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Individual Pension Plans (IPPs)

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Financial Planning  -> Pensions  -> Registered Pension Plans (RPPs) -> Individual Pension Plans (IPPs)

Individual Pension Plans (IPPs)

Income Tax Regulations s. 8515

This is a type of defined benefit pension plan, governed by provincial pension legislation.  Characteristics of IPPs:
bullet Each IPP must qualify for registration as a pension plan under the Income Tax Act.
bullet IPPs are beneficial for high income (typically over $100,000) owners of incorporated businesses and senior corporate executives.
bullet Allowable contributions are normally much higher than RRSP limits.
bullet Contributions are based on age, employment income, and actuarial calculations.
bullet Each plan usually benefits one employee, not a group of employees.
bullet Contributions to an IPP reduce or eliminate the allowable RRSP contributions of the employee.
bullet Contributions and administrative fees are deductible expenses for the corporation.
bullet Interest on money borrowed to fund contributions is tax deductible for the corporation.
bullet Contributions may not be made to an IPP for a spouse, but if the spouse works for the same employer, they could be added to the plan.  Due to the recent federal government announcement regarding pension income splitting, this is less important.
bullet The assets of the IPP are locked in until retirement.
bullet Setup and ongoing administrative fees are high.

Individual Pension Plans can accept transfers of funds from a prior registered pension plan (RPP).  If the IPP is set up primarily for the purpose of the transfer from an RPP, it is essential to establish in advance that the IPP will qualify for registration under the Income Tax Act.  Improper planning in this area could result in the IPP having its registration retroactively revoked after a period of years.  This would result in the assets of the plan becoming taxable.  There is information on this topic in the Canada Revenue Agency (CRA) frequently asked questions for registered plans administrators.

In 2005, CRA retroactively revoked the registration for two IPPs which were established in 1999 and 2000 and to which funds were transferred from defined benefit pension plans.  The Federal Court of Appeal upheld the CRA position in 2007 court cases.  The cases are:

    - 1346687 Ontario Inc. vs MNR, and

    - Jordan Financial Limited vs MNR

To contact the provincial regulator of an IPP, see Registered Pension Plan Regulators and Legislation.

Tax Tip:  Get professional advice to determine if an IPP would be beneficial for you or your high income employees.

Revised: September 20, 2017

 

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