December 1, 2023

Is the Individual Pension Plan for you?

The Individual Pension Plan (IPP) is designed to optimize retirement income, it was modeled on defined benefit pension plans and is designed to provide a predetermined annual income.

It is ideal for a shareholder of a small or medium-sized company who is at least 40 years old and whose remuneration takes the form of a salary. Naturally, the company must be in a position of financial health, generating yearly surpluses and sufficient cashflow. Since the last budget, corporations generating passive income from their investments will benefit even more from this plan, so we should see an increase in the appetite for this type of plan.

The advantages of the IPP are multiple: higher contributions than in the RRSP, possibility of buying back past service, thus creating a significant deductible expense for the company, opportunity for income splitting, allows for the development of an independent asset that can be unseizable.

One of the strategies when selling a business that exceeds its maximum amount is to use the IPP to dispose of it in order to purify the company for the purpose of exemption eligibility tests.

Particularly interesting fact: it is possible to defer the tax on the death of the member on certain amounts accumulated in the IPP as part of a family estate if the son or daughter is also a member of the plan.

Obviously, the IPP does not only have good sides. Indeed, the costs are higher, administration is more tedious, income strategies are limited, the assets would be part of the family patrimony, whereas they are not if they remain in the company.

Before implementing an IPP, the pros and cons must be carefully considered, ensure that the analysis considers the sums accumulated in the management company, carry out sensitivity tests and consider the administrative burden and limitations specific to the IPPs.

It is ideal for a shareholder of a small or medium-sized company who is at least 40 years old and whose remuneration takes the form of a salary.

– Geneviève Bauer

Key takeaways:

Suggested minimum requirements

40 years and over
Salary of $100,000 or more
Deductible benefits for the business, but higher than in the case of an RRSP
IPP contributions that increase with age
IPPs protected from creditors
Possibility of bequeathing the IPP to children
Higher management and administration fees than an RRSP – on the other hand, fees tend to decrease as the volume of the IPP increases
In retirement, withdrawal strategies can be developed: IPP (Sharing of Income)

Is the Individual Pension Plan for you?

Is the Individual Pension Plan for you?

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