP room

Establishing an IPP will eliminate almost all of the plan member’s RRSP contribution room while the IPP is in existence. In most cases the plan member will only generate $600 of RRSP room each year.

Summary

So, is an IPP right for you? Well, that depends. If you’re a business owner or executive, receive ample T4 employment income, 40 years or older and are looking for tax-efficient ways to save more for retirement, an IPP should be considered. Reach out to a Certified Financial Planner® professional that specializes in Individual Pension Plans (IPP) to see if it’s the best strategy for you.

Take some time to learn more about IPPs. And most importantly, start planning for your retirement if you haven’t already. After all, you’ve worked hard building your business—don’t you want to make sure you can enjoy a comfortable retirement when the time comes?

With files from Westcoast Actuaries (2024). This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Coby Blystone is solely responsible for its content.