th
4
CIFPS
Annual National
Conference - 2006
Vancouver
May 28 – May 31
Individual Pension Plans (IPPs)
Robert G. Camp
Salim Hajee
INW Financial
AGENDA
• What is an IPP?
• History of IPPs
• What are the rules regarding IPPs?
• Why would one want an IPP?
• Why would one NOT want an IPP?
What is an IPP?
• Registered Pension Plan (employee/employer
relationship)
• Defined Benefit, not Defined Contribution
(RRSP is DC)
• Ancillary Benefits can be added
• Who Determines How Much can be Paid into
an IPP?
What is an IPP?
Registered Pension Plan
(employee/employer relationship)
• Only employees can be members of a
Registered Pension Plan
• Partners and Proprietors are not Eligible
• Registered with both Canada Revenue Agency
and the Provincial Authority
• Some Provincial Authorities have chosen to
ignore IPPs
What is an IPP?
Registered Pension Plan
(employee/employer relationship) Cont’d
•Federal Registration gives deductibility to Plan
Contributions
•Employer contribution NOT a taxable benefit to
the Employee
•Provincial Rules may force extra reporting and
employer commitment
What is an IPP?
Defined Benefit, not Defined Contribution
(RRSP is DC)
• Pension Promise is based on Employee Earnings, not on
Contributions to the Plan
• In an RRSP, Pension will arise from Contributions and Investment
Earnings on the Fund
• If Investments tank in an IPP, who has responsibility to "make it
whole"?
• If Investments do well in an IPP, who gets the "surplus"?
• If Investments tank in an RRSP, who has responsibility to "make it
whole"?
• If Investments do well in an RRSP, who gets the "surplus"?
What is an IPP?
Ancillary Benefits can be added
• Post-retirement indexing to CRA limits
• Improved Spousal Protection
• Early Retirement Provisions
• Improved Pre-Retirement Death Benefits
What is an IPP?
Who Determines How Much can be Paid
into an IPP?
• An Actuary (FCIA)
• Filings with CRA and Provincial Authority must be made
History of IPPs
• Prior to October, 1968
• Information Circulars 71-4 and 72-13Rx
• 1980 Significant Shareholder Plans
• The Sedgwick IPP Marketing Scheme
• Regulation 8515 (Designated Pension Plans)
History of IPPs
Prior to October, 1968
•Basically, there were no special rules
•If Arnold Chater accepted a Plan for Registration, it was
okay
•His guideline appeared to be a pension should not exceed
70% of pre-retirement pay
•October 1, 1968 saw the definition of a "Significant
Shareholder" and restrictions thereon
•The "primarily for" restriction
History of IPPs
Information Circulars 71-4 and 72-13Rx
•Codified the federal taxation rules for Registered
Pension Plans
•Defined Pensionable Service, Earnings, Maximum
Pensions, Form of Pension, Retirement Age
•IC 72-13R8 still applies for a Pension Plan crediting
service prior to 1991
History of IPPs
1980 Significant Shareholder Plans
•Someone forgot Mr. Chater's "blue book"
•Door opened for about six months and hundreds of plans
were established for Significant Shareholders
•Door closed December 31, 1980 and restrictions on Plan
"improvements" were applied punitively
History of IPPs
The Sedgwick IPP Marketing Scheme
•Highly paid executives and commissioned people possibly through foregoing of bonus
•The "flip-flop" of RRSP and AVC
•Maximize contributions through "conservative" actuarial
assumptions and maximum ancillaries
•Extension of IPPs to Partners who were Former
Employees
History of IPPs
Regulation 8515 (Designated Pension
Plans)
•Applies to Plans with small numbers of participants who
are highly compensated
•Connected Person rules different from those for
"regular" employees
•Sets out the actuarial assumptions that are acceptable
to CRA for Designated Plans …
History of IPPs
Regulation 8515 (Designated Pension
Plans) Cont’d
• Mortality Table
80% of 1983 Group Annuity
Mortality Table
• Discount Rate
7.5% per annum
• Retirement Age
Age 65
• Form of Pension
2/3 JLS guaranteed 5 years
• Post-retirement indexing
5.5% per annum
What are the rules regarding IPPs?
