Source: https://gblinc.ca/products-services/business-owners/individual-pension-plans/

Who is an IPP suitable for?

IPPs are available for the benefit of those defined under the Income Tax Regulations as “specified individuals.” This includes shareholders who own at least 10% of the issued shares, people who do not deal at arm’s length with their employer, or other well-paid employees who earn more than 2.5 times the year’s maximum pensionable earnings (YMPE). The YMPE is $71,300 for 2025. 

IPPs are most advantageous to owners, managers or executives of incorporated businesses between the ages of 40 and 71, that have a steady T4 employment income greater than $100,000. While the annual RRSP contribution limit does not vary with age, the annual IPP contribution limit does. IPP contributions begin to exceed RRSP contributions around age 40.

Business owners might also find IPPs beneficial to help reduce the amount of passive assets within your corporation. This reduction may allow your corporation to continue benefiting from the small business deduction (SBD), which lowers the corporate tax rate on active business income. Access to the SBD can be impacted if your corporation generates over $50,000 in passive income.

IPP contributions

The sponsoring corporation, which establishes an IPP, is responsible for funding the plan and continuing to ensure it holds sufficient assets to provide the necessary retirement benefits.

An actuary provides the methods and assumptions that determine the contributions required to ensure the IPP has sufficient assets to provide the necessary lifetime retirement income.

In addition to annual contributions, tax-deductible contributions may also be available for the corporation in the following situations:

• At inception - to fund past service
• As a top up during the plan - if actual investment returns fall short of the actuarial assumptions of 7.5%
• At retirement - to fund any shortfall and enhanced benefits

The amount that can be contributed to an RRSP is subject to the annual limit, whereas the amount that can be contributed in an IPP is the amount required to fund future benefits and is subject to higher limits after age 40. As a result, contributions to an IPP can be significantly higher to ensure retirement income and any enhanced benefits (early retirement, bridge benefits, indexing etc.) are sufficiently funded.

What investments are eligible to be held in IPPs?

An IPP has investment flexibility similar to RRSPs, TFSAs, and other registered accounts, but also has additional limitations. An IPP may invest in cash, mutual funds, Guaranteed Investment Certificates (GICs), bonds, as well as securities listed on a designated stock exchange in Canada or internationally.

The IPP should follow “prudent investor” standards with respect to the quality and diversification of the portfolio. Your financial advisor can assist with this requirement. 

If the investor owns individual securities, no single investment may amount to more than 10% of the IPP on a fair market value basis. This restriction does not apply to mutual funds as they are already diversified.

The plan cannot invest in the securities of the IPP sponsor. In other words, the business can’t make tax-deductible contributions and have those dollars used to buy its own debt or equity in the IPP.

IPPs at retirement

The IPP must be used to provide lifetime pension income. At retirement, you will have the following options for retirement income from your IPP which are discussed in more detail below:

• Lifetime retirement income from the pension
• Transfer the commuted value to:
  • A locked-in retirement account
  • An annuity
  • To another DB pension

Lifetime retirement income from the pension

Depending on the legislation of the pension, retirement income could begin as early as age 50 but no later than age 72. As mentioned, the amount of income is determined by a formula based on years of service, earnings and a percentage multiplier assigned to each year of service.

Receiving lifetime income from the IPP is generally the most tax efficient option. The income payments will be taxable in the year they are received. These payments are eligible for pension income splitting and the pension income tax credit at any age. If there is surplus in the IPP after all plan members and their pension partners have passed away, the proceeds are taxable to the beneficiary that receives them rather than the deceased. There are, however, downsides to this option including compliance, accounting and actuary costs, the risk that if the actuarial assumptions were wrong, the retiree could outlive the IPP and that the IPP must continue to be sponsored by a corporation to remain open during retirement and pay lifetime income. In other words, the company is obligated to remain in existence, or the IPP must be wound-up or transferred to another sponsoring company.

Transfer the commuted value

The present value of all the future pension income payments, known as the commuted value, can be transferred out when leaving the IPP, at retirement, or when the IPP is being wound up. The options include a transfer of the proceeds to either an annuity, a locked-in retirement account or another DB pension plan.

The Income Tax Regulations limit the amount of the commuted value that can be transferred on a tax-deferred basis (maximum transfer value). Any remainder (excess) will be paid to you as fully taxable cash and you will need to report as income for the year it is received.

