What is an Individual Pension Plan?

An Individual Pension Plan (IPP) is a defined-benefit pension plan registered with the CRA, established by a company for one person — typically an incorporated business owner or key executive. It provides the maximum retirement pension the Income Tax Act allows, funded with corporate dollars.

Who is it for?

IPPs work best for connected persons — someone who owns 10% or more of any class of the company's shares (or doesn't deal at arm's length with it) — with several years of T4 income from their company. The advantage over an RRSP grows with age and income: it typically becomes compelling from the early 40s onward, for T4 income approaching or exceeding the pensionable-earnings maximum.

More room than an RRSP — and it grows with age

RRSP contributions are fixed at 18% of earned income up to an annual cap. IPP funding is calculated actuarially: the older you are, the less time contributions have to grow, so the Income Tax Act allows the company to contribute more each year. By the mid-50s the IPP contribution can exceed the RRSP limit by a wide margin — and every dollar is a deductible corporate expense.

Recognizing your past service

An IPP can credit service back to when you first drew T4 income from the company — often decades. Funding that past service starts with a qualifying transfer from your existing RRSP, and the remainder becomes an additional deductible company contribution once CRA certifies the past service pension adjustment. Years of RRSP saving become the foundation of a larger, guaranteed pension.

More advantages at retirement

When the pension begins, the plan becomes eligible for terminal funding — further deductible contributions to enhance the pension: an increased early-retirement pension, a bridge pension replicating CPP until 65, and full inflation indexing. If plan assets underperform the prescribed assumptions, the company may make additional funding contributions — a safety valve an RRSP simply doesn't have.

Investment costs, deductible

Investment management fees for an IPP are deductible to the corporation. The same fees inside an RRSP are paid with money that's already been taxed and are not deductible.

What are the obligations?

An IPP is a registered pension plan: it has a trust, trustees, actuarial valuations every few years, and annual filings. That's the part that has traditionally made IPPs slow and expensive — and it's exactly the part Online Actuaries automates.