• What is a Connected Person? Specified Individual?
Designated Plan?
• Highest Average Earnings versus Updated Earnings
• Maximum Lifetime Pension
• Maximum Bridge Benefit
• Past Service Pension Adjustment
• Funding versus Cost at Retirement
What are the rules regarding IPPs?
What is a Connected Person? Specified
Individual? Designated Plan?
•A "connected person" owns (directly or indirectly)
10% or more of the company
•Usually measured in conjunction with relatives
•A "specified individual" is a connected person
earning more than 2.5 times the YMPE
•A Designated Plan is one with less than 10 active
members
What are the rules regarding IPPs?
Highest Average Earnings versus Updated
Earnings
•"Regular" employees can have benefits based on Highest
Average Earnings (HAE)
•Connected Persons are restricted to benefits based on
Updated Earnings
•Updated Earnings are based on actual earnings brought
forward at the AIW rate
•Maximum pension limits rising at about 5.5% per annum,
AIW running less than 3% per annum
What are the rules regarding IPPs?
Maximum Lifetime Pension
•For a "regular" employee, 2% times credited
service times HAE
•Dollar limits finally moved from $1,715 (set in
1974) to $1,722 (in 1990) to $2,111 (in 2006)
•For a connected person, the sum of 2% of
Updated Earnings for each year of service
What are the rules regarding IPPs?
Maximum Bridge Benefit
•Bridge pension is payable from actual retirement until age 65
(when government benefits start)
•Maximum Bridge Benefit is sum of OAS and CPP for a
person currently age 65 and eligible for maximum benefits
•However, at least ten years of credited service is required for
the maximum to be payable
•The maximum dollar amount is the lifetime maximum plus
1/35 of CPP
What are the rules regarding IPPs?
Past Service Pension Adjustment
• For each year of service (after 1990) credited today, a
PSPA must be computed
• If the member is a connected person, a PSPA for 1990
must also be computed even though no benefit for 1990
is credited
• The PSPA for a year is the same as the Pension
Adjustment (PA) would have been if the member were in
the Plan in the year
• The PA for 1996 and later years is 9 times the pension
earned with a $600 offset
What are the rules regarding IPPs?
Past Service Pension Adjustment
•The PA for 1990 through 1995 is 9 times the pension
earned with $1,000 offset
•The effect of PA and PSPA is to reduce the RRSP room of
the member in the next calendar year
•If the member does not have sufficient RRSP room to
absorb the PSPA, a "qualifying withdrawal" must be made
from RRSP
What are the rules regarding IPPs?
What are the Funding Levels for 2006
•Assuming a person earning in 2006 in excess of
$110,000, new RRSP room for 2007 will be
$19,000
•Assuming sufficient earnings and service back to
1991, the PSPA and Qualifying Withdrawal will be
$226,100
What are the rules regarding IPPs?
What are the Funding Levels for 2006 (Cont’d)
Age
Accrued
Liability
2006 Service
Cost
2007 Service
Cost
2008 Service
Cost
35
238,000
17,100
18,300
19,600
40
262,000
18,700
20,100
21,500
45
287,000
20,600
22,100
23,600
50
316,000
22,600
24,200
25,900
55
347,000
24,800
26,600
28,500
60
381,000
27,300
29,300
31,300
65
418,000
30,000
What are the rules regarding IPPs?
What are the Cost Levels for 2006
•Assuming the Plan is being wound up at the
beginning of 2006 pension accrual is $29,500:
•CRA rules limit the amount of transfer to RRSP??
•Alternatively, can purchase an immediate pension with
maximum bridge from an insurance company licensed
to transact business in Canada??
What are the rules regarding IPPs?
What are the Cost Levels for 2006
CRA rules limit the amount of transfer to RRSP to the
following:
Age
Transfer
under 50
265,000
50
277,000
55
307,000
60
339,000
65
366,000
What are the rules regarding IPPs?
What are the Cost Levels for 2006
The cost of purchasing an immediate pension with
maximum bridge would be approximately:
Age
Cost
50
539,000
55
594,000
60
619,000
65
542,000
Why would one want an IPP?
