RBC Dominion Securities Inc.

Individual Pension Plans (IPP)

IPPs: Frequently Asked Questions

When can you start contributing to an IPP?

General IPP Questions 20

21 How much time do you have after the end of the

1 What is an IPP?
fiscal year to make a contribution to an IPP so that
2 What is a defined benefit pension plan? the contribution will be deductible for the fiscal
3 Who calculates the amount of contributions to an year in question?
IPP?
22 When does an IPP have to be in place in order for
4 Who can establish an IPP? the company to deduct contributions to the IPP for
5 What is special about IPPs? a given fiscal year?

6 What criteria make an IPP advantageous for an 23 What qualifies as T4 income?

individual?
Questions on the legal aspects of IPPs
7 Who is the ideal candidate for an IPP?
8 What is a “connected person”? 24 Who regulates IPPs?

9 What are the different types of contributions that 25 Can the amounts contributed to an IPP be seized by
can be made to an IPP? creditors?

10 Can contributions made to an IPP be withdrawn at 26 What happens to an IPP if the company that
any time? established it is sold?

11 Are contributions to an IPP locked-in?

Questions on the process of establishing an IPP
12 Can “past service” be provided when the individual
has contributed to a spousal RRSP? 27 How can I find out the amount of contributions that
13 What if I have already made my current year’s RRSP can be made into an IPP?
contribution? 28 What are the steps required to establish an IPP?
14 What if I have unused RRSP room at the end of the 29 Why does Buck’s illustration use $100,000 for the
previous year? 1990 salary?
15 What happens if my ability to contribute to the IPP 30 Is there a specific naming convention the IPP must
is reduced? follow?
16 Who is the plan administrator and plan sponsor?
17 What is the role of the Trustee?
Questions on the advantages and considerations
of IPPs
Questions on the fiscal aspects of IPPs 31 What are the advantages of IPPs versus RRSPs?
18 Are IPP contributions tax deductible? 32 What are the main considerations for IPPs versus
19 Are there other tax deductions related to IPPs? RRSPs?
 Individual Pension Plans – FAQs

33 Didn’t the government change the rules regarding 36 What are my payment options at retirement?
IPP’s making them non-attractive?
37 If I retire before turning 65 will I be able to get my IPP
34 Can money from a LIRA or Locked-in RSP be used pension right away?
for the RSP qualifying transfer?
38 What happens to the IPP funds that remain after my
Questions on maturity options for IPPs death?

35 What happens to the IPP monies if your employment 39 What happens on the death of the last person
or the plan is terminated? entitled to benefits under the IPP?

General Information about Individual 5. What is special about IPPs?

Pension Plans For participants meeting certain criteria, IPPs allow
for much higher employer tax-deductible contribution
1. What is an IPP? amounts than the maximum permitted for RRSPs.
An IPP is a defined benefit pension plan established
by a company for one individual (sometimes two, if 6. What criteria make an IPP advantageous for an
the participants are family members). The IPP was individual?
developed to offer the maximum benefits permitted by IPPs are most advantageous for an individual who is
the Canada Revenue Agency. 40 years of age or older, and who wants to contribute
more money on a tax-sheltered basis than the maximum
2. What is a defined benefit pension plan? permitted for RRSPs. There’s no specific criteria related
As the name indicates, it is a pension plan where the to the salary of the individual; however, the financial
benefits (or the amount of annuities or payments) advantages of IPPs increase in relation to the individual’s
are defined in advance. The amount of contributions salary up to a maximum.
required to fund the promised benefits must therefore be
calculated based on a set of assumptions. 7. Who is the ideal candidate for an IPP?
Incorporated business owners that meet the criteria
3. Who calculates the amount of contributions to an outlined above are ideal candidates to establish IPPs for
IPP? themselves, since a company must establish an IPP and
An actuary must calculate and certify that the these individuals have the authority to make these types
IPP contribution calculation complies with legal of decisions on behalf of their companies.
requirements.
8. What is a “connected person”?
4. Who can establish an IPP? A “connected person” is a person who directly or
Like all pension plans, an IPP must be established by an indirectly (spouse, brother, sister, child, grandchild,
incorporated company. An individual who wants an IPP father, mother) holds at least 10% of a company’s shares
must first convince the company that he/she works for or the shares of any other corporations linked to the
to establish the IPP. company.
 Individual Pension Plans – FAQs

