Personal Pension Plans

The last time I wrote about Individual Pension Plans (“IPPs”) was in 2011; see my blog. Recently, I have received a few emails from my readers asking if I planned to update the discussion on this topic. As it happens, over the last year or so, I have met and spoken to Jean-Pierre Laporte of INTEGRIS Pension Management Corp. about his company’s personal pension plan (“INTEGRIS PPP”), and I thought I would ask Jean-Pierre to write a guest blog.

It should be noted upfront that the INTEGRIS PPP while similar to an IPP, is more of an IPP on steroids, and was created to be a private sector version of the major public sector defined pension plans for incorporated individuals.

While I think that for some small business owners, a personal pension plan may make sense (especially for anyone concerned their corporation is a personal service business), please be aware, that neither Cunningham LLP nor The Blunt Bean Counter blog is endorsing INTEGRIS Pension Management Corp. or the INTEGRIS PPP in any manner, and you should obtain independent professional advice on whether an IPP or a personal pension plan makes sense for your own circumstances.

With all the caveats out of the way, I will leave it to Jean-Pierre to discuss personal pension plans.

Personal Pension Plans

By Jean-Pierre A. Laporte

If there is one thing that most business owners can agree on, it is that Canadians pay too much tax. Even with well-informed accountants providing advice in the background, there is a general feeling within Corporate Canada and in the small private sector that the various levels of government are in dire need of tax revenues.

Ontario’s recent introduction of new tax brackets for the “wealthy”, the increase in the taxation of non-eligible dividends and the punitive corporate taxation of personal service businesses, in conjunction with the introduction of the mandatory Ontario Retirement Pension Plan all reinforce this perception.

Personal Pension Plan vs RRSP

One option available to reduce this tax burden is a personal pension plan. Simply-put, a personal pension plan (or PPP) is a registered pension plan offered for the owner-operator of a business or for an incorporated professional. A PPP provides a flexible contribution mechanism that can match the available cash flow of the company while enjoying superior tax deductions unavailable to those saving through RRSPs.

For example, a 55 year old doctor earning $300,000 from her medical practice corporation could contribute $24,270 her RRSP this year. If the Dr. established a PPP, she would be allowed to contribute $33,395 to her PPP, and $24,270 to her RRSP as well in the year that the PPP is established.

The double RRSP and PPP contribution noted above can occur only if two conditions are met:

(1) the member had no T4 income in the year 1990 and

(2) the RRSP deductions can only occur in the year of PPP set up. For subsequent years, the RRSP deduction is limited to $600, called the PA Offset.

Moreover, if she had drawn T4 income from her company over the past 10 years, she would also be eligible to claim an additional corporate tax deduction (in this case $95,640 assuming she received the maximum pensionable salary over that 10 year period) in the year past service is purchased.

Any investment management fees the Dr. pays to have someone manage her registered assets are tax-deductible to her corporation.

At retirement, her basic pension benefit could also be enhanced with indexing protection or she could retire early on a full unreduced pension and make a final tax deductible contribution out of her corporation. For example, in the example above, if the Doctor decided to retire at age 60 instead of 65, on a full (i.e. unreduced) pension, the medical corporation would have to contribute $286,252. This amount called “terminal funding” is also tax-deductible in the hands of the medical corporation, against corporate income taxes. At 15.5% of corporate tax, the medical corporation will receive a cheque from the CRA worth $44,369.06. Not a bad way to start one’s retirement. In addition, by removing excess cash out of the sponsoring corporation, there is a secondary benefit of purifying the corporation for purposes of the $800,000 lifetime capital gains exemption, especially where you are preparing the company for sale.

The value of the tax refunds generated by the additional deductions permitted by pension law can often reach over $100,000 over a 20 year period, a sum that, by definition, cannot be accessed through an RRSP. The true value of the PPP though comes from the substantially higher tax-deferred compounding of assets resulting from higher contributions.

Personal Service Businesses

For small businesses who only have one large client (such as IT Consultants and oil patch service providers) and may be considered personal service corporations, a PPP may be a very effective tax planning tool. In Ontario, these types of corporations pay corporate tax at the rate of 39.5%. While deductions are limited to salaries and benefits, the Canada Revenue Agency does consider contributions to an individual pension plan such as the PPP to be an eligible corporate deduction. As such, the PPP provides a great way to convert tax owing into pension benefits.

The Disadvantages of a Personal Pension Plan

If a business owner is solely looking to their registered plan to claim a deduction but need to access all of their money at any time, the PPP is inappropriate since pension laws require that a portion of the contributions and interest be set aside to provide for a pension in retirement.

In addition, you cannot invest more than 10% of the book value of your pension fund into any one security, as that would be in violation of the specific investment rules that regulates most of the registered pension plans in Canada.

