A Powerful Tax-Deferred Retirement Savings Tool

An Individual Pension Plan (IPP) is a powerful tax-deferred retirement savings tool designed for incorporated professionals — especially business owners — who are over 40 and earn a consistent high income through their professional corporation.

Here’s a detailed breakdown of the key benefits of using an IPP for a business owners in Canada:

• IPPs allow larger annual contributions than RRSPs, especially as you age.
• Contribution limits increase with age because they’re based on pension formulas and projected retirement income.

All contributions to the IPP are paid by your corporation and are 100% tax-deductible. This includes:

• Assets in the IPP grow tax-deferred, just like RRSPs.
• Investment income is not taxed until the funds are withdrawn in retirement, when you may be in a lower tax bracket.

• An IPP is a defined benefit plan, meaning it provides a predictable retirement income.
• You’re not relying solely on market returns.
• This makes it ideal for business owners seeking stable, pension-like retirement income.

• If you were previously self-employed or paid yourself salary before establishing an IPP, you may be eligible for past service contributions.
• This can create a large upfront deduction (sometimes over $100,000).

• When you retire, your corporation may be required to make a final lump-sum contribution (called terminal funding).
• This can result in a significant final tax deduction and increase your pension benefits.

• IPP assets are generally protected from creditors, unlike corporate retained earnings or open investments.

• Unlike salary (which incurs CPP contributions), IPP contributions are not subject to payroll taxes.
• This results in cost savings and more money staying in the retirement plan.

• An IPP allows you to move money out of the corporation into a protected, tax-deferred environment.
• This is helpful for reducing passive investment income inside the corporation (which can reduce access to the small business tax rate).

• IPPs can include survivor benefits and guaranteed payments to your spouse or estate.
• If structured correctly, unused funds may pass on to heirs, or be used to purchase a joint last-to-die annuity.

Summary

This content is intended for general informational purposes only and does not constitute financial, legal, or tax advice. Individual Pension Plans (IPPs) are subject to specific rules and regulations under Canadian law, and the suitability of an IPP depends on individual circumstances. We are not tax advisors, and we recommend readers to consult with a qualified tax professional before making any decisions regarding pension planning.