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 since been a major area of focus for our team. We have offered a number of Provincial Institutes of Chartered Accountants professional training on these programs for more than a decade. 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 terminates. The LIRA remains tax sheltered until age 71. In most provinces, when the LIRA is converted to what is called a LIF (Life Income Fund), 50% of the account can unlock to a regular RRIF (Registered Retirement Income Fund). In addition to unlocking 50% at retirement, most clients can also accelerate access to the LIF if critically ill, or under financial hardship. Combined, these opportunities of improved access make the pension strategy even more palatable for many small business owners and executives.
Recent Changes – 2014 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 $547,619) will have to transfer to the trust over and above the deductible portion shown below (called a qualifying transfer). This can be optimized on a case-by-case basis. We assume past income (1991) of at least $138,500 in the following examples (thanks to IPP Inc.):
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 $138,500 since 1990 and maximized RSP contributions. Dad was 63 and Mom 61. 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 2016.
Case Study – Income Splitting Challenges
Another recent case was a 60 year-old accountant, with a 58-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 $138,500/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.
Qube Investment Management Inc.
We assist in creative compensation programs like IPPs and encourage your organization to call or email us to discuss. 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).