Maurice Walch, B. Comm, CFP,CLU,
is a Certified Financial Planner and may be reached at maurice.walch@canaccord.com
or 403-263-7999.
Budget 2018 was a highly anticipated document as business owners across Canada were thrown into a state of high alert. Finance Minister Morneau threated to undermine many of the tax planning advantages given to the risk-takers and job providers of our country. Fuel was added to the fire as it became clear that Morneau was presenting legislation that benefited his own company, Morneau Shepell, a well-known employee benefits company. The issue was the changes Morneau was implementing would increase the popularity of individual pension plans (IPP) — a tax planning tool that provides a significant portion of his company’s revenues.
The IPP is a little used retirement savings option for business owners and professionals. Instead of contributing to an RRSP (registered retirement savings plan), the business owner or professional sets up an IPP. Their company funds the IPP directly instead of paying the business owner who then makes an RRSP contribution.
The IPP differs from a traditional self-directed RRSP in certain key areas.
• The IPP is a trust arrangement and as such, can provide bullet-proof creditor protection from personal and corporate creditors and inter-generational transfers.
• The contributions to an IPP are determined by age, years of service, and income levels. As a result, allowable contributions may be more than what might be available through an RRSP. For example, in 2018 the maximum RRSP contribution is $26,230. With an IPP, an individual aged 44, would have an IPP contribution limit of $33,300. At age 54, that same individual is estimated to have a $63,600 contribution limit while the RRSP plan user would see his contribution significantly restricted by the levels imposed by the Federal Government.
• The IPP is funded by the company with a past service contribution, composed of a tax-free rollover of the business owners’ existing RRSP assets, plus an additional tax-deductible corporate contribution.
• The IPP has an ongoing actuarial valuation requirement which will require additional contributions if the portfolio has underperformed those mandated requirements. An RRSP savings plan must face the consequences of poor long-term markets without the ability to make additional deposits.
• An RRSP has no rules on diversification while the IPP mandates a safety-first approach by ensuring that the portfolio is not permitted to invest more than 10 per cent of its assets in any one investment.
• The IPP rules permit additional lump sum payments to the plan by the company upon retirement to fund early retirement prior to age 65 as well as to provide enhanced retirement income benefits through indexing.
• The IPP can boost retirement savings by up to 61 per cent.
The Strategy Employed
A 52-year-old business owner decides to establish an IPP. The business has been around for 27 years and consequently the CRA (Canada Revenue Agency) permits past service benefits dating back to January 1, 1991. This creates a total past service contribution of $690,700. This contribution is funded by rolling over $406,600 from the business owner’s RRSP with no tax consequences and making an additional tax-deductible Company contribution to the IPP of $284,100.
In addition, for 2018 the current service contribution is $55,600 for the owner which is also a deductible contribution to the IPP for the company. At the end of the first plan year the assets in the IPP are expected to amount to over $750,000 whereas in a conventional RRSP the assets would only be around $433,000.
So, although the budget wasn’t as bad as it could have been for business owners and professionals, it did highlight the value of an individual pension plan as an effective tax planning tool. Consult your professional advisor to see if it will fit your situation.
*This article is solely the work of its author, a registered Investment Advisor at Canaccord Genuity Wealth Management. The views (including recommendations) expressed in it are those of the author alone, and are not necessarily those of Canaccord Genuity. The information contained herein is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author or Canaccord Genuity assume any liability. Canaccord Genuity Wealth Management is a division of Canaccord Genuity Corp., Member – Canadian Investor Protection Fund. Independent Wealth Management advisors are registered with IIROC through Canaccord Genuity Corp. and operate as agents of Canaccord Genuity Corp. Insurance services are offered through Canaccord Genuity Wealth & Estate Planning Services Ltd.
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