In conclusion, for incorporated professionals and owner/operators of companies (especially those deemed to be personal service businesses by the CRA), a Personal Pension Plan allows you to build up a substantial retirement nest-egg that is much larger than what RRSP rules allow. Even if the rate of return on assets is held constant, over 20 years, the difference in wealth accumulated between the two types of plans can be substantial.


Jean-Pierre A. Laporte, BA, MA, JD, is the Chief Executive Officer of INTEGRIS Pension Management Corp. The company is a private Canadian based company that offers business owners and incorporated professionals tax-effective ways to save for retirement by providing access to highly experienced actuaries, pension and compliance officers. The company has alliances with some of Canada’s highly regulated, respected and well capitalized companies to offer the best-in-class service providers. Jean-Pierre can be contacted at 416-214-5000. The company’s website is https://www.integris-mgt.com/.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

Individual Pension Plans

A quick update on the Bloggers for Charity initiative. Tim Penner still has the highest bid at $250 to be a Blogger for a day on The Blunt Bean Counter site. The contest ends this week, so if you have something to say and would like to give to charity, this is your last chance. 

Individual Pension Plans

My firm deals almost exclusively with entrepreneurs and owner-managers of corporations. As such, we have reviewed numerous Individual Pension Plan (“IPP”) proposals for our clients over the last few years. In this blog post I am going to review the basic characteristics of an IPP and then discuss proposed changes to the rules pursuant the 2011 budget.

IPP’s are defined benefit pension plans established by an employer for an employee. Typically the IPP is set-up by our client’s corporations for their own benefit, their spouses benefit or for key employees.

The following are some of the key features of an IPP:

1. The contribution to your IPP (think of it as a Registered Retirement Savings Plan “RRSP” with a different acronym) is made with corporate monies and the corporation receives a deduction for the IPP contribution against its corporate income. The key here is that you are using corporate monies and not after-tax monies to fund your IPP. For example, to fund a $22,000 RRSP contribution, a high rate taxpayer would need their corporation to pay them a salary of $40,000 to have the $22,000 to contribute to their RRSP, whereas a corporate contribution would only require $25,000 or so of corporate after-tax net income.

2. For an owner-manager in the sweet spot, say early to mid-fifties, that earns over a $100,000 a year in salary and has worked for the company since 1991, in many cases they are entitled to a past service contribution in the $100,000 to $150,000 range depending upon their prior employment history. This provides a tremendous opportunity for an owner-manager who has a small RRSP due to lack of funding or poor performance to immediately rebuild their retirement fund in one fell swoop. .

3. Upon establishing an IPP, you will cease to be able to contribute to your RRSP and a portion of your RRSP must be transferred to your IPP. Future pension contributions will be made to your IPP instead of your RRSP. Typically the contribution limits to the IPP are higher than to your RRSP. In addition, an IPP may provide for a catch-up contribution if the performance is weak.

4. IPP’s have restrictions on withdrawals, unlike RRSPs, which allow withdrawals at any time.

5. IPP’s can generally invest in the same investments as a RRSP; however, you cannot invest more than 10% of the book value of the IPP in any one security.

6. At age 71 your IPP must begin payment or be converted to a Life Income Fund instead of a Registered Retirement Income Fund.

Bill Kennedy, FSA, FCIA an actuary with W.C. Kennedy & Associates Inc. in Toronto suggests some of the following advantages IPP’s have over RRSPs:

1. The IPP current service contributions are significantly larger than the RRSP contribution limits. For example, a 55 year old has a 25% IPP contribution limit vs. the 18% RRSP limit providing for approximately a $32,000 IPP contribution limit, as opposed to a $22,000 RRSP contribution limit.

2. All assets under an IPP are creditor proofed.

3. The IPP contributions are not subject to payroll taxes.

4. IPP’s allow for a “top-up” if the return for the IPP falls below a certain threshold.

5. If the IPP is set up properly and circumstances permit (child in the business), the IPP may be transferred to the next generation keeping the assets tax-sheltered, as opposed to RRSPs which are taxable upon the death of the last spouse to die.

Bill suggests the following are some of the disadvantages of an IPP in addition to the withdrawal and investment restrictions noted above:

1. Cost of set-up and maintenance. Including the required triennial valuation, the yearly costs will average between $1,500 to $2,500.

2. Compliance with the Canada Revenue Agency.

3. If the IPP assets grow to be greater than 120% of the liabilities because of bullish markets contributions may be reduced or eliminated for the year.

Under the budget tabled June 6, 2011, (originally the March 22, 2011 budget) the past service contributions were to be restricted, as essentially any past service contribution was to be satisfied by current RRSP assets first, meaning in many cases, minimal amounts could be contributed by the corporation. However, a new Ways and Means motion has muted the original rules, such that in most cases, corporate owners should still be able to make a significant past service contribution.

Personally, where a clients RRSP has limited assets and they can catch-up in one fell swoop using corporate dollars, I feel an IPP has merit. Where a client has a large RRSP in place, I am less enthusiastic to use an IPP because of the complexity of the technical rules and the high ongoing administration costs.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.