Individual Pension Plans have been one of our passions since 1997 when our senior consultant (Ian Quigley) began wholesaling the concept to brokers and planners on behalf of a national insurance company. In 2000, Ian started Qube and IPPs have been a major area of focus for our company ever since. This proved to be a wise choice, as these programs have become a strong tax and investment-planning tool for many Canadians – one that all business owners and executives should review if they are over age 40.
Why an Individual Pension Plan?
A perspective that is unique to Qube is that we believe the best pension plan is one that is
justified even if it only runs for a few years. Using pension legislation, it is possible to create large deductible first year deposit that can easily justify running the pension program for only a couple of years. The first year deposit/deduction can be amortized for tax purposes or taken in one lump sum. Funds flow directly from the company to the creditor proof, tax sheltered pension trust account and are invested in a similar manner how RSP accounts are managed. When the plan is terminated, most clients terminate the trust account at the same time. In the end, the pension strategy should offer a much larger retirement account to the client than what an RSP program could accomplish.
Recent Changes – Unlocking
Many clients will transfer as much of the pension trust account as possible to a LIRA (locked-in retirement account) when the plan closes. The LIRA account remains tax sheltered until age 71. In Alberta/BC, when the LIRA is converted to what is called a LIF (Life Income Fund), 50% of the account can unlock to a RRIF (Registered Retirement Income Fund). An RSP converts to a RRIF no later than age 71 as well. In addition to unlocking 50% at retirement, clients in Alberta/BC can accelerate access to the LIF if critically ill, or under financial hardship. Combined, these opportunities of increased access make the pension strategy even more palatable for many clients.
Recent Changes – 2013 Numbers
With one more year of past service the first year deposits to an IPP shown below, are higher than ever. If full past service is registered, some RSP money (up to $474,260) will have to transfer to the trust over and above the deductible portion shown below. Full past service is not required when setting up a plan and the combination of deductible deposit to RSP transfer can be optimized on a case-by-case basis. We assume past income (1991) of at least $135,000 in the following examples:
Case Study – Family Business
A recent case involving a family business really drove home for us the power of the IPP to strip retained earnings from a corporation. The family business has been very profitable for many years and the successors were looking for ways to push some retained earnings into Mom and Dad’s hands in a tax smart manner. Both Mom and Dad had earned over $135,000 since 1990 and maximized RSP contributions. Dad was 64 and Mom 62. The plan was registered and ran for 3 years before termination with the following tax deductions (over and above the RSP transfer):
The trust was invested in a conservative balanced portfolio and will transfer to simple LIRA accounts in 2014.
Case Study – Income Splitting Challenges
Another recent case was a 61 year-old accountant, with a 59-year-old spouse. There was interest in pushing as much income into the spouse’s hands as possible, but they struggled with CRA’s focus on appropriate income splitting. The spouse had a T4 history of $40,000/yr since 1990 and the accountant over $135,000/yr and both had maximized their RSP accounts. The first year deposit was amortized over 3 years to create the following deduction pattern for the firm:
The pension plan effectively allowed a large bump in the compensation of the spouse, without
attracting additional risk from CRA on an income splitting challenge. The program also boosted the retirement savings of this client and creating a funding requirement that the junior partners of the firm agreed was reasonable. The client invested the trust in guaranteed investment certificates.
Qube Investment Management Inc.
We assist in several creative compensation programs like IPP and encourage your organization to call us anytime to discuss such matters. We are happy to review any potential pension situation at no charge and provide a consulting review of how the program could work if a feasible case.