IPP - Individual Pension Plans

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
brucecohen
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Re: IPP - Individual Pension Plans

Post by brucecohen »

WillH wrote:As the size of the IPP GROWS, ASSUMING INTEREST RATES DON'T CHANGE, THE SIZE OF THE "top up" will grow each year.
Off the top of my head:
1. You're deliberately creating a large and recurring pension deficit. Does your CCPC have enough reliable cash flow to make the top-up payments that regulators will require? IOW, what about down years for your business? At least every three years you must file an actuarial valuation with a plan to cover the deficit. That generates the top-up opportunity but the top-ups must be paid within a set time that ranges from five to 15 years. I believe that in the event of a cash crunch you can reduce the liability by reducing the pension benefits promised, but all of this should be discussed with an advisor well-versed in IPP compliance.

2. The IPP contributions will be tax-deductible for your CCPC at its marginal rate and benefits paid out in retirement will be fully taxed at your marginal rate then. To what extent, if any, will there be a mismatch? IOW, will tax saved by the CCPC today be less than future tax paid by you on the same dollar?

3. I haven't looked at IPPs for years, but am aware that successive budgets and CRA rulings have substantially reduced opportunities for gaming. You should consult a well-versed advisor on whether CRA would tolerate a chronically underfunded plan.

4. IPP setup and admin fees used to be quite high but have come down a lot. How far down, I don't know. To what extent would these costs erode the tax advantage you're seeking?

5. I know very little about CCPC taxation. If they're potentially subject to AMT, would large deductions for IPP top-up contributions create an AMT liability? In the same vein, would they create a chronic annual business loss that would unduly attract CRA's attention?

6. You wrote about "converting" your RRSP to an IPP. That implies you plan for the IPP to recognize past service and plan to pay for those credits by rolling in RRSP money. Consult a well-versed advisor; past service buyback in a red flag area that was substantially cut back a few years ago.

Have you read the explanatory material published by West Coast Actuaries? Many years ago they led the way in reducing IPP setup and admin fees and published the most informative info around.
WillH
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Re: IPP - Individual Pension Plans

Post by WillH »

Bruce,

Thank you for your reply. You have raised a few good questions.

Fortunately, as far as is predictable, my CCPC should be able to fund the IPP obligations (earnings are steady). I have actually talked a lot with West Coast Actuaries. They will set up and admin a plan for ~ $1000/year. my pre and post retirement tax brackets are likely to stay the same.

Your point about whether CRA will find a "chronically underfunded" IPP irritating is good - I don't know the answer, but I imagine that they wouldn't consider it underfunded unless my CCPC fails to make the "top-up". I'll ask WCA what they think.

The real question for me is whether this is worth the time and expense. To my simple minded view, the ability to buy a larger portion of the FI component of my portfolio in pre-tax dollar and tax defer more of it is attractive. Whether that outweighs the costs, I'm not sure. It's possible it would be a lot of effort for little real benefit.

This is all predicated on the fact that my fixed income component is about to exceed the room in my RRSP and this discrepancy is going to get steadily worse.
I could start to put my non-RRSP FI into the Horizons swap based bond ETF, but the MER is a bit high, and I am pretty skeptical that CRA will leave this intact (to say nothing of counterparty risk).
brucecohen
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Re: IPP - Individual Pension Plans

Post by brucecohen »

WillH wrote: This is all predicated on the fact that my fixed income component is about to exceed the room in my RRSP and this discrepancy is going to get steadily worse.
I'm about to make a very controversial suggestion. While I know nothing about your CCPC, many business owners have to carry life insurance -- sometimes large amounts of life insurance. If that includes you, it might be worthwhile to check out universal life insurance as an alternative to doing an IPP. UL's side fund offers a lot of fixed income gaming opportunity for those who are debt-free and have already maxed RRSP and TFSA room. But I suggest this with great trepidation because UL policies are typically loaded with high fees and lots of wrinkles. Put on your skeptic's helmet and talk to at least two brokers, each of whom should produce three illustrations: best case, worst case and mid case.

BTW, you might have misunderstood my point about CRA's view of a chronically underfunded IPP. CRA doesn't care about solvency -- that's the concern of your provincial pension regulator. CRA does care very much about the size of a tax shelter. As you've pointed out, the bigger the gap between performance and target return, the bigger amount of tax-deductible funding that can -- indeed, must -- be put in. I would expect WCA to have some idea on the extent to which owner-managers are using this strategy, CRA's current view and what, if anything, CRA or Finance might do to curb it.
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Re: IPP - Individual Pension Plans

Post by WillH »

I did actually look at UL for this exact reason. It really turned me off - the fees are obscene, and the MERs (on top of fees) are ridiculous. Currently, a fixed income investment with them would lose money on both a nominal and real basis. I have looked at participating life as well - returns "might" be better, but there is so much smoke and mirror that I feel that someone must be scamming me.