The commuted value calculation must be calculated by an actuary using the assumptions and discount rates provided by the Canadian Institute of Actuaries, the date of termination, and the formula specified in the plan. If the commuted value exceeds the amount of the IPP assets, the employer may have to fund the shortfall.

• Locked-In Retirement Account
  
  Your IPP pension proceeds, if governed under Alberta legislation, can be transferred to a Locked-in Retirement Account (LIRA) or a Locked-in Income Fund (LIF). A LIRA is essentially an RRSP that is governed by pension legislation, or “locked-in,” and a LIF is essentially a locked-in RRIF. Similar locked-in account types are available in other jurisdictions.
  
  LIRAs and LIFs are tax-deferred investment accounts that allow you to choose how the funds are invested and subject to certain restrictions, when to initiate regular income payments. The payments are included in your taxable income in the year of withdrawal. Withdrawals are not permitted directly from a LIRA, however, you can initiate on-going retirement income with a transfer of the locked-in proceeds to a LIF.
  
  Locked-in accounts, as well as being governed by the Canadian Income Tax Act, are also regulated by the applicable provincial or federal pension jurisdiction. This additional regulation is to ensure lifetime retirement income is available for both the original pension plan member and the member’s spouse or common-law partner, since this was the intent of the original pension. These rules limit how and when the funds can be accessed and provide for spousal protections. The article, What is a locked-in account, and why would I have one? discusses locked-in accounts in more detail.
  
  
• Life annuity
  
  If you decide to take the commuted value but also desire a guaranteed lifetime income stream, you could choose to purchase an annuity through an insurance company.
  
  A life annuity will pay you a set amount of annual or monthly income over your lifetime and can be purchased through a transfer of the maximum transfer value of your IPP commuted value. The excess will be paid directly to you and is taxable in the year it is received and the income payments received from the annuity would be taxable in the year they are received. The amount of income you will be entitled to is based on a variety of factors including: the current interest rate, your age, health and life expectancy.
  
  A “copycat annuity” is another option for those that may face a large tax bill on the excess amount of the commuted value, or for those that are seeking lifelong income but may be concerned about the long term health of the company pension plan. The CRA allows for the transfer of up to the full commuted value to purchase a copycat annuity, which mirrors the provisions of the employer pension plan.
  
  The copycat annuity isn’t a standard product, but a custom strategy provided through a life insurance company that provides benefits that mimic the pension benefits. The cost of the annuity may be more or less than the commuted value amount. If it is less than the commuted value, the difference will be paid to you as a taxable cash payment. If the annuity costs more than the commuted value amount, as long as you use the full commuted value for the purchase, the tax-deferred transfer is still available and the income and benefit amounts will be reduced accordingly.
  
  
• Transfer to another DB plan
  
  You may be able to transfer all or part of the IPP commuted value to a new employer’s DB plan.

At the point in time when you retire or terminate your employment, you'll need to make an important decision regarding your pension. This involves choosing between receiving a guaranteed income stream directly from the plan or potentially transferring out the commuted value. Before making your decision it's important to consider various factors, not only those that can be quantified, but also those that are more personal to your circumstances. Consider discussing this topic with an IPP administrator to ensure you fully understand your various IPP options at retirement before implementing an IPP.

IPP at death

According to pension legislation a spouse is automatically entitled to death benefits from an IPP, both pre- and post-retirement. However, in some pension jurisdictions, a spouse may be able to waive this entitlement by signing a waiver. In the event that the spouse predeceases the member, or signs the applicable waiver form, a different beneficiary can be designated to receive these benefits.

Member’s death before receiving a pension

Pre-retirement death benefits vary from one jurisdiction to another, and may also depend on whether the member was within early retirement age and their marital status at the time of death.

If the deceased had a spouse or common-law partner at the time of death, the spouse or common-law partner would be entitled to receive either a lifetime monthly pension or a transfer of the commuted value to a locked-in retirement account or an annuity. There may be a portion of the commuted value that is considered “excess” which must be paid as a lump-sum cash payment that is taxable in the hands of the surviving spouse or common-law partner.

In the absence of a spouse or common-law partner, the commuted value will be paid as a lump-sum cash payment to the non-spouse beneficiary and the payment will be taxable to the beneficiary.

Member’s death while collecting a pension 

Prior to the start of your pension, you will be provided with various options for the payment of your pension income. Whether your survivors receive benefits from the plan and the amount of benefits they will receive is determined by the option you choose.

