TaxBites – March 2014

Protect Insurance continues to provide the life and income-protection expertise that professionals have relied upon for years.  In addition, we are now pleased to offer a complete suite of financial, tax and estate planning services, tailored to our valued clients.  We hope you find our TAXBITES series of newsletters to be valuable.

The Individual Pension Plan – A powerful alternative to RRSPs/TFSAs

Because RRSP contributions are limited to an annual maximum of $24,270 (2014) and TFSAs to a maximum of $5,500 (2014), most professionals will need additional savings outside of their RRSP in order to fully fund a comfortable retirement.  The absence of tax-deductibility on these additional savings, combined with annual taxation on income and realized gains, makes most non-registered choices less efficient wealth-builders.

Many incorporated professionals and business owners turn to the Individual Pension Plan (IPP) as a means of augmenting their tax-sheltered savings.  An IPP is simply a defined-benefit pension plan that is sponsored by your Professional Corporation (PC) and established for your benefit.  It works on the same tax-deferral basis as the pension plans of large public and private sector employers. You own an incorporated business so why not fund your own pension plan?

Some of the key advantages of an IPP are:

·  Your PC can make larger annual tax deductible contributions than the limits available to an RRSP.  Depending on your age the total contribution room can be up to 65% higher.

·  You will be entitled to a large lump-sum tax-deduction at plan inception.  Because you will be permitted to fund the plan based on the number of years you have been employed by your professional corporation, there is a large tax-deductible catch-up contribution that can be made in year one.

·  It can reduce investment risk.  In any year that your investments do not attain a government stipulated 7.5% rate of return, your PC will make additional tax-deductible contributions to cover the difference.  This can be ideal for the fixed income portion of your portfolio with prevailing rates far less than 7.5%.

·  The assets of the plan are 100% creditor-proof.

·  All costs of the plan and all investment management fees are tax-deductible to the corporation.  You can fund your investment management fees from the corporation and they are fully tax-deductible.

How does an IPP work?

An IPP is a defined benefit pension plan with one or two members – usually the professional and the spouse if both have T4 income from the corporation.  Based on your years-of-service and your age(s), an actuary calculates the amount of lump sum and annual contributions required to fund a fully indexed pension at age 65 (or 71).  The pension is based on 2% per year of service on a maximum income of $134,834 (indexed).  The contributions are invested in similar vehicles to those eligible for RRSPs (stocks, bonds, investment funds, etc).  Like an RRSP, you choose and control the choice of investments.  Every three years, the assets in the plan are reviewed to determine their adequacy to provide the promised pension. If there is a shortfall (because the rate of return has not achieved 7.5%), additional tax deductible contributions are permitted.  At retirement age, you can choose to take an annual pension or wind-up the plan and transfer the assets to a locked-in RRSP.

Is an IPP for everybody?

While the consistent, steady and tax-effective funding of an IPP is ideally suited to the earnings path of many professionals and especially most dentists, there are additional considerations.   There are fees to set up and maintain an IPP.  For younger professionals, these fees often outweigh the additional tax deductions achieved through the higher contribution room.  Professionals intending to sell their practice need to plan ahead of the date of sale to wind up or transfer their IPP.  A purchaser of a dental practice will not want to inherit the obligations of contributing to your pension plan.  Probably the most important consideration is that from the day the plan is set up, pension contributions are required by law… unlike RRSPs the contributions are not optional.  Being comfortable with the annual cash-flow requirements is an absolute pre-requisite.

IPP Example:

– A 60 year old male dentist,
– Incorporated January 1, 2006.
– Earnings every year in excess of $134,834.
– No carry-forward RRSP room
– Existing RRSPs of $368,000

Tax-deductible corporate IPP contributions:

– 2013: $165,590
– 2014: $37,721
– 2015: $40,550

For the three-year period ended 2015, total IPP contributions of $243,861 exceed allowable RRSP contributions of $73,754 for the same period.  The difference is a tax deduction of $170,107.  In this example, $165,590 of existing RRSPs must also be transferred into the plan at setup.

If you combine the additional tax deduction of $170,107, the ability to deduct management fees (at 1% this would be an additional tax deduction of $4,094), and the ability to add more tax-deductible contributions when the annual return is less than 7.5%, you can see why an IPP can be a superior retirement savings vehicle for the dental/medical professional.

Please contact us for an IPP estimation based on your own earnings and years-of-service.

The next issue of TaxBites will pick up on the tax-deductibility of investment management fees paid by your Professional Corporation and discuss using Private Investment Management.

Todd Roberts, B.Com.

Vice President
416-391-3764, ext. 233

Toll free: 1-866-919-3764



The views expressed in this commentary are those of Protect Insurance Agencies Inc. (Protect) at the date of publication, are subject to change without notice, and are not representrd to be error free. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific insurance products or investments, nor is it intended to provide tax, legal or accounting advice in general or specific to your circumstances. Buyers should review all documents relating to any insurance or investment carefully before making a decision and should ask their advisors for guidance based on their specific circumstances. Protect assumes no responsibility for how you use the information you obtain from this commentary.  E. &. O.E.

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