I take your point about "maximum size". I will see what WCA says. Thanks for your insights, it is very helpful to get an outside opinion about these topics. However, seeing as the "top-up" only gets the IPP size up to the minimum required actuarially, this strategy won't create a huge IPP. Or do you mean that I would be making large tax deductible contributions?
brucecohen
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Re: IPP - Individual Pension Plans

Post by brucecohen »

WillH wrote:Or do you mean that I would be making large tax deductible contributions?
Yes. The view at Finance was historically that the retirement tax shelter should cover about 2.5 times average wage. The 2.5 is coming from distant memory and might be off. (Just checked. The 2014 RRSP limit -- $24,270 -- is 2.6x the 2013 YMPE.) In effect, Ottawa says it'll bear the short-term revenue loss on that level of retirement funding. There is, however, a problem because a DB pension plan promises a set future benefit. So Ottawa regulates the size of that benefit and allows whatever funding is required to meet the promise. That's all well and good when you're talking about a traditional DB plan that covers many employees who get no direct say in setting the benefits promise and managing the investments. From the Finance policy analyst's point of view, there's a control in that the traditional employer wants to minimize its cost and will seek the optimal investment allocation. While the IPP was constructed on the DB pension chassis, it's a rather different vehicle in that it covers just one person who also happens to control the plan and who, for the reason you cited, just might want to maximize -- not minimize -- the cost. IOW, in the current and foreseeable environment an IPP holder can easily create far more deduction room than an RRSP holder. That not only increases the govt's short-term revenue loss but creates a fairness issue if a lot of IPP holders do that. There's a lot of unfairness built into the retirement funding system and every so often Finance tries to reduce it. Ironically, investing your IPP only in fixed income is conservative from the perspective of an investor but aggressive from the perspective of a tax policy wonk.
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Re: IPP - Individual Pension Plans

Post by WillH »

Bruce,

That was a fantastic post . A very good explanation of this issue. I will see what WCA thinks. Thank you for your insight.
Doug
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Re: IPP - Individual Pension Plans

Post by Doug »

http://www.taxplanningguide.ca/tax-plan ... lans-ipps/

"These plans can be either 100% funded by the employer or employer/employee-funded. In general, you won’t be able to fund more than 50% of the cost of the pension."

http://www.dswactuarial.com/images/DSW%20IPP%202003.pdf

"Employer contributions are tax deductible, and are not subject to employee withholding taxes. Employee contributions are also tax deductible."

http://www.thebluntbeancounter.com/2014 ... plans.html

"At retirement, her basic pension benefit could also be enhanced with indexing protection or she could retire early on a full unreduced pension and make a final tax deductible contribution out of her corporation. For example, in the example above, if the Doctor decided to retire at age 60 instead of 65, on a full (i.e. unreduced) pension, the medical corporation would have to contribute $286,252. This amount called “terminal funding” is also tax-deductible in the hands of the medical corporation, against corporate income taxes. At 15.5% of corporate tax, the medical corporation will receive a cheque from the CRA worth $44,369.06."

In the link above, there's a later comment by a different person than the one above:

"In the doctor example provided above, does it make sense to save a paltry 15.5% (small business tax rate) tax on contributions to a PPP only to face a substantially higher - possibly double or more - this level of taxes on the resulting pension income?

The same logic applies to the "terminal funding" of $286,252 which triggers a $44,369 (= 15.5% x $286,252) cheque from CRA. This could easily require the doctor to pay double (or more) of the initial $44,369 of her tax "savings" back to CRA when the funds are eventually drawn out of the PPP at her personal marginal tax rate."

It looks like an IPP can be funded by the employer and employee, or solely by the employer. I'm not sure about this, but it looks like the employee can only fund up to 50% of the contribution. About terminal funding, I assume that the same rules apply. Both employer and employee contributions are tax deductible.

Let's assume employer tax rate of 16%. Let's assume personal tax rate of 32%.

Assume the employer pays for the IPP contribution. As has been mentioned above, the corp would get deduction at a 16% tax rate, so the net tax is zero for the corp. When you take the money of the the IPP, you pay 32% in tax. In other words, you've deferred an extra 16% in tax by making a contribution to an IPP, as opposed to leaving it in the corp. This ignores the tax deferral in the IPP on investment income.

