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Small business and individual pension plans

As employees, many people have a hard time finding the money to contribute to their registered retirement savings plans (RRSPs). As a successful business owner, you will often be able to maximize your entitlement, and be looking for even more ways to make use of tax‐sheltered retirement savings tools.

As it turns out, the Income Tax Act allows you as the owner of a corporation to set up an individual pension plan (IPP) for yourself as an employee of the business. By doing so, your corporation will be able to make larger tax deductible contributions, which in turn means larger deposits into retirement tax sheltering for you as employee.

How much can go in

Funding for RRSPs is based on your recent income, specifically you are allowed to contribute 18% of the previous year’s earned income. There is a limit to that, which is $26,010 in 2017, with that dollar figure indexed annually. What RRSP room you do not use in a year can be used in future years.

In comparison, IPPs require an actuarial calculation to determine the amount an employer can and must contribute. The calculation is based on factors such as age, past and projected future employment income, and the amount and terms of the pension the employer will be required to pay. Up until about the age of 40, the RRSP rule will allow more deposit money, but an IPP allows increasingly greater room as you move beyond that age.

More detailed administration

An individual RRSP can be set up with fairly simple administration and low cost, but an IPP has more complexity and generally higher cost. A trustee must be appointed to manage the assets, and there are more regulatory and tax filings. As well, an actuarial report is required to be prepared at the beginning, and triennially (every three years) thereafter.

As a conscientious business owner, you will want to do a careful cost‐benefit analysis. With larger startup and periodic maintenance costs, an IPP will likely only come into consideration for those at or near top tax bracket. It is certainly possible though to establish one while at a lower income level, but in anticipation of moving up in income as the business builds.

Mandatory contributions

Unlike your own RRSP where you can decide whether or not to save, an IPP is legally binding on your corporation as employer.

On startup, it is possible to fund past employment service as far back as 1991. The allowed amount is calculated, then funded by: 1. Transferring‐in existing RRSP assets,
2. Making a deductible employee/personal contribution up to the amount of unused RRSP room, and
3. Making a deductible employer contribution for the remainder.

Ongoing, annual contributions will entitle your corporation/employer to a tax deduction. As with RRSP contributions, there are no immediate income tax consequences to you as employee at this time.

The triennial actuarial test may reveal that there is not enough in the plan to meet the obligations, in which case your corporation will be required to make up the difference. On the other hand, if it is in a surplus position then funding will be temporarily suspended until things are back in line.

Allowable investments

An IPP can generally invest in the same types of investments allowed for RRSPs. The rules are a little more restrictive, however, in that no more than 10% of the assets may be in any one security. This restriction does not apply to mutual funds, which themselves are diversified holdings.

Pension payout time

There are three options on retirement: 1. Pay the pension pursuant to terms in the agreement.
2. The IPP value may be used to purchase an annuity from an insurance company, or
3. Commute the value and transfer to a locked‐in registered plan. If the commuted value exceeds the allowable transfer limit under the Income Tax Act, the excess amount will be taxable.

As a final point, IPPs may be entitled to greater creditor protection as compared to RRSPs, depending on province. This may be an important issue for an entrepreneur looking to balance business and personal financial risk.

Speak to your Meridian Wealth Professional for perspective on these important issues.

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