Guarantee period - A guarantee period is available to ensure that, in the event of an early death, your survivors can receive retirement benefits until the end of your chosen guarantee period. If you have a surviving spouse or common-law partner and you pass away within the guarantee period you have chosen, your spouse will continue to receive your pension payments until the end of the guarantee period. When the guarantee period has ended your spouse will continue to receive their survivor pension (discussed further below).

If you do not have a surviving spouse or common-law partner, or your spouse has waived their right to survivor benefits, your chosen beneficiary or your estate will receive your pension payments, or an equivalent lump sum, up until the end of the guarantee period.

Survivor pension - Pensions, including IPPs, are intended to provide lifetime income not just for the plan member, but also for the member’s spouse or common-law partner. If you have a spouse or common-law partner at the time of your death, most jurisdictions require that your spouse or common-law partner receive a survivor pension of at least 60% of your pension for the remainder of their lifetime.

Surplus

After the death of the last person entitled to benefits from the IPP the remaining value is known as surplus. Unlike remaining proceeds from an RRSP or RRIF, which would be included in the deceased’s income in the year of death, the surplus is taxable in the hands of the beneficiaries that receive the proceeds. This may result in a lower level of income tax on those funds. 

Is an IPP right for you?

An IPP can be a powerful tool for retirement planning for business owners. However, like any significant financial decision, it comes with a mix of advantages and disadvantages that warrant careful consideration to ensure an IPP aligns with your personal financial goals and business strategy. We will explore these in more detail below:

Advantages:

• An IPP allows business owners to maximize their tax-deferred savings for retirement. IPPs can be a powerful retirement savings tool, especially for those approaching retirement with less than sufficient retirement savings. The IPP allows the use of tax-deductible corporate income to help you catch up and increase your savings for retirement.
  
  
• An IPP can provide greater control over retirement income. If the IPP investments perform below the assumed 7.5% net annual growth rate, the sponsoring company can make a tax-deductible contribution to cover the shortfall, ensuring a predictable 7.5% growth in IPP investments.
  
  
• Funds contributed to an IPP are generally protected from the corporation's creditors. However, individuals concerned about creditor protection should seek advice from a qualified legal advisor.
  
  
• An IPP can be established for key employees, offering a tax-efficient way to enhance employee benefits. Implementing an IPP acts as a strong retention tool and demonstrates a commitment to the well-being of highly valued employees within the organization.
  
  
• Contributions to the IPP are considered a non-taxable benefit for the employee. The assets held within the IPP accumulate on a tax-deferred basis until they are withdrawn at retirement. Upon withdrawal, the IPP pension income may be split with a spouse or common-law partner for tax purposes, up to a maximum of 50%.
  
  
• IPP retirement income can be inflation-protected if the plan specifies indexed pension benefits. This allows for significantly larger, tax-deductible corporate contributions, unlike an RRSP, where individuals cannot make additional tax-deductible contributions beyond allowable limits.

Considerations:

• IPPs may require mandatory contributions, and corporations must evaluate their ability to fulfill these funding commitments. Nevertheless, an exception exists for Alberta-regulated IPPs established for the benefit of an owner-manager or entrepreneur.
  
  
• Establishing IPPs for key employees demands a sustained commitment from the corporation. IPPs are much more expensive to administer than RRSPs. There are registration and startup costs as well as annual filings, actuarial analysis and other requirements.
  
  
• Funds transferred by a corporation into an IPP are subject to pension legislation, meaning they are locked in and exclusively for retirement purposes. These funds, along with any accrued growth, cannot be transferred back to the corporation for its use. Unlike an RRSP, an IPP offers less flexibility in accessing funds, which are typically disbursed to the retired employee as regular, periodic pension payments.
  
  
• For an IPP to continue, the sponsoring corporation must remain in existence. If the corporation ceases to exist, the IPP must be wound up or transferred to another sponsoring corporation.
  
  

IPPs are a specialized solution for entrepreneurs and high-income professionals. They provide business owners with a strategic and tax-efficient way to accumulate significant retirement funds. IPPs are an excellent choice due to their higher contribution limits, tax advantages, and reliable retirement income.

While IPPs offer powerful benefits for a financially secure and comfortable retirement, their complexities necessitate effective management, including access to professional financial and actuarial guidance. Therefore, while not suitable for everyone, IPPs offer significant value for those willing to navigate their complexities.