Assume the employee pays for the IPP contribution. You'll get a deduction at a 32% tax rate, so once again, the net tax is zero. When you take the money out of the IPP, you'll pay 32% in tax. So you've deferred 32% in tax by making the IPP contribution. This is 16% more than with the employer making the IPP contribution.
Last edited by Doug on 29 Oct 2017 19:27, edited 1 time in total.
Doug
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Re: IPP - Individual Pension Plans

Post by Doug »

The following is about terminal funding:

http://www.mnp.ca/fr/ipp-terminal-funding

"The purpose of the ITA (Income Tax Act) restrictions on actuarial assumptions is to prevent excessive tax deductible funding by business owners (and highly compensated employees) through aggressive assumptions. Hence, there are specific rules for “designated plans”; that is, the IPPs of “connected” shareholders, individuals related to connected shareholders or highly compensated employees. One last opportunity exists for business owners and highly compensated employees. When the individual retires, the IPP is no longer a designated plan. This frees the actuary from the restrictions they had to operate under through the duration of the IPP, which include:

retirement no earlier than 65
Post-retirement inflation adjustments not exceeding CPI increases less 1%
Spouse is the same age as the IPP member
Investment yield of 7.5% per annum
Salary increase and wage index increase of 5.5% per annum
Inflation (CPI) of 4.0% per annum
Mortality rates equal to 80% of the average of the male & female rates setforth in the 1983 Group Annuity Mortality Table

After retirement, the actuary can take a conservative approach in their assumptions about anticipated investment yield, the plan can be amended to provide full CPI indexation and early retirement benefits, and, the spouse’s actual age can be considered for purposes of funding for survivorship benefits."
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Re: IPP - Individual Pension Plans

Post by Doug »

The following is about being able to make past service contributions to an IPP.

http://mcleanpartners.com/files/public- ... -ipp-3.pdf

"An IPP can provide for benefits prior to the IPP implementation date and is referred to as Past Service. Contributions in respect to Past Service can be made even if all eligible RRSP contributions have been made. To eliminate any doubling of benefits over this same period, a specific amount has to be transferred from the RRSP (referred to as a Qualifying Transfer) or alternatively, unused RRSP room is reduced (for individuals who have elected not to make full RRSP contributions). The 2011 Federal Budget introduced additional provisions that can increase the Qualifying Transfer (and thus reduce the tax deductible contribution) in a small number of IPP implementations"

http://www.fyork.com/library/FY-calu-un ... g-ipps.pdf

"The new rules call for the plan member´s years of service to be divided by their age less 18 (and this denominator can be no more than 35). This factor is multiplied against the current market value of RRSPs to determine how much of the unfunded liability must be made up of a RRSP rollover"

"In cases where the individual is much older, in their mid-60´s for instance, or their RRSP balance is considerable (in excess of $700,000) they may see some reduction in past service funding."
Doug
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Re: IPP - Individual Pension Plans

Post by Doug »

The Canadian Securities Institute has an online course for $80 on IPPs:

https://www.csi.ca/student/en_ca/course ... /ipp.xhtml
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Re: IPP - Individual Pension Plans

Post by icudoc »

I'm interested in starting up an IPP.

I found ipponline.ca ... and found the fine print that they charge 1% of assets yearly in addition to explicit fees. Reddit says NBDB (my favourite) holds IPPs, but I tried and they said no.

I called West Coast Actuaries, and they suggested I use my own "advisor" (what's that?) or find an institution that holds IPPs.

Anyone know if the costs of managing investments (MER or ipponline's equivalent) is a problem for all IPPs?

Also, anyone else concerned about RRSP/CPP/IPP in some combination adding up to too much retirement money at the expense of flexibility until age 70?

icudoc
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Re: IPP - Individual Pension Plans

Post by brucecohen »

icudoc wrote: 11 Feb 2019 12:51 I called West Coast Actuaries, and they suggested I use my own "advisor" (what's that?) or find an institution that holds IPPs.
I'm surprised. A few years ago West Coast was aggressively marketing them. Looks like they only want to do the actuarial work I guess they want you to find a brokerage that'll open the account and administer the investments. I see that MD Management offers IPP. All of the full-service brokers probably do too. I doubt that you'd find a discount broker offering IPPs.
Anyone know if the costs of managing investments (MER or ipponline's equivalent) is a problem for all IPPs?
Fees were quite high years ago until West Coast Actuaries offered plans at much lower rates. If you open a full-service brokerage account you'd be able to invest in low-MER ETFs, but the brokerage will still likely charge a reasonably hefty annual admin fee. Appreciate that the organization administering the plan has to work under both federal tax and provincial pension laws and regs.
Also, anyone else concerned about RRSP/CPP/IPP in some combination adding up to too much retirement money at the expense of flexibility until age 70?
I don't understand what you mean. CPP contributions and benefits are out of your hands except to the extent you take dividends from your corp as opposed to salary. RRSP and IPP investment choices are virtually the same -- IIRC an Ontario IPP can't fund the annuitant's mortgage the way an RRSP can. IPPs are typically designed to fund/pay the most generous benefits allowed by law which means the PA will substantially wipe out your ability to make RRSP contributions.
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Re: IPP - Individual Pension Plans

Post by icudoc »

Thanks Bruce.

