June 1, 2003
by Peter Merrick
Have you heard about Individual Pension Plans (IPP)? As more dentists choose to incorporate their practices, IPPs will become their Sanctioned CCRA Tax Avoidance Vehicle of choice over RRSPs. IPPs were established in 1991 by Ottawa and were written into the Income Tax Act to provide senior executives and business owners with the opportunity to achieve maximum tax relief combined with maximum retirement pension.
The IPP is a sound business decision for all dentists who have historically maximized their RRSP and have the income to support a more aggressive tax deferral arrangement.
Advantages of an IPP
Tax deductibility: All contributions, interest and expenses are tax deductible to the incorporated practice and are a non-taxable benefit to the dentist.
Creditor proof: Assets held in the IPP cannot be seized by creditors of the dentist nor their incorporated practice on condition that the pension plan was set up in good faith — not just because of a looming bankruptcy.
Ownership of plan assets: At retirement, the dentist owns any actuarial surplus. The surplus may be used to upgrade pension benefits or pass the surplus tax-free to their spouse, heirs or estate.
Guaranteed lifetime income to members and their spouses: The pension plan offers a predictable retirement income. An actuary determines the current annual costs of the future retirement income. Eligible spouses receive 66.66% of pension in the event of death of the plan member. Spousal pension benefits may be upgraded to 100% at the time the member retires.
Past service funding: For dentists, the pension plan funding formula is more generous than the RRSP limits. The pension plan allows dentists to make contributions for years of service prior to the set-up of the plan. No other plan or individual investment can offer this benefit.
Terminal funding: One of the most attractive features of the IPP is the possibility of terminal funding. While CCRA restricts the benefits that can be pre-funded, at retirement, the pension plan can be amended to provide the most generous terms possible. Some of these include: full consumer price indexing, early retirement pension with no reduction as well as bridge benefits.
Who qualifies for an IPP?
Generally speaking, IPPs are best suited for:
A key executive and/or owner manger of a corporation;
Individuals over 40 years old;
Individuals earning a base salary of more than $100,000.
To qualify for an IPP, a plan member of the IPP must have T4 income; be an employee of an incorporated company, which is taxable under the Income Tax Act.
How good are IPPs really?
Image you created a service company for your dental practice in 1991 and had no pension benefit plan. You are now 62-years-old and have been maximizing your RRSP contribution every year at $13,500. When your practice creates an IPP and you make a qualifying transfer from your RRSP, this immediately creates $132,000 of addition deductible tax sheltered room. The following year the amount that will be tax sheltered will be $24,100.
Note: While RRSP limits are scheduled to increase to $18,000 maximum per year in 2006, then every year afterwards RRSP limit maximums will increase with the Industrial Wage (approximately 1.8%). IPP tax deferral limits are much more generous. IPP tax deferral room increases each year by approximately 7.5% due to the aging of the individual that the IPP was set up for.
Don’t expect your regular financial adviser or benefit consultant to be well-versed in IPPs, there are many pension, tax and investment rules and they are very complex. To my knowledge there are only a half dozen firms cross Canada who specialize in the creation, implementation and maintenance of IPPs. It would be well worth it for you to explore if IPPs are right for you.
Peter J. Merrick, FMA, CFP, FCSI is President of Merrick Williams Wealth Management Inc., Toronto.