IPPs still viable

The 2011 Federal Budget included changes to the age 72 distribution requirements of Individual Pension Plans (IPPs). More importantly, it also affected past service contributions, which now must be made by first transferring unused RRSP room or actual RRSP assets to the IPP.

The change will limit the new funds the corporation/employer can deposit into the IPP. This results in less corporate tax-deductible contributions by the employer. Some see this signalling the demise of IPPs, but these predictions are premature at best.

Realistically, the new past service requirement will only affect IPP candidates closer to retirement who have sizable RRSP balances. Younger IPP candidates with low RRSP balances will not be seriously impacted since they do not have many past years of service with the employer/sponsor. Even for older IPP candidates who have higher RRSP balances and employers that could be impacted by legislative changes, there are benefits.

Benefits of IPPs

For example, the IPP is a secure, creditor-protected defined-benefit pension plan. Given that most DB plans are slowly being replaced by CAP or DC plans, it is a great opportunity for a business owner to have the security of a DB plan like their counterparts in large public or crown corporations.

As an advisor, you can help your clients benefit from planning that addresses risk management and retirement issues. As an example, a client of our firm ran a successful Canadian-controlled private corporation for many years.

The company’s earnings were consistently in excess of the small business limits. The company established Retirement Compensation Arrangements (RCAs) for the shareholder and key employees as part of their long-term comprehensive financial plan.

The 2008 recession caused the collapse of the company’s target market, and it still hasn’t recovered. As a result, the company filed for Companies’ Creditors Arrangement Act (CCAA) protection.

Increasingly, monitors of CCAA proceedings are showing their willingness to attack pre-CCAA transactions that occur between an operating company and holding company.

This puts into question the logic of having supplemental pension arrangements through excess dividends and retained earnings in the HoldCo. Anything in excess of what can be held in the RRSP, IPP and/or RCA can be funded by the OpCo, thus creating a well-diversified retirement plan.

Concept allocation

If asset allocation or product allocation are important in building a financial plan, then “concept allocation,” such as IPPs or RCAs, should be just as important.

Returning to the example, during CCAA protection, regular scheduled payments to both DBPP and RCAs were allowed ahead of payments to creditors, which included secured lenders. You can only achieve that security through pension planning with either an IPP or RCA, or both.

The use of IPPs for successful professionals and small business owners, and the use of RCAs for even more successful business owners, must be considered no matter how much the immediate tax savings are.

As a financial planner, you must always be focused on a long-term strategy for the client, as well as any risks they may expose themselves to. Any changes to IPP legislation or even corporate tax rates should not impact the basic fundamentals of prudent financial planning with the use of an IPP or RCA, or both.