OK ... I'm still working this out in my mind.

We have RRSPs totalling high six figures, and we are still contributing. So we are retiring in a high tax bracket. Presumably deferring CPP to age 70, in comparison, only acts as longevity risk insurance.

With that background, it may or may not be logical to lock up more money for retirement and therefore lose flexibility now. For example, if I get a weird cancer tomorrow and have to pay out of pocket for a new biologic, that can run to a million out of pocket. If all the money is locked up in an IPP, that would be a problem.

I think I'm still interested in IPPs, but I'm trying to understand 2 things.
1. I assume IPP is ideal for sheltering fixed income, but I already have RRSP room for that.
2. if I start an IPP, how do I minimize costs.

West Coast Actuaries are pretty economical for initial fees. I found Qtrade holds IPPs at the same ultralow cost as you would expect.

I found it interesting that, like corporate insurance, an unwary investor could find the tax sheltering of IPPs attenuated by high added fees for the investments.

icudoc
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Re: IPP - Individual Pension Plans

Post by brucecohen »

icudoc wrote: 12 Feb 2019 09:22 We have RRSPs totalling high six figures, and we are still contributing. So we are retiring in a high tax bracket. Presumably deferring CPP to age 70, in comparison, only acts as longevity risk insurance.

With that background, it may or may not be logical to lock up more money for retirement and therefore lose flexibility now. For example, if I get a weird cancer tomorrow and have to pay out of pocket for a new biologic, that can run to a million out of pocket. If all the money is locked up in an IPP, that would be a problem.
Depending on your situation you might be able to use a hefty chunk of your current RRSP money to buy past service in the IPP and fund future service. You'd have to talk toa pro about setting up the plan because the rules are quite complex and running afoul of the Income Tax Act can get expensive quickly. I haven't paid attention to IPPs in years.

The wisdom of concentrating most/all of your investment in a retirement plan will depend a lot on your age, alternate investment plan and what other uses you might have. Maybe an expensive cottage? Exotic travel?

An RRSP withdrawal can be made at any time. While the withdrawal gets fully taxed as income, your cancer treatment costs would be tax-creditable medical expenses. There used to be several ways to get money out of an IPP. They're complex, arguably aggressive and beg a professional consult as one or more might have been shut down.

I suggest you write down why you'd want an IPP and your concerns about doing it. Then get a detailed consult with an experienced pro. If you want an objective opinion/analysis you can get the name of a consulting actuary in your locale from the Canadian Institute of Actuaries in Ottawa. Make clear to the chosen actuary that you just want an objective consult and would not hire him/her to set up or administer the plan.

A financial advisor named Peter Merrick wrote a professional-level book for advisors years ago, but it looks like the most recent edition was published in 2007. A used copy would cost US$100 from amazon.com, but Toronto Public Library has one copy for reference. If not in TO, your public library and/or nearby university business school library might have a reference copy. But reading it in the library or photocopying may not be worth the time -- it runs 350 pages.
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Re: IPP - Individual Pension Plans

Post by icudoc »

Bruce, you are amazing.

After careful review of your replies, and in fact the whole thread, I have decided to put this issue off until my youngest is an adult, investigate getting all the kids as shareholders, and inquiring as to an IPP with sequential beneficiaries culminating in kids, not principally for retirement income, but rather to funnel corporate cash to the beneficiaries with as few intermediaries to get taxed on the way.

Whether the law will still allow that then remains to be seen, but clearly I cannot convince myself I need an IPP now.

icudoc
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Re:

Post by Eclectic12 »

Flights of Fancy wrote: 05 Feb 2009 15:13 Hmmmm. IPPs are not a "product" but an RRSP alternative which incorporated businesses can use to top up compensation for executives. Makes me wonder what sites you are reading!
Don't know about the OP ... but a book in the library talked about it for successful small business owners who wanted a pension similar to what an employee or executive could have from their Mcorp.

One of the warnings was that once it was started up, one had to make the require payments/top ups, no matter how good or bad the business was doing (same challenge as the Mcorp has).


Cheers
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Re: IPP - Individual Pension Plans

Post by icudoc »

I did the CSI IPP course. I really liked it. It took about 5 to 10 hours.

I got quotes from West Coast Actuaries and GBL. I give them both highest recommendations.

Unfortunately, at my age and expected retirement date, the IPPs only offered ~10% more contributions than RRSPs alone, so I decided to forego them for now.

I recommend those in mid 50s with CCPC assets more than 1M to investigate IPPs, particularly if there are adult family shareholders.

icudoc
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