IPPs Are Alive And Well!
By: Michael Marmoreo
We are pleased to announce that Finance Canada has amended the tax measure on past service contributions to an Individual Pension Plan (IPP). This measure was originally introduced in the federal budget. The revised tax measure restores the effectiveness of the IPP as a solution to provide past service benefits to business owners or executives.
We anticipate that only a small number of IPPs will be affected by the new tax measures. Only IPPs for connected members are subject to the new tax measures introduced in 2011 (IPPs for non‐connected members are not subject to any of these new tax measures).
Past Service Contributions
One of the advantages of an IPP is the ability of the sponsoring company to make tax deductible contributions to the plan. Generally, past service contributions to the IPP are permitted to capture years of service as if the individual had been a member of the IPP in the past.
A past service contribution consists of two parts:
- A transfer of assets from the member's registered assets (RRSP, RRIF, LIRA, and/or money purchase pension plan assets) into the IPP, calculated in accordance with Canada Revenue Agency (CRA) rules and/or the giving up of unused RRSP contribution room
- A 'top‐up' contribution from the company that is deductible for corporate tax purposes
Under the rules proposed earlier, the cost of past service was to be first satisfied by transfers from any registered assets belonging to the IPP member and/or a reduction in their unused RRSP contribution room. Only then would past service contributions from the company have been permitted. Following the recent changes, only a portion of the member's registered assets will be considered to determine the qualifying transfer amount required to fund past service benefits.
This revised calculation to determine the qualifying transfer will preserve full past service benefits for the vast majority of plans, thus reinstating one of the IPP's main benefits – the ability to have the sponsoring company, not the individual, fund a generous pension benefit for past years of service on a tax-deductible basis.
For each year after a plan member attains age 71, the minimum annual amount to be withdrawn from an IPP starting in 2012 is equal to the greater of the following amounts:
- The amount of pension based on the terms of the plan
- The minimum withdrawal required from registered retirement income funds (RRIFs)
We feel that the IPP is still one of the best-kept secrets in retirement planning for entrepreneurs and executives. It is certainly a profitable tool for high-income individuals to accumulate additional retirement income.
Michael Marmoreo is business development manager, group savings and retirement, with Industrial Alliance (email@example.com).