All About Estates

Individual Pension Plans Revisited

A fellow blogger wrote very eloquently late last week about succession planning for family owned businesses. Regrettably, as she noted the statistics for the successful transfer of family businesses are not very good. With the introduction of the new tax proposals, the challenge for a successful transfer of business to the next generation has become even greater.

One important aspect of succession planning is for the current owner/operator to be able to monetize the value of his or her business interests for retirement purposes. Despite the governments’ assertions otherwise, many owner/operators have not saved “pots of money” in their businesses. Aside from the value of their business interests, many business owners only have their RRSP’s to turn to for retirement. The government has more than hinted that its tax proposals, some of which have not been fully expressed as yet, will not encourage business owners to “bank” any excess earnings (referred to “passive earnings”) in the future.

I was reminded last week that in the context of the above, an individual pension plan (“IPP”) may be the one of the few tax breaks available to incorporated small business owners (and professionals). An IPP is an individual retirement savings vehicle that works similarly to a defined benefit (or in some cases both defined benefit and defined contribution) pension plan. It is registered with the Canada Revenue Agency. These plans can be made available to family members (and other staff) who work in the company but it is not mandatory. These plans are creditor protected in the event something happens to the business.

These plans are not cheap to set up or operate. There are strict guidelines and formulae to follow and the plan must be certified by an actuary. However, payments made to the plan are deductible to the company, and depending on your age and number of years of service to the company, there is an opportunity to make “past service” contributions and supplemental contributions to support the pension payout goals of the plan, all deductible to the business.

I must admit that the IPP was always in my “quiver” for succession and retirement planning but never at the top of the list. I suspect it will be become so once the government tax proposals are implemented.

Happy Reading

About Steven Frye

CW LLP is a firm of professional advisors providing a comprehensive suite of services to a diverse client base. Our experienced and skilled team can provide personal and corporate solutions to maximize growth potential, wealth and value.

Email: sfrye@cwcagroup.com

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