An IPP is a defined-benefit pension arrangement generally established by a corporation for a single participant.

Advantages can include higher tax-deductible contributions at older ages, creditor protection, and the ability to make past-service contributions.

Potential drawbacks include establishment and administration expenses, funding obligations if the plan falls short, and complicated termination requirements.

An IPP is not suitable for every Business owner and should be evaluated with professional guidance.

Always verify applicable requirements with the CRA and the appropriate provincial pension authority.

What readers need to know

An IPP represents a long-term financial commitment. Professional guidance should play a central role before implementing one.

Provincial pension laws, CRA regulations, and corporate planning considerations all affect how an IPP operates.

Introduction

Many Canadian entrepreneurs who operate through a corporation eventually ask whether an Individual Pension Plan is the right retirement strategy. While an IPP can provide significant retirement-planning advantages, it also involves important compromises that should be carefully reviewed before proceeding.

This guide outlines both the advantages and disadvantages of an IPP in straightforward language designed for incorporated business owners.

The benefits

At older ages and with higher T4 Earnings, IPPs can permit larger tax-deductible contributions than an RRSP. An actuary determines the contribution amount required to fund a specified retirement benefit.

Past-service contributions make it possible to fund eligible pensionable service dating back to 1991, frequently creating a one-time corporate Tax deduction.

Many provinces provide creditor protection through pension legislation. In addition, the defined-benefit framework shifts part of the Investment risk to the corporation.

Administrative costs are generally deductible expenses for the corporation.

The risks and costs

Initial setup expenses are typically about $3,000 to $6,000. Ongoing administration generally ranges from $2,000 to $4,000 annually, with actuarial valuations required every three years.

When investment performance is weaker than expected and the plan becomes underfunded, the corporation may need to contribute additional amounts to close the gap.

Terminating the plan upon retirement or the sale of a business can be complicated and involves significant tax considerations.

Changes to pension legislation may affect how the plan is structured and managed.

Tax considerations

Contributions made to the IPP are deductible to the corporation rather than the individual. The resulting pension adjustment reduces available personal RRSP contribution room.

Investment earnings within the plan accumulate on a tax-deferred basis. Pension payments received from the plan are Taxable Income when paid out.

Comparing to alternatives

RRSPs generally offer greater simplicity and lower costs. TFSAs provide flexibility. Investment holding corporations, often referred to as HoldCos, may also be used to retain earnings without establishing a pension arrangement.

Rather than depending exclusively on one strategy, many entrepreneurs combine several retirement-planning tools.

When an IPP usually fits

Older incorporated business owners with substantial T4 income and long-term intentions to retire from their corporation are commonly considered suitable candidates for an IPP.

Entrepreneurs who are younger, earn lower T4 income, or remain uncertain about maintaining an incorporated structure may find RRSPs and TFSAs more appropriate.

IPP benefits and risks summary

Aspect

Benefit

Risk

Contribution size

Often larger than RRSP at older ages

Requires high T4 salary

Tax

Deductible to corporation

Plan adjustment reduces personal RRSP room

Structure

Pension-style with creditor protection

Complex, requires actuarial work

Costs

Often deductible to corp

Setup and annual administration fees

Investments

Held in pension trust

Underfunding requires top-up contributions

Key takeaways

IPPs can provide substantial advantages for the appropriate business owner.

There are genuine expenses and administrative complexities involved in establishing and maintaining the plan.

Guidance from actuaries, accountants, and legal professionals is highly important.

Plan termination rules require thoughtful long-term preparation.

An IPP is not the right solution for every Entrepreneur.