9. What are the different types of contributions that can by transferring RRSP assets to the IPP or by making a
be made to an IPP? withdrawal. Because the spousal RRSP will not be in the
individual’s name, a transfer or a withdrawal would not
• Annual contributions: always greater than the
be possible. Any unused RRSP room or personal RRSP
maximum permitted by an RRSP for an individual that
funds would need to be used to credit some past service.
meets the criteria described above;
• Past service contributions: It is possible to purchase
13. What if I have already made my current year’s RRSP
additional years of service in an IPP. It will be necessary
contribution?
to transfer an amount from the participant’s RRSP to
his/her IPP for the company to contribute the balance You may have to withdraw a part of your RRSP
of the cost of the past service. contribution, without penalty or withholding tax.
• An additional contribution at retirement: certain
benefits cannot be pre-funded due to limitations 14. What if I have unused RRSP room at the end of the
imposed by the Income Tax Act. previous year?
• An additional contribution when terminating the IPP, if This RRSP room may be used to increase IPP funding for
annuities are purchased: it is possible to purchase the past service.
benefits payable from an IPP from an insurer; in which
case, an additional contribution may be required if 15. What happens if my ability to contribute to the IPP
annuity interest rates are less than 7.5%. is reduced?
In certain provinces, once the IPP is established, there is
10. Can contributions made to an IPP be withdrawn at an ongoing obligation to make contributions. However,
any time? in the event of cash flow difficulties, it may be possible
No. Contributions to an IPP cannot be withdrawn for to suspend contributions. When conditions improve,
any reason other than for the payment of benefits. When contributions may be resumed. If necessary, the IPP may
the IPP is terminated, the amount can be transferred to be wound up at any time. If the IPP is not required to be
another registered retirement savings product subject to registered provincially, there are no minimum funding
a maximum or used to purchase an annuity. requirements and therefore contributions do not have to
be made.
11. Are contributions to an IPP locked-in?
Yes – generally contributions from an IPP are locked-in 16. Who is the plan administrator and plan sponsor?
on termination. The allowable transfer would be sent to Both the plan administrator and plan sponsor are simply
a locked-in registered fund. For connected members, in the company that is establishing the IPP.
the Province of Quebec, different rules apply as well as in
the Province of Prince Edward Island. 17. What is the role of the Trustee?
An IPP requires either a corporate trustee or 3 individual
12. Can “past service” be provided when the individual trustees to be appointed. The corporate trustee can be
has contributed to a spousal RRSP? very expensive and the assets would most likely have
Generally, no. If the individual’s contributions in the past to be held off-book. All 3 trustees must be Canadian
have always been to a spousal RRSP, it is unlikely there Residents. The RBC DS IPP requires 3 individual trustees
will be enough room to have the past service certified by where one of the trustees must be considered an
CRA. Normally, an individual who has maximized their “independent trustee”. An “independent trustee” is one
RRSP contributions can only receive past service benefits who is not a significant shareholder, partner or employee
 Individual Pension Plans – FAQs

