Recent federal tax reforms in Canada have steadily eroded the benefits of accumulating passive income within private corporations. From the 2018 changes that restricted access to the small business deduction, to tighter income-splitting rules and the proposed increase in the capital gains inclusion rate to 66.67%, the tax environment has become more challenging for incorporated professionals and entrepreneurs.
Against this backdrop, the Individual Pension Plan (IPP) has drawn increasing attention as a potential tool to manage corporate taxes and retirement savings. But while IPPs offer attractive tax-deferral features, they are not universally suitable and require careful evaluation.
An IPP allows business owners or incorporated professionals to use their corporation to make tax-deductible contributions to a pension plan — the goal is to fund a stable and predictable pension in retirement.
To be eligible, an IPP participant must be connected to a corporation, meaning they must hold at least 10% of a category of shares in a Canadian-controlled private corporation. An eligible participant could also be related to one of the owners of the corporation. Technically, IPPs can be offered to unrelated employees, but the regulatory burden imposed by provincial pension laws — locked-in rules, mandatory funding of deficits and extensive reporting — makes this impractical in most cases.
IPP advantages
The key advantage of an IPP lies in its contribution limits. Unlike RRSPs, which are capped at 18% of income (up to a maximum), defined benefit pension plans require the corporation to fund a retirement benefit based on actuarial assumptions. As a result, contribution room can exceed RRSP limits significantly, especially for individuals over 40. By age 65, annual contribution room may approach 31% of T4 income.
Additional tax-deferred growth is possible when past service (for years worked before the IPP was established) is purchased, or when early retirement is funded. Both scenarios often trigger further deductible corporate contributions due to actuarial deficits.
There are secondary tax advantages too. Investment management fees within the plan are deductible to the corporation, unlike in an RRSP. For example, a 1% management fee on a $500,000 portfolio, at a 26.5% corporate tax rate, yields an annual tax saving of $1,325. Fees for actuarial and administrative services are also deductible.
Finally, in the case of a family business, a significant tax amount can be avoided upon death. A combined plan can enable accumulated funds to pass to the next generation without immediate tax consequences. With an RRSP, only the rollover to a spouse (or a dependent disabled child) allows for such a deferral.
Caution flags
IPPs are complex and require ongoing administration. Each plan must be registered with the Canada Revenue Agency and a fellow actuary is required to produce the actuarial valuation of the plan. Detailed reporting is required annually via a T244 form. And plan sponsors must engage qualified professionals to perform valuations and ensure the plan remains compliant with evolving regulatory standards. Business owners and accountants must have a proper understanding of the plan and report an annual pension adjustment when filling the personal income tax information (box 52 of the T4 slip).
Financial advisors, tax professionals, actuaries and legal counsel often work in concert to establish and manage these plans, making them more accessible to individuals with the financial means to absorb associated costs. The actuarial fee to set up an IPP alone can reach $2,000 – $3,000, in addition to an annual recurring fee of $750 – $1,200.
There are also flexibility constraints. At retirement, benefits must be taken as a prescribed annuity. Unlike RRSPs or individual pension-style accounts, IPPs generally don’t allow for excess withdrawals. If the plan member sells the business to an unrelated party, they may be required to collapse the IPP and transfer assets to an RRSP or RRIF. Any assets above the CRA’s maximum transfer value become immediately taxable, which can erode the advantages gained during accumulation.
Compensation structure also plays a critical role. IPPs only generate contribution room from T4 income, not dividends. Business owners who remunerate themselves primarily through dividends may find IPPs ineffective. Additionally, some entrepreneurs prefer to accumulate assets in holding companies. They can rival IPPs in long-term tax efficiency, especially where passive income thresholds aren’t breached.
Finally, IPPs are considered matrimonial assets and may be subject to division upon divorce, introducing another layer of planning complexity.
IPPs occupy a niche within the broader framework of retirement planning strategies in Canada. While they can offer substantial retirement income advantages for the right profile — typically high-income individuals over 40 who control their corporation — they are not universally suitable.
The administrative requirements, funding obligations and regulatory complexity make them less appealing for individuals seeking flexibility or those with unpredictable income streams. As with any sophisticated financial vehicle, a careful assessment of benefits, obligations and alternatives is essential to determine whether the IPP fits within an individual’s or corporation’s long-term planning objectives.
Léo Deblois, B.B.A., F. Pl. is a financial planner and business development advisor for the E-PP at SFL QMA.