And When?
• Additional Tax Deferral
• Creditor Protection
• Ability to "Ensure" a Post-Retirement Income
Why would one NOT want an IPP?
• Cost of the Plan
• Investment Restrictions
• Conversion of Capital Gains and Dividends into
Regularly Taxed Income
• Commitment of Employer
Business Planning Cycle
• Early Career Years
• Too busy Growing Business
• Money into RRSPs for purposes of tax-deferment, Not
ACTIVE Retirement Planning
• Middle Career Years
• Mature Business
• Looking to pass on business/value in tax-effective manner
• Money into RRSPs for purposes of tax-deferment, Not
ACTIVE Retirement Planning
• End Career Years
• Phase out of business
• Retirement – how much is enough?
Retirement Planning
• RRSPs
• Company Registered Pension Plan
• Government Statutory Benefits (CPP + OAS?)
IPP – A Possible Solution
• Comprised of one (individual) plan
member – spouse may participate,
provided she is employed by same or
associated employer
• Complex rules – simple concept
• Employer must sponsor and fund
(employee contributions permitted)
• Registered defined benefit pension plan
IPP – A Possible Solution (Cont’d)
• Benefit is clearly defined:
• Lifetime - 2% of Updated Annual
Compensation for each Year of Service with
Employer (within annual ITA limits)
• Bridge - Within ITA limits payable to age 65
• Spousal Pension on Death - 66 2/3% of
member’s lifetime
• Indexing - Yes
IPP – A Possible Solution (Cont’d)
Maximum Annual Benefit Accruals under the ITA
2006
$ 2,111.11
2007
2008
$ 2,222.22
$ 2,333.33
2009
$ 2444.44
2010
$ 2,444.44
* (1 + AIW)
Until the next time the ITA is amended
Ideal Candidates for an IPP
• Owner/manager or senior executives of private
•
•
•
•
or public corporation
Age 41 or older
Business must be incorporated
T4 earnings of approx. $106,000 in 2006,
$112,000 in 2007, etc. (dividend income
ineligible)
Have an employer that is willing to set one up
An IPP is NOT Like an RRSP…
The Good (Cont’d)
• Annual Contributions in an RRSP depend on earnings
only; Annual Contributions to an IPP depend on earnings
and AGE – higher the age, higher the annual
contribution requirement
An IPP is NOT Like an RRSP…
The Good
• Younger than Age 41 – RRSP More advantageous;
•
•
•
•
Older than 41 – IPP more advantageous
IPP must fund the benefit promise, hence additional
funding may be required if shortfall in pension fund
(ongoing or member/plan termination); RRSP – no
such requirement
IPP is creditor-proof; RRSP may be assigned
Investment risk transferred to plan sponsor
Any money borrowed by Company to fund IPP
contributions is tax-deductible to Company, unlike
borrowing to make personal RRSP contributions
An IPP is NOT Like an RRSP…
The Bad
• Restrictions on withdrawal of funds as subject to
locking-in in most provincial jurisdictions in Canada
• No spousal contributions permitted and reduces
income-splitting opportunities
• Requires a trustee – either self-trusteed (3 individual
trustees, at least one at arms-length), corporate
trustee or life insurance company
An IPP is NOT Like an RRSP…
The Ugly
• Administration costs: IPPs – set up ~ $3,000 -
$5,000, annual $1,000 - $1,500, every 3 years ~
$2,500; RRSPs - $100 for self-administered
• Any surplus over permissible ITA limits will be paid
to employee as fully taxable lump sum upon
termination of employment/IPP, if elect the transfer
option
An IPP IS Like an RRSP…
• Contributions tax deductible: IPP by Company from
•
•
•
•
•
business income; RRSP by taxpayer
Investment income accumulates and compounds on
a tax-deferred basis
Upon death by member, all assets in an IPP may be
transferred to spouse and rolled over to an RRSP on
a tax-deferred basis, similar to that for an RRSP
Investments, if RRSP-eligible are also IPP-eligible
Foreign content limits are the same
Taxed when amounts withdrawn/paid
And, Finally …
Thank You
Q&A