- An individual pension plan, or IPP, is a defined benefit pension plan sponsored by a corporation for the benefit of one, or a small number of, specific employees — typically the…
- An RRSP's contribution room is calculated using a formula based on your earned income, capped at an annual dollar limit that's indexed each year.
- An IPP's funding is built on your history of T4 employment income from the sponsoring corporation — dividend income doesn't count toward it.
Most incorporated business owners default to an RRSP for retirement savings, because it's familiar and the corporation doesn't need to do anything special to support it. But for owners further along in their careers with solid T4 salary income, an individual pension plan can allow meaningfully more tax-sheltered retirement savings than an RRSP alone, funded by the corporation rather than just personal contributions.
This is a more complex tool than an RRSP, with real trade-offs. Here's the basic tax logic behind why it works, and what it actually requires.
What an Individual Pension Plan Is
An individual pension plan, or IPP, is a defined benefit pension plan sponsored by a corporation for the benefit of one, or a small number of, specific employees — typically the owner-manager, and sometimes a spouse or key employee who is also on the corporation's payroll. Unlike an RRSP, which is a personal savings vehicle you contribute to yourself, an IPP is a formal registered pension plan that the corporation establishes, administers, and funds.
Why It Can Shelter More Than an RRSP
An RRSP's contribution room is calculated using a formula based on your earned income, capped at an annual dollar limit that's indexed each year. An IPP works differently: contributions are calculated actuarially, based on your age, your salary history, and the target pension benefit at retirement. Because defined-benefit funding math favours older plan members closer to retirement — more years of expected pension payments to fund, in less time — the actuarially required contribution for an owner later in their career can exceed what an equivalent RRSP contribution limit would allow. Exactly how much more depends entirely on your age and salary history, and should be calculated by an actuary rather than estimated from a general rule of thumb.
The Salary Requirement: Why T4 Income Matters
An IPP's funding is built on your history of T4 employment income from the sponsoring corporation — dividend income doesn't count toward it. This is one of the most important planning implications: an owner who has taken most of their compensation as dividends rather than salary over the years may have little or no IPP funding room to show for it, regardless of how much the corporation has earned overall. If an IPP is part of your retirement planning, it needs to factor into how you split compensation between salary and dividends well before you're ready to set one up.
Who the Corporation Pays, and Who Deducts What
The corporation, not the individual, makes the required contributions to the IPP, and those contributions are generally a deductible business expense to the corporation, similar to how it deducts salary. The plan member doesn't get a personal tax deduction the way an RRSP contributor does, because the corporation is funding the plan directly rather than the individual contributing after-tax personal savings.
The Trade-Offs: What You Give Up
An IPP isn't simply a bigger RRSP. It comes with ongoing actuarial valuation costs, more restrictive rules about when and how funds can be withdrawn, and, because it's a defined benefit plan, a possible requirement for the corporation to make additional top-up contributions if the plan's investments underperform the assumptions used to fund it. It's also a more complex, less flexible structure to unwind than an RRSP if your circumstances change. These costs and constraints are why an IPP tends to make sense only once the numbers involved are large enough to justify them.
Is an IPP Worth Exploring for You?
An IPP is generally worth a closer look if most of the following apply:
- [ ] You've taken meaningful T4 salary, not just dividends, from your corporation for a number of years
- [ ] You're within a couple of decades of retirement, where the actuarial advantage over an RRSP tends to be more significant
- [ ] Your corporation has stable, ongoing profitability to fund an annual contribution commitment
- [ ] You're comfortable with less liquidity and more administrative complexity than an RRSP
Frequently asked questions
Can I have both an RRSP and an IPP?
Generally, once you're an active member of an IPP, your RRSP contribution room going forward is affected, since you're accumulating retirement savings through a registered pension plan instead. Existing RRSP savings from before the IPP are generally unaffected. Ask your accountant how the transition affects your specific room.
Does my spouse need to be an employee to join the IPP too?
A spouse can potentially be included if they are a genuine employee of the corporation with their own T4 income history that supports IPP funding — they can't simply be added as a plan member without a real employment and salary basis.
What happens to the IPP if I sell my corporation?
This depends on the structure of the sale and the plan's terms. An IPP can sometimes be wound up, transferred, or continued, depending on the circumstances. This is exactly the kind of question to raise with your actuary and lawyer before finalizing a sale.
Is setting up an IPP expensive?
There are set-up and ongoing actuarial valuation costs that an RRSP doesn't have, which is part of why IPPs generally only make financial sense once the tax-sheltering benefit is large enough to outweigh them. An actuary or advisor who specializes in IPPs can quote the specific costs for your situation.
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