Finance: Individual Pension Plans
Lower taxes, more savings
As a result of the February 2018 Federal Budget, which clarified the rules of how passive investment income will be treated in a corporation, business owners should be looking carefully at IPPs (Individual Pension Plans).
For those who earn at least $100,000 in employment income on an annual basis from their corporation, IPPs are an effective way to extract well intentioned retirement savings from a corporation, without triggering taxes at both the individual and corporate level.
IPPs ensure that the retirement nest egg is safely protected from the reach of creditors.
SIX REASONS TO CONSIDER IPPS
1. NEW PASSIVE INVESTMENT INCOME TAX RULES:
Beginning in 2019, annual passive investment income (above $50,000) means that less of your business income will be eligible for the small business tax rate. If passive investment income surpasses $150,000, the small-business rate is eliminated, and all business income is subject to the full corporate tax rate. IPPs help extract excessive capital from your corporation to ensure that your business maintains its favourable small-business tax rates.
2. HIGHER LIMIT FOR TAX-SHELTERED SAVING:
IPPs are calculated on your years of service and age, not just on the income that you earned. This means that if an individual is over the age of 37, IPPs allow for a higher annual contribution limit, compared to a RRSP, when income exceeds $145,000. By retirement age, you can put up to 65 per cent more into your IPP, than your RRSP.
3. LARGE PENSION ACCRUAL DEDUCTION:
IPPs allow you to fund previous years of service. Your company can make a tax-deductible contribution to fund pension benefits for those members who had employment income dating as far back as 1991. Notably, a portion of these past service contributions must be made by transferring, and folding, an existing RRSP into the IPP. However, this balance is fully tax-deductible by the corporation.
4. MULTIPLE MEMBERS:
Even though it’s called an individual pension plan, you can have multiple participants within a single corporation. Any shareholder with more than 10 per cent ownership in a corporation, and (in most cases) their spouses, are eligible to hold an IPP.
5. TAX DEDUCTIONS:
Both the contributions and expenses are tax deductible, which benefits the business. Associated expenses would include interest on the money borrowed to make the contributions, as well as administrative costs, such as accounting, investment management and actuarial expenses.
6. 100 PER CENT CREDITOR-PROOF:
Assets held within an IPP cannot be seized by creditors of an incorporated business. Even if a business goes through financial crisis in the future, previously established IPPs ensure that the retirement nest egg is safely protected from the reach of creditors.
When you consider the long-term compounding effects of increased tax-sheltered investment earnings, along with the other benefits, IPPs are impressive retirement-savings vehicles. However, they’re not for everyone. Speak to a knowledgeable actuary or investment manager to evaluate your estate planning options.
Aleem Israel is President and Portfolio Manager at AFINA Capital Management, where he specializes in preserving, optimizing and growing wealth for his clients. afinacapital.com