Individual pension plans and the family business

With the increases in the pension limits and the ability to include an Individual Pension Plan (IPP) in a succession plan, IPPs have become the RRSP alternative for many business owners.

Normally on the death of the second spouse, registered assets create a tax liability in the estate. An IPP for a family business can be an effective way of transferring registered assets to the second generation on a tax deferred basis.

WHAT IS AN INDIVIDUAL PENSION PLAN?
An Individual Pension Plan (IPP) is a defined benefit pension plan. If you are a business owner, an IPP offers both maximum tax relief and a maximum retirement pension. The result?

You won’t have to rely solely on your Registered Retirement Savings Plans (RRSP’s) performance to provide a long and happy retirement. That’s because IPPs can also offer guaranteed lifetime income and any surplus in the plan belongs to you.

WHY ARE IPPS SO POPULAR?
For people over age 40, IPPs offer higher tax deferred contributions than RRSPs. In fact, at age 50, the annual maximum contribution is $6,000 higher than the maximum contribution to an RRSP. As you get closer to retirement the cost to provide the benefit increases.

You can also include service back to 1991. This is optional but if you decide to include extra years, it will significantly increase the amount that can be deposited into the plan.

OPPORTUNITIES

The family business
Normally on the death of the second spouse, registered assets create a tax liability in the estate. An IPP is an ideal way to keep the assets in a tax-deferred vehicle when involving a family business.

If the business is continuing after the parent retires, the family member (usually a son or daughter) taking over the business can be added as a member of the existing plan. By leaving the plan intact, any assets not used to provide benefits to the retired parent will remain and can be transferred to the second generation without triggering tax.

Sale of a business
Most small businesses are sold to family members or partners. The proceeds from these types of asset sales are treated as taxable income. By setting up an IPP now using terminal funding, a deduction can be created against this income.

Early retirement
Legislation requires funding projections to be based on a retirement age of 65.

However, anytime after attaining age 60, a member of an IPP can retire and supplement the benefits provided in the plan by adding unreduced early retirement benefits, cost of living increases and bridging benefits. These early retirement benefits can provide a significant additional tax deduction for the company.

ipps vs rrsps

IDEAL CANDIDATES

* Owners of an incorporated company1
* Individuals age 40 or older
* People who earn employment income reported on a T4 of at least $100,000 from the company sponsoring the Individual Pension Plan

TAKE ACTION

* Request a quote from your advisor showing the deposits that can be made based on your age and length of service while incorporated
* Compare the benefits of an IPP to an RRSP
* Work with your advisor and other tax, legal and actuarial professionals to establish an IPP if you determine it is right for you

1 Corporation may be public, CCPC, Farm Corp, Professional Services Corp.

Content provided courtesy of Manulife Investments

© Copyright of this article is held by The Manufacturers Life Insurance Company (Manulife Financial). You are free to make copies of this article and to distribute it, either in paper form or electronically, as long as you do not change or remove any part of this work. All other uses are prohibited.

Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. As one of Canada’s largest integrated financial services providers, Manulife Investments offers a variety of products and services including segregated funds, mutual funds, principal protected notes, annuities and guaranteed interest contracts.

WealthStyles, Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation.

Share Us and Let Others Enjoy:
  • Digg
  • del.icio.us
  • Google
  • description
  • E-mail this story to a friend!
  • Facebook
  • Furl
  • LinkedIn
  • StumbleUpon
  • Technorati
  • YahooMyWeb
  • Print this article!
  • TwitThis
No Comments

Leave a reply

  1. You will post the following soon.
    Go ahead and start typing.
Add a Comment
Disclaimer: The information and opinions expressed and contained on this site are solely the opinion of the author based on his personal observations and years of experience. As with any public journal involving financial information, you agree to use the content of this site at your own risk! Either consult with us or your own financial professional before even considering using any of the information obtained here. All trademarks and copyrights on this site are owned by their respective owners. Comments are owned by the Poster.