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Planning for profitable tomorrow

In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Will you have sufficient monies to support a comfortable reti...

In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Will you have sufficient monies to support a comfortable retirement? I pondered this same question and heard about a new pension product that could be the answer.

I spoke with Marc Henein and Matt Berry, both wealth advisers with Scotia McLeod at their Brampton office.

What is an IPP?

According to Henein, “An IPP is a defined benefit pension plan that can provide greater tax deferred contributions than those available through a Registered Retirement Savings Plan (RRSP). Unlike an RRSP, it uses a formula to set a specific monthly pension that is promised at retirement. An IPP is subject to the provisions of the Income Tax Act which govern defined benefit pension plans. The plan provides for an annual pension that is equal to a percentage of an employee’s T4 (or T4PS) income times years of employment to a maximum defined amount. Employer contributions to fund the pension are determined by an actuary.”

The current thinking is that this would be for someone over the age of 40; their maximum IPP contributions will exceed those of RRSPs. It is also possible to fund for previous years’ pension benefits going back as far as 1991. Funding of these past service benefits can result in significant deductible contributions for the employer.

Heinen believes that the ideal IPP candidate is likely a business owner or incorporated professional earning around $100,000 or more, and who is over 40. The candidate must have T4 income to generate pension’s benefits. Dividend income, income from a sole proprietorship or partnership does not qualify.

So what are the advantages?

Branch manager Matt Berry said that, “Annual contribution amounts are larger than RRSP contributions. These can be made retroactive back to 1991 with past-service contributions.”

Contributions are tax deductible for the employer. Employer contributions must be exempt from CPP/QPP and other payroll taxes. Berry believes that there is a good possibility of making additional contributions for early retirement benefits. Employees are not taxed until withdrawals from the plan are made. Pension benefits are creditor protected under pension legislation.

And what about any disadvantages?

Heinen said there are “significant regulatory compliance requirements. Set-up and annual maintenance costs can be $3,000 or greater, and may increase if past service benefits are provided. Assets may be locked in by provincial pension legislation. Required annual employer contributions need to be considered. And a surplus may reduce future contributions.”

What are the current year contributions?

Once an IPP is established, the employer must make ongoing contributions to keep the plan funded. In order to determine the contribution amount, an actuarial valuation is required when an IPP is opened, and every three years thereafter. Future RRSP contributions by the individual will likely be impossible due to the size of the pension adjustment reported on the IPP benefits earned.

Contributions made within 120 days of the corporate year-end are deductible in the immediately preceding corporate year. An IPP may be established after the corporate year-end, but must be submitted for registration before the calendar year’s end.

What do you mean by past service?

“When past service is funded, the Income Tax Act requires that RRSP contributions made for that period of time either be withdrawn or transferred to the IPP in order to offset the cost of past service,” Berry said. “The amount is called a Past Service Pension Adjustment (PSPA). It is the sum of the pension adjustments that would have arisen during those years, had the pension plan been in place. The transfer of RRSP assets to the IPP is tax free. Most people choose to transfer existing RRSP assets to the IPP to satisfy the PSPA. A transfer can only be completed once the IPP has been accepted for registration by CRA. In many cases, Scotia McLeod is able to facilitate this as an in-kind transfer. Once the RRSP assets are transferred into the IPP account they cease to be treated as RRSP money and form part of the IPP. The remaining deductible past service costs are either paid by the company in a lump sum, or amortized over a specified period up to a maximum of 15 years.”

I also learned that investments that are RRSP eligible generally qualify for an IPP, and can be managed in a similar way as a self-directed RRSP. The contributions increase the closer the employee gets to retirement, as there is less time to accumulate the assets in the plan to fund the required pension.

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