Individual Pension Plan (IPP)

About Individual Pension Plans (IPPs)

IPPs have been approved by the Canada Revenue Agency. They offer the best tax and retirement savings solution for individuals 40 years of age and older who have T4 income from their company of more than $116,667 (2008). Ideal candidates have also historically maximized their Registered Retirement Savings Plans (RRSPs) and pension contributions. In order to qualify, income must be T4, not dividend or investment income. This is because, as with all pensions, there must be an established employer-employee relationship.

IPPs are alternative retirement savings vehicles that allow for enhanced tax relief and increased pension benefits above and beyond those available through RRSPs and other retirement plans. They can be set up for one person or for a group of employees within the same company.

An IPP is sometimes referred to as an RRSP upgrade; but it is actually a Registered Defined Benefit Pension Plan, and is typically designed to deliver the same legislated payout limit applied to retirement benefits that a member of a defined pension plan can receive in retirement. This limit is about $2,000 per year of service ($2,333 for 2008, $2,444 for 2009). So it is really a pension alternative, not an additional pension like a Retirement Compensation Arrangement (discussed later). Also, a typical IPP will produce a maximum pension adjustment similar to that of most other pension plans, so going this route means that there may be no further room for RRSP contributions.

Rules for setting up an IPP

IPPs can only be set up by corporations (active businesses and not holding companies). Contributions are made on behalf of the designated person(s) and are suitable for business owners and employees over the age of 40 and up to age 70 whose existing retirement savings alone are not expected to fully fund their desired retirement lifestyle. An IPP can also be a good option for self-employed individuals who have incorporated a company and earn a significant amount of income.

When an IPP is established, the plan member must be resident in Canada and pay income tax in Canada. Types of executives and incorporated professionals who commonly establish IPPs include, for example, officers and directors of corporations, accountants, doctors, dentists and lawyers. There are no restrictions as to the level of annual income or the minimum age that is required to set up an IPP, however, most professionals agree that individuals should earn an annual salary of at least $100,000 and should be at least 40 years of age in order to best benefit from establishing an IPP. Until that time, RRSPs are often considered to be more effective retirement vehicles. That’s because IPP contributions increase with age. Another factor to consider is the setup cost associated with IPPs. Younger individuals with no past service may wish to wait until age 45 when IPP contributions are at least $3,000 higher than RRSP maximums.   

All contribution set up fees and maintenance fees paid by a corporation on behalf of employees are fully tax deductible by the employer. As well, the contributions made to IPPs on behalf of their specified employees are excluded from the employee’s income because the contribution is tax-deferred while the employee is in his or her peak earning years.