This is a type of defined benefit pension plan,
governed by provincial pension legislation. Characteristics of IPPs:
Each IPP must qualify for registration as a pension
plan under the Income Tax Act.
IPPs are beneficial for high income (typically over
$100,000) owners of incorporated businesses and senior
corporate executives.
Allowable contributions are normally much higher than
RRSP limits.
Contributions are based on age, employment income, and
actuarial calculations.
Each plan usually benefits one employee, not a group
of employees.
Contributions to an IPP reduce or eliminate the
allowable RRSP contributions of the employee.
Contributions and administrative fees are deductible
expenses for the corporation.
Interest on money borrowed to fund contributions is
tax deductible for the corporation.
Contributions may not be made to an IPP for a spouse,
but if the spouse works for the same employer, they
could be added to the plan. Due to the recent
federal government announcement regarding pension
income splitting, this is less important.
The assets of the IPP are locked in until retirement.
Setup and ongoing administrative fees are high.
Individual Pension Plans can accept transfers of funds
from a prior registered pension plan (RPP). If the IPP is set up primarily for
the purpose of the transfer from an RPP, it is essential to
establish in advance that the IPP will qualify for
registration under the Income Tax Act. Improper
planning in this area could result in the IPP having its
registration retroactively revoked after a period of
years.This would result in the assets of the plan
becoming taxable. There is information on this topic
in the Canada
Revenue Agency (CRA)
frequently asked questions for registered plans
administrators.
In 2005, CRA retroactively revoked the registration
for two IPPs which were established in 1999 and 2000 and to which funds were
transferred from defined benefit pension plans. The Federal Court of
Appeal upheld the CRA position in 2007 court cases. The cases are: