It’s no secret that the finance industry loves its acronyms. Things like RRSP, TFSA, RESP and FHSA are thrown around by people with CFP, CFA and CIM designations. Why, even our firm name is an acronym! (Quality and Value, just in case you forgot.) But ‘IPP’ might be a new one to you.
The IPP – More than Just Another Finance Acronym
So, what is an IPP anyway? IPP stands for Individual Pension Plan. It is a defined benefit (DB) pension plan designed for high-income business owners, incorporated professionals (like doctors and dentists), and key employees of a corporation. These types of individuals generally do not have access to registered defined benefit pension plans as employees in public service would. The primary purpose of an IPP is to enable these incorporated individuals to maximize their tax-assisted retirement savings. After some recently announced upward capital gains revisions for corporations, these may look more attractive than ever.
How They Work – The Short Version
The corporation that establishes an IPP is commonly referred to as the ‘sponsoring corporation.’ The sponsoring corporation is legally required to fund the IPP and maintain sufficient assets in the plan to provide the required retirement pensions. That’s why it’s important to make sure the corporation can continue to meet the funding requirements over time. Contributions to an IPP are tax deductible to the sponsoring corporation rather than the individual, which can also create corporate tax planning opportunities. The amounts that can be contributed are often greater than your typical RRSP contribution limit (more on that shortly).
Although the account is funded by the corporation, in all cases, the amount of funding is determined by an actuary. Keep in mind that unlike your own RRSP where you can decide whether or not to save, an IPP is legally binding on the corporation as an employer.
As far as investments are concerned, an IPP can usually invest in the same types of investments allowed for RRSPs, such as stocks, bonds, mutual funds, pooled funds, etc. However, the rules are a little more restrictive on certain matters, due to federal or provincial pension legislation.
3 Reasons to Consider an IPP
1. Peace of Mind: As a DB pension plan, retirement income is defined and predictable. Business owners and incorporated individuals typically take on enough risk over their lifetime so having a guaranteed retirement income stream is valuable.
2. Higher Contribution Limits than RRSPs: One of the most significant advantages of IPPs is the ability to contribute larger amounts compared to traditional retirement savings vehicles. Unlike an RRSP, tax deductible contributions are not limited to 18% of income. Instead, for individuals over age 40, IPPs can create annual contribution room that starts out higher than allowed with RRSPs. The amount varies as the contribution limit is based on a formula that considers an individual’s age, years of service, and average annual earnings.
In the following example from our actuarial friends over at Lesniewski Moore, a 60-year-old high-income earner can contribute $53,320 to an IPP vs the $32,490 maximum 2025 RRSP contribution, a 64% increase!
*Assumes an individual with average T4 earnings of $180,500
Source: https://lmcgroup.ca/services/individual-pension-plans/
3. Creditor Protection: Assets inside of an IPP can be creditor proof through provincial legislation. This may be advantageous to those businesses in higher risk industries.
The Fine Print
IPPs come with certain regulatory requirements, including annual contributions, actuarial valuations, and mandatory minimum funding levels. Due to these requirements, IPPs are more complex and are costlier to create and maintain.
That said, it seems there are fewer and fewer tax savings opportunities, especially for those in higher income tax brackets. Many of the administrative costs to set up and manage an IPP are deductible, resulting in a reduction of corporate passive income. Investment management fees can also be deducted under certain requirements.
You may have other questions such as: How do I find out how much I can contribute to an IPP? What happens to my IPP when I decide to retire? What if my company is sold? What happens if my company cannot meet the funding requirements?
At QV, we work closely with actuarial, accounting and legal professionals who are very knowledgeable about IPPs to ensure a smooth experience including compliance with CRA’s rules. Our investment pools and strategy follow a pension-like, risk adjusted style of investing, a perfect fit for IPPs.
Is an IPP Right for You?
With higher contribution limits, defined benefit structures, tax advantages and creditor protection, IPPs can be a powerful tool for high-earning business owners in Canada.
If you are a business owner or incorporated professional over the age of 40 drawing T4 income over $100,000, you should consider an IPP. And the best part? Conceptually exploring whether an IPP could work to your advantage is easy and risk free. Feel free to reach out to me or my colleagues on the QV Private Client team to find out whether an IPP is right for you.