of the employer or a proprietor of the business of the

20. When can you start contributing to an IPP?
employer. (for example an accountant, cousin, in-law).
Contributions can be made as soon as the documents
The responsibility of the Trustees is to oversee the Trust.
required to register the IPP with the government
Any one of the Trustees (or all 3 Trustess depending on
authorities have been submitted.
the terms of the Trust Agreement) has the power and
authorization to:
21. How much time do you have after the end of the
• Delegate custodial responsibility to RBC Dominion fiscal year to make a contribution to an IPP so that
Securities the contribution will be deductible for the fiscal
• Satisfy their responsibilities under this trust agreement year in question?
and exercise all their powers as if they owned the Fund
Contributions made during the 120 days after the end of
and by working in concert with the RBC DS Investment the company’s fiscal year end, and which were payable
Advisor. over the course of the fiscal year, can be deducted for this
• Buy/sell any assets of the fund fiscal year.
• Exercise all voting rights pertaining to equities, bonds
or any other instruments of the Fund conferring such 22. When does an IPP have to be in place in order for
voting rights the company to deduct contributions to the IPP for
• Execute any and all transactional documents that may a given fiscal year?
be required to execute the powers conferred by this In order to deduct contributions for a given fiscal year,
agreement all of the documents required to register the IPP with
It is important to note that individuals acting should government authorities must be submitted before the
have some knowledge regarding pension fund end of the 120 days after the fiscal year in question.
investments and custodial arrangements to act as
pension plan trustees. They may have certain liability to 23. What qualifies as T4 income?
act as trustees. Although most of the types of income reported on a T4A
would not be pensionable for the reason that they are
Questions on the fiscal aspects of IPPs taxable under section 56 rather than under sections 5 or
6 of the ITA, there are some types of income reported on
18. Are IPP contributions tax deductible? a T4A that are taxed under section 6 as “taxable benefits”
Yes, contributions made to an IPP are tax deductible for provided by an employer, and thus, could be included in
the employer, or for the participant, if he/she contributes pensionable earnings.
directly to the IPP. In addition, contributions made to an By comparing the T4A boxes to section 6 of the ITA, this
IPP are not subject to payroll taxes. would include:
• premiums for medicial benefits paid by the employer,
19. Are there other tax deductions related to IPPs?
• premiums for a group term life insurance plan paid by
In addition to deducting company contributions, an
the employer
employer can deduct administrative and investment
• payments from a wage loss replacement plan (that
costs related to an IPP, as well as the interest on any
qualifies as a sickness or accident insurance plan,
amounts that the employer has to borrow to make the
disabililty insurance plan or income maintenance plan
company contributions to the IPP.
contributed to by the employer)
 Individual Pension Plans – FAQs

• lump sum payments from an employee benefit plan receive will outline the main characteristics of IPPs and
(other than death benefits and payments attributable show the amount of contributions that could be made in
to period when the employee was not resident in your specific situation.
Canada)
• and any other type of income reported under box 28 28. What are the steps required to establish an IPP?
(Other Income) under code 16 (any other amount) that • Provide the necessary information to produce a
is taxed under section 6 of the ITA. personalized illustration;
• Review the illustration; in particular the amounts that
Questions on the legal aspects of IPPs could be contributed to an IPP;
• Complete an Engagement & Implementation Form to
24. Who regulates IPPs? hire Buck Consultants Limited to set-up an IPP;
• Canada Revenue Agency: defines the maximum benefit • Discuss the investment strategy for the IPP funds.
that can be granted within an IPP and, consequently,
the maximum contributions that can be made to an IPP; 29. Why does Buck’s illustration use $100,000 for the
• Provincial laws on pension plans: define the rules 1990 salary?
governing minimum funding requirements; The maximum RRSP contribution in 1990 (up to a
• Regulations on pension plan investments: establish maximum of 11,500$) was based on a maximum salary
how IPP funds can be invested. of 100,000$. CRA needs to use the client’s actual 1990 T4
salary (regardless of who he/she was working for at the
25. Can the amounts contributed to an IPP be seized by time) to determine the RRSP deduction limit for the year
creditors? the IPP is implemented. Buck’s illustration simply uses
As long as the amounts are within the IPP, they are 100,000$ to demonstrate the maximum amount of RRSP
generally protected from creditors. However, the benefits contribution that could be available to the client in the
payable can be seized. year they open the IPP.

26. What happens to an IPP if the company that 30. Is there a specific naming convention the IPP must
established it is sold? follow?
The new owners have the choice of terminating or Yes, the IPP name on all documents needs to be the
continuing the IPP. Determining what to do with the IPP same, in order to avoid any confusion from CRA when
should be discussed during the negotiations surrounding the actuarial firm requests a registration number for the
the sale. A transfer of sponsorship may be possible if plan upon set up. At DS, the naming convention is as
certain conditions are met. follows:
IPP of <Company Name> for <Beneficiary Name (s)>
Questions on the process of For example: IPP of Widgets Incorporate for Joseph Peter
establishing an IPP for a prospect Smith

