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Frequently Asked Questions

What if I have a bad year and can’t make a contribution?

Contributions are an annual contractual commitment of your business. So one should always enter into an IPP with the expectation of meeting the annual obligation. At the same time, it’s understood that economic and business conditions fluctuate and there may be an occasional year when it is not feasible for you to make the contribution. There are options:

• First, if your company has made the maximum contribution to the IPP (as opposed to making the minimum contribution) this creates a credit balance in the account. (The maximum contribution consists of the annual plus the past service contributions.)
• The credit balance allows the business owner, during a tough year or two, to carry forward the contributions to future years when cash flows are better.
• Alternatively, he/she could elect not to receive salary income (i.e. T4 income) and pay out dividends instead. Under this scenario, there is no contribution requirement.  
• In addition, since this is a pension plan for a connected person, it is reasonable to assume more flexibility exists than under a typical third party arrangement in which a corporation is funding the pension plan for its non-related employees.  
• Lastly, in a crisis situation, it is possible to wind up the plan and remove the obligation entirely. 

What if I need to access the funds?

While the rules around withdrawing funds from an IPP (prior to age 55) have been relaxed somewhat in recent years, practically speaking, the tax consequences make this option less attractive – not unlike the tax treatment on withdrawing capital from an RRSP for example.

For this reason, we encourage business owners to think about their IPP as a long-term retirement asset. In fact, many appreciate knowing they have a secure, creditor-proof, ‘untouchable’ source of capital tucked away, irrespective of the performance of other personal or corporate assets.

Are the funds within an IPP creditor-proof?

Yes, assuming there is no fraudulent conveyance. Every client should confer with his or her legal counsel.

Can I continue to contribute to an RRSP?

Because your corporation is making contributions to the IPP for you as plan member, your RRSP contribution room is subject to a ‘Pension Adjustment’. The net result of this adjustment is that you have approximately $600 of available RRSP contribution room annually. 

What if I want to discontinue the plan for whatever reason? How do I get out of it?

If the corporation (the plan sponsor) is sold, IPP plan sponsorship will be moved to another company of the business owner/plan holder (i.e. personal holding company), which becomes the new plan sponsor.

If for some other reason the plan has to be wound up, the following steps would be followed:

• A calculation is done by the actuary and a deemed amount of the capital in the defined benefit plan is rolled, tax free, to a Life Income Fund (LIF) for the benefit of you, the member.
• The remaining proceeds are distributed to you personally and are taxed at your then current tax rate.
• The plan is then wound up and all responsibilities of the plan sponsor are dissolved.

When can I start receiving income from my pension?

The earliest you can start receiving income from the pension is age 55 and the latest is age 71.

Is the income guaranteed?

The income from the pension is subject to the contributions being made and the actual performance of the assets within the plan – as with any corporate pension plan. To meet its funding obligations, the actuarial assumption is that your IPP must earn a 7.5% annual return. If it does not meet this obligation, the plan sponsor, your company, may make additional tax deductible contributions to bring it up to par – a benefit that is not currently available to RRSP investors.

What happens to the IPP on my death?

At the time of the plan member’s death, a spouse receives the pension for the balance of the spouse’s life. Alternatively, in lieu of receiving the pension, the spouse may elect to receive a lump sum transfer to a registered plan (i.e. RRSP or RRIF) on a tax-deferred basis. 

Note to family business owners: Normally on the death of the spouse, registered assets (RRSPs, etc.) create a tax liability in the estate. By contrast, the assets in an IPP can be transferred to the second generation without triggering an immediate tax liability if the business is continuing after the parents pass away as a son and/or daughter who are in the business can be added as a member to the existing plan if they have been paid T4 employment income from the company. We can provide further information about how to put this estate planning strategy into effect.

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