expertise we offer
Understanding The Personal Pension Plan
It is a Canadian tax-savings solution for business owners and incorporated professionals looking for a better way of saving for their retirement. As compared to an RRSP, the pension solution allows up to 60% greater tax-deferred compounding until the individual retires.
Shelter More Income
The ability to build a larger retirement nest-egg by increased contribution levels on an annual basis.
Safety of Your Assets
Your savings within a pension plan are protected from the claims of trade creditors and furthermore, we offer tax-exempt roll-over of existing RRSP assets which will provide further protection of all registered assets.
Tax Deduction of Fees
The ability to deduct all investment, actuarial, administration and trustee fees related to your account from corporate income.
Mitigating Market Losses
The Pension Plan allows the sponsor to make additional tax-deductible contributions each year to top up your account if investments return less than 7.5% to ensure full funding of your pension plan.
Contribution Flexibility
We offer a combination plan that allows you to switch between Defined Benefit and Defined Contribution components to allow for changes in the economic climate of the business.
Greater Scope for Investments
INTEGRIS provides the flexibility to invest in a wide range of non-traditional investment vehicles that are otherwise not available inside of an RRSP.
How much more can be saved in a PPP?
This table show permissible contributions by age in the Personal Pension Plan (where salary is $151,278 or more):
Who is INTEGRIS Pension Management?
INTEGRIS Pension Management Corp. is a private Canadian based company that offers peace of mind by providing access to highly experienced actuaries, pension and compliance officers. We have built strong strategic alliances with some of Canada’s highly regulated and well-capitalized companies to offer you the best-in-class service providers.
Key Advantages Of the Personal Pension Plan:
Ability to pass wealth to the next generation without triggering taxes
Funding flexibility
Higher annual taxes deductible contributions than RRSP
Ability to Top Up contributions tax effectively in poor markets
Assets are invested by existing financial advisors (not INTEGRIS)
Highest level of creditor protection in Canada
Fiduciary oversight (Pension Committee)
Ability to invest in RRSP eligible asset classes
All fees are tax-deductible
Actuarial services provided by IA financial group. Plan Administration provided by Integris Pension Management corporation.
Copyright ⓒ 2018/2019 All rights reserved.
What is the difference between an Individual Pension Plan (IPP) and an INTEGRIS Personal Pension Plan (PPP)?
Thank you for your interest in the Personal Pension Plan. You were asking us to clarify how the INTEGRIS Personal Pension Plan differs from the Individual Pension Plan (or IPP).
We can subdivide the answer to your question across a number of dimensions:
Structure
Flexibility
Tax optimization
Fiduciary oversight
Structure
It is important to recall that the term “Personal Pension Plan” is not a defined term under the Income Tax Act (Canada), but rather is a common law trade-mark used by INTEGRIS Pension Management Corp. to refer to our core product. From a pure legal point of view the PPP has the following characteristics:
- It is a registered pension plan (or RPP) governed by Income Tax Act (Canada) section 147.1
- It is considered a combination RPP because it offers both a Defined Benefit component (everything that a conventional IPP offers) and a money purchase or Defined Contribution account. It also contains an “Additional Voluntary Contribution” account (or AVC account)
- For registration purposes, our PPP is considered an individual pension plan by CRA
- It is also a designated plan, and as such, must comply with the maximum funding valuation rules as prescribed under Income Tax Regulation 8515
- Since most of our clients are ‘connected persons’, a number of additional legal rules further round out the regulatory structure surrounding the plan
Moreover, individuals have the right to elect to flip between the DB and DC/AVC sides of the PPP each year without filing a plan amendment. This allows the member to control how much gets contributed each year without losing any potential tax-deferral savings room. When the DB component is not in use, the DC rules are as follows: Mandatory employer contribution = 1% of T4 income. Voluntary member contributions = between 0% and 17% of T4 income. Existing RRSPs can also be rolled into the AVC account on a tax-deferred basis with a CRA Form T2033. [This creditor protects these assets, allows the IMFs to be tax-deductible to the corporation and allows these assets to be deployed in non-RRSP eligible asset classes].
By contrast, in order to reduce or eliminate current service cost contributions in a conventional IPP, one would have to either freeze accruals, or opt for T4 compensation of $0.00, thereby temporarily fixing the contribution issue but permanently removing the year of credited service. Our flexible plan architecture allows for seamless and cost-free movement between the two main ways to accrue benefits under an RPP.
Furthermore, if an individual decides to dial down contributions to the DC side of the plan [recall that our plan only requires a mere 1% of T4 income from the employer] for a number of years, it is always possible at a later date, once the company has a lot more disposable income, to do a plan amendment and convert the DC years into DB years, and thus provide the corporation with an ability to do a retroactive purchase of past service.