27. How can I find out the amount of contributions that Questions on the advantages and
can be made to an IPP? considerations of IPPs
After completing an IPP client information form
provided by your Investment Advisor, WMSS will prepare 31. What are the advantages of IPPs versus RRSPs?
a personalized illustration. The documents that you will The main advantages for individuals meeting the criteria
 Individual Pension Plans – FAQs

described above are as follows: for the client only once the IPP is established, the
• Annual contributions greater than to an RRSP; clients MAY be still able to have some contribution
• Possible to make contributions for past service; amount available for future deductions, (other than
• Additional contribution at retirement; the 600$/year) although this would only be applicable
• Potential for additional contribution if an annuity is if the client had T4 income in 1990, and would be
purchased; based on 18% of that income, up to a maximum of
• Ability to compensate for investment losses through 11,500$. Until they receive this new assessment,
additional contributions; clients should definitely be advised NOT to contribute
• Generally protected against creditors. to their RRSP for current year deductions if they are
planning to open an IPP in the same year, as penalties
32. What are the main considerations for IPPs versus from the CRA will arise.
RRSPs?
• Income splitting in the form of a spousal contribution 34. Can money from a LIRA or Locked-in RSP be used
is not allowed with an IPP; for the RSP qualifying transfer?
• High levels of surplus in the plan may limit future Yes. Provided there are no legal or investment restrictions
contributions, while a deficit in the plan may require on the account, LIRA/LRSP transfers can be used as RRSP
additional funding; qualifying transfers into an IPP to credit past service.
• IPPs are subject to pension legislation at both the
federal and provincial levels, which will result in Questions on maturity options of IPPs
“locking-in” requirements, except in certain provinces;
• Expenses for the plan set up, administration and wind 35. What happens to the IPP funds if your employment
up are higher than those of an RRSP. or the plan is terminated?
The IPP funds are transferable to another registered
33. Didn’t the government change the rules revolving
product, but are subject to maximum transfer rules.
IPP’s making them non-attractive?
Generally, any money in excess of the maximum transfer
Although some significant changes were proposed, for limit will be paid in cash to the member, and will be
the most part things are back to the way they used to be. taxable. If you are eligible for early retirement, the same
Please view this document prepared by Buck Consultants options are available as outlined below.
that shows exactly what impact this has had: http://
advisornet.fg.rbc.com/individualpensionplans/file- 36. What are my payment options in retirement?
604822.pdf.
As a pension plan, the IPP must be used to finance a
Two important points however: lifetime pension income. The IPP may be funded until
1 – In the first 60 days of the year in which an IPP is the retirement date, or it may be terminated prior to
established, YOU CAN contribute to your RSP. This retirement, in which case the pension payments may
amount MUST be deducted for the previous taxation be deferred to a later date. At retirement, one of the
year however, or else the client will need to remove following three options are available:
this amount from his/her RRSP. • Pension payment from the plan (Company must
2 – Generally, you cannot use unused RRSP contribution remain open)
amounts for future carry forward RRSP deductions. • Transfer the IPP to a registered product
Since the CRA will do a revised notice of assessment • Purchase of an annuity from an insurance company
 Individual Pension Plans – FAQs

37. If I retire before turning 65 will I be able to get my 39. What happens on the death of the last person
IPP pension right away? entitled to benefits under the IPP?
Yes, you can get your pension before you turn 65. An IPP Anything left in the IPP fund is surplus that belongs to
may begin paying a pension as early as age 50, or as late your estate and would be distributed in accordance
as the year-end in which the individual turns 71. with your beneficiary designation or your Will. The fund
becomes entirely surplus, because all liabilities end
38. What happens to the IPP funds that remain after my when the last beneficiary of a pension promise under an
death? IPP dies. Your beneficiaries will be subject to income tax
The IPP provides for a survivor pension and for when they receive their share of the surplus. Contrast
guarantee periods. Should you die before the end of the this result with an RRSP or RIF, where your estate is
guarantee period, the full amount of the pension will taxed, on your final income tax return, on the residual
continue to be paid to your spouse or other designated value, subject to limited deferral provisions. The IPP
beneficiary for the remainder of that period. After the shifts the income tax burden on the residual funds to
guarantee period, the normal form of pension provides your beneficiaries, which may result in a lower level of
for the continuation of the pension payments to an income tax on those funds.
eligible surviving spouse at a rate of 66-2/3% of the IPP
participant’s pension.

The information in this document is based on data that we believe is accurate and complete, but we do not represent or warrant that it is accurate or complete and it should not be relied upon as such. This
publication is for information only and should not be construed as offering tax or legal advice. Consult your lawyer, accountant or other professional advisor when planning to implement a strategy. This
information is not investment advice and should only be used in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor.
RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company
of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. ©2012 Royal Bank of Canada. All rights reserved. (05/2012)