Individual Pension Plans (1)

We are seeing today that a great number of corporate clients have accumulated a significant amount of wealth in their companies, mostly in the form of cash or near cash instruments. In some situations, cash accumulation has resulted from the owner manager loaning back to the company, after-tax bonuses that have been paid in order to keep taxable income in the $500,000 range to optimize both personal and corporate tax.

Clients generally creditor proof any excess cash by transferring it either to a sister company or up to a holding company. This transaction has also served to facilitate succession planning in so far as to enable you to claim the $800K capital gains exemption, should you desire to sell common shares of your company. Prior to 2014, the cge limit was $750K.

As time passes on, we are finding that owner managers may have not thoroughly considered their retirement objectives, other than RRSPs. The 2014 maximum annual RRSP contribution limit based on 2013 earned income of $134,833 is $24,270. The RRSP is not a defined benefit plan. Your retirement fund is dependent on how your contributions in the plan perform.

An IPP is a defined benefit plan; it pre-determines your retirement income based on actuarial assumptions. The maximum pension may be attained with income of $134,834 for 2013 with tax-deductible current service employer contributions of $27,700 per annum for someone who is age 45 in 2014. The current service limit will rise to $32,500 for one who has attained age 55 in 2014 which is significantly greater than the otherwise 2014 RRSP contribution limit.

The added attraction to the IPP is the ability to deduct contributions for past service, going back to 1991, which could be over $110,900 for someone who is age 45 in 2014. In essence contributions to the IPP can be viewed as an alternative to accruing bonuses without payroll taxes.

Other advantages are as follows:
  • Tax-deductible employer contributions are creditor proof
  • No employer health tax on contributions
  • Larger tax deductions than for RRSPs
  • Tax deductible interest for loans made to fund IPPs
  • Allows for additional contributions where rate of return on plan assets are less than 7.5% per year
  • Pension plan surpluses belong to the member
  • Provides for estate planning

Reference to GBL Actuaries & Consultants
Contact your professional advisor prior to implementing any of the outlined strategies