Tax Optimization
Perhaps the most innovative aspect of the PPP is its ability to further increase the overall tax-deductible contributions an individual is legally allowed to make to a tax-deferred savings vehicle under the ITA. This stems from the fact that from age 18 to 40, an individual using the DC component of the PPP can contribute substantially more pre-tax income to a PPP than by using an IPP.
If an RRSP is used instead [because the savings limit between DC and RRSP plans is quite minor], the individual in question who waits until age 40 to set up an IPP then foregoes these additional tax deductions:
- RRSP double dip contribution (RRSPs are based on previous year earned income) + PPP DC amounts
- Tax deductibility of all of the investment management fees of the assets
- Input tax credits on HST, or with trust plans, access to the 33% HST Pension Entity Rebate Program
- Tax deductibility of any interest paid to a corporate lender for PPP contributions
Also, should an IPP end up being ‘overfunded’ and considered by the CRA to be in “excess surplus”, with the addition of another year of credited service, a Pension Adjustment would be created, and this would reduce the member’s personal RRSP contribution room to a mere $600 (the PA Offset amount).
By contrast, in such a situation, the PPP allows the member to switch to the DC and AVC components of the plan. Because another year of credited service is not added to the Defined Benefit component of the plan, there is no pension adjustment. This allows the PPP member to contribute up to 17% of T4 income (capped by the money purchase limit) to the Additional Voluntary Contribution component of the plan. This generates a personal tax deduction, reported in Box 20 of the T4 slip, and deductible against the high marginal tax brackets facing the member.
Recent actuarial modelling undertaken shows that for a 30 year old individual earning 6% (whether an IPP or PPP is set up at that age) and wishing to retire at 65, the cumulative additional assets of the PPP will exceed the IPP by approximately $790,000. This assumes the exact same level of market risk being borne by the member. It makes the PPP the most tax-effective retirement savings vehicle permitted by the rules under the Income Tax Actand its regulations in Canada.
Fiduciary Oversight
All PPPs are currently administered by INTEGRIS, who acts as the pension committee of the PPP, and as such acquires a fiduciary duty of care in connection to its plan members. This fiduciary duty of care is anchored in the provincial pension legislation and the law of agency. While INTEGRIS could also act as a fiduciary of an IPP, to date few remain in IPPs in view of the additional value provided by the PPP architecture.
In practical terms, the fiduciary obligations undertaken by INTEGRIS translates into immediate value for PPP clients in the following manner:
- INTEGRIS negotiates economies of scale to reduce actuarial administration costs through group purchasing of services
- INTEGRIS seeks out specialized partners to offer special ‘pensions-only’ value like access to private equity investments that are not RRSP-eligible or access to the HST Pension Entity Rebate
- INTEGRIS supervises the agents of the PPP hired to carry out the actuarial and administrative work related to the plan. This gives immediate power and influence to the clients that they would otherwise not be able to wield when faced with large financial institutions
By contrast, IPP suppliers merely act as service providers and refuse to share the fiduciary burden of plan administration with the corporate clients. Since IPPs are highly individualized, it is often very difficult to achieve economies of scale.
We hope the foregoing provides a useful summary of the key differences between IPPs and PPPs.
Why such a large advantage?
For many who must work long hours to earn income, it seems as though the incredible tax sheltering ability of the PPP is ‘too good to be true’. After all, if assets return the same whether in a PPP or RRSP, how can there be such a substantial pension advantage?
The answer lies with the Income Tax Act and the way pension plans are given the right to contribute more money towards retirement than RRSPs. Under pension rules, as a doctor gets older, the law requires the professional corporation to contribute more tax-deductible amounts to counter the fact that the sums invested will not have as many years to compound.
Professional or business owner can have real pension?
The rules allowing owner operators of small companies to have their own pension plans have been codified since 1991, and in Canada, Approximately 15,000 individual pension plan are registered with the Government of Canada.
Now the medical doctors can incorporate, and that the taxation of non-eligible dividends make it tax-efficient to draw some salary, the PPP is the most effective way of withdrawing taxable corporate income in an efficient manner.
Does INTEGRIS manage my money?
No, Lifecare financial planner will manage the investment in the pension plan.
Are there other advantages to being in a PPP besides saving a lot more for retirement?
Yes. Some include additional tax deductions not permitted to RRSP holders.
The Universal Policy Strategy the Personal Pension Plan: Complementary Strategies To Maximize Client Wealth
Background
Financial planners and accountants who are well-versed in the benefits of using an over- funded, corporate-held universal life policy (“U/L”) to provide for retirement income often ask whether the INTEGRIS Personal Pension Plan (“PPP”) is a better way to provide for retirement than the U/L strategy.
This briefing note suggests that the U/L and PPP are not competing strategies but complementary ones. In fact, if structured correctly, a client could have both a U/L and a PPP at the same time.
