January 15, 2010
By W. Michael Thomas, CFP, CLU, CH.F.C., R.F.P.

Since it was introduced by the federal government into the Income Tax Act, the Individual Pension Plan (IPP) has become the most effective way to compensate high-income earners who were disadvantaged by Registered Retirement Savings Plan (RRSP) contribution limits. The IPP is also a very useful tool in family-owned business succession planning.

The Individual Pension Plan is a defined benefit created for either an owner, or key executive of a sponsoring incorporated company. The owner/executive’s age, earnings and the length of time employed with the corporation will determine ongoing contributions to the plan and the potential to contribute funds for past service benefits. Contributions made on behalf of the owner/executive are tax deductible to the corporation. Similar to an RRSP, the owner/executive eventually pays taxes, when the funds are withdrawn during retirement.

An IPP allows for increased contributions compared to a RRSP. Below is an example of someone establishing an IPP in 2009*.

An IPP allows the sponsoring company to make large tax deductible contributions. This allows the company, not the individual, to incur as much of the deductible cost as possible. The IPP plan provides 100 per cent creditor proofing of plan assets, and allows those assets to move from the business to the owner on a tax-deductible basis, and then protects those assets from creditors. It also ensures pre-determined retirement benefits.

Any investment losses under an RRSP plan are the problem of the pensioner and cannot be made up with increased contributions, as they are a Defined Contribution Plan. An IPP allows the sponsoring corporation to make up for poor investment performance by making additional tax-deductible contributions that ensure adequate income at retirement.

The IPP program is perhaps the least known, yet most effective, tax deductible savings strategy available in Canada.
  50 year-old 55 year-old 60 year-old  
(A)  Total maximum RRSP contribution (2009): $21,000 $21,000 $21,000
(B)  Total current service cost IPP: $27,700 $30,400 $33,400
(B-A)  Increase in contribution (2009): +$6,700 +$9,400 +$12,400
(C)  Potential past service purchase: $141,500 $188,900 $241,000
(B+C)  Total corporate deductible contribution (2009): $169,200 $219,300 $274,400
*Assumes an income level that would allow for maximum RRSP and IPP contributions in all years ($150,000 from 1991).
W. Michael Thomas is a partner with The Investment Guild, endorsed provider of the HortProtect Group Insurance Program, and is a director of Ontario Horticultural Trades Foundation.