Many individuals have come to the realization that RRSPs alone will not provide them with sufficient retirement income. In this age of lower expected real returns on assets, additional savings will be needed to finance comfortable post-employment years. Tax-sheltering on those additional savings will be even more important.

IPPs have long been viewed by professional advisors as having more tax advantages than traditional individual RRSP programs. In the future, the advantages of IPPs relative to RRSPs are expected to continue, ensuring that IPPs remain a viable tax-effective retirement planning tool for certain groups of business owners, incorporated professionals, and key employees.

IPPs permit more contributions to be made toward retirement savings than RRSPs. More contributions means more tax-sheltered funds are working to provide a larger retirement nest egg. More contributions also means larger tax deductions. The annual contribution to an IPP is dependent on your age and, in most cases, allows a larger funding opportunity than that available under an RRSP. However, the real advantage of an IPP is its ability to provide pension benefits for prior periods of employment.

Past service contributions are tax deductible contributions used to purchase pension benefits for an employee’s years of employment prior to the IPP implementation date. In general, post-1990 past service is available to all employees provided they have sufficient RRSP funds or unused RRSP room. Additional pre-1991 past service funding may be available if specific conditions are satisfied.

IPPs have other advantages over RRSPs:

• Spousal Benefits: The higher IPP contribution limits are available to the spouse of an incorporated professional, business owner or key employee, if the spouse is also employed by the company.
• Downside Protection: In addition to upside potential through larger contributions, IPPs also provide downside protection. In the event your retirement account suffers investment losses or lower than expected investment returns, an IPP may allow the company to make additional tax deductible contributions to make up for such investment losses. RRSPs have no mechanism to allow additional contributions to be made to recover from investment losses or lower than expected investment returns.
• Flexibility: The timing of contributions to an IPP is quite flexible depending on the province of employment (B.C. allows greater flexibility than most other provinces). This means there is no requirement to make contributions in any given year. This is especially useful for businesses with fluctuating earnings that wish to maximize the tax effectiveness of the plan.
• Larger “catch-up” contributions: Contributions not made in a particular year may be made in a subsequent year. However, unlike a missed RRSP contribution, the catch-up contribution to an IPP can include an additional amount for foregone investment income.
• Estate Planning: In certain circumstances IPPs also offer unique estate planning opportunities not available with RRSPs.
• Pension Income Splitting: Proposed changes to the Income Tax Act (Canada) will allow employees age sixty-five and older to allocate to their spouses up to one-half of their income paid out of their RRSPs. Under the same proposed changes, employees who are drawing a pension from their IPP may allocate to their spouses up to one-half of their IPP pension. As a result, IPPs will potentially allow income splitting with a spouse much earlier than under an RRSP.

Leong & Associates have been recognized experts in this field for 21 years. We believe that a custom-designed plan is necessary in order to maximize tax-assisted savings for retirement, especially in light of recent legislative changes. A custom-designed plan ensures that every opportunity is fully researched and that the plan meets the needs of both the member and the company.

Please contact us for more information on IPPs or for a personalized feasibility assessment. We can normally provide an estimate of the contribution room for both current and past service in five working days. Our initial feasibility assessment is free.

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