Refresher on U/L Strategy Characteristics
As a refresher, while there are many variants of the U/L strategy, many include the following features:
- Premiums paid by the corporation with after-tax dollars
- Face value is payable to the corporation on the event of the owner’s death
- Death benefit flows to the Corporate Dividend Account of the corporation
- Premiums not required to pay for the cost of insurance are invested in a tax- deferred account and can be used as collateral to secure a line of credit
- Owner can draw on secured line of credit to live in retirement
Because of the way in which tax rules operate both the PPP and U/L can be adopted by a business owner, with the costs of the U/L partially defrayed by the tax refunds/savings generated by the PPP.
Comparing the U/L with the PPP
Because of the way in which tax rules operate both the PPP and U/L can be adopted by a business owner, with the costs of the U/L partially defrayed by the tax refunds/savings generated by the PPP.| Features | U/L | PPP |
|---|---|---|
|
Sources of funds |
Corporation |
Corporation and especially business owners |
|
Premiums/Contributions tax deductible? |
No |
Yes |
|
Underwriting required? |
Yes |
No |
|
Guaranteed rate of return? |
Possible |
Only if PPP sponsors is willing to make additional tax-deductible special payments |
|
Available in all provinces? |
Yes |
Yes |
|
Time commitment |
Usually minimum 10 years |
No |
|
Funds withdrawn taxable? |
Only if removed from the U/L policy to be paid to business owners |
Yes, but pension income splitting might be available if there is a spouse |
|
Limits on benefits? |
Subject to underwriting limits, or otherwise flexible |
Tax assistant is limited to maximum pension limits |
|
Primary purposes |
1. Pass corporate assets to shareholder beneficiaries without taxation relying on the tax-exempt nature of life insurance
2. Depending on the size of the investment account, provide tax-free retirement income |
1. Create a regular stream of retirement income benefits after leaving the business
2. Where applicable, pass on pension assets to shareholder adult children who work for the family corporation without taxation |
How the Two Strategies Are Synergistic In Nature
The PPP provides a business owner with multiple ways of moving corporate assets from a taxable non-registered environment, into a tax-deferred pension vehicle – the pension fund.
Because contributions to the PPP attract corporate (and sometimes individual) tax deductions, this generates tax savings/refunds in the hands of the corporate entity. The key sources of tax savings/refunds attributable to a PPP are:
- Annual contributions (exceed RRSP limits at all ages)
- Special payments if the rate of return on assets is below 7.5%
- Corporate contribution to purchase years of past service
- Terminal Funding to enhance the basic pension benefit promised under the plan
- Investment management and administration fees
- Interest paid to a lender if corporate borrowing occurs to fund the PPP
- GST/HST pension entity rebate for excise s the PPP
For example, take a business owner in Ontario who is aged 50 and wishes to retire early at age 62. Over the past 30 odd years of work, he has accumulated an RRSP worth $500,000. He has traditionally, over the past 11 years, paid himself $140,000 in salary and /or bonuses. He has $50,000 of carry forward RRSP contribution room as well. By upgrading from the RRSP (current worth $500,000) to a PPP, the business owner’s position would be as follows:
|
$127,344 |
Corporate tax-deduction for contributing to the cost of buying back 11 years of past service. |
|
$586,185 |
Cumulative annual contributions to the PPP (tax deductible) from age 50 until age 62 retirement age. |
|
$480,979 |
Tax deductible terminal funding corporate contribution to purchase ancillary benefits: early unreduced pension, CPP temporary bridge pension from 62 to 65 and indexing of benefits to CPI minus 1%. |
|
$109,100 |
Deductions for investment management fees paid by corporation over 12 years from age 50 to 62, assuming an Investment Management Fee of 1% of Assets under Management inside the PPP. |
|
$1,303,608 |
Total Corporate Deductions available to corporate sponsor of PPP |
|
15% |
Corporate tax rate of corporation on revenues below $500,000 |
|
$195,541 |
Tax Refunds/Savings available to corporation as premiums for U/L strategy. |
By way of illustration, let us assume that this (non-smoker) owner sets up a U/L policy with a face value of $1,000,000 and has an annual premium of $14,040.
Conclusions
The PPP ‘subsidy’ of $195,541 would fund the cost of the U/L policy for the next 13.9 years.
In essence, the owner will have created a $1,000,000 tax-free transfer of wealth from the corporation to the shareholder/beneficiaries, without having to disburse any additional corporate monies for the first 13.9 years since the cost of the U/L is borne by the tax refunds/savings generated by the PPP.
In addition, the PPP upgrade will also mean that his retirement savings will be $486,373 greater than had he remained in his RRSP while contributing the maximum amount each year.
At age 62, the PPP will pay an annual pension of $139,148 until age 65, at which time the annual amount will be $138,170 indexed to inflation minus 1% for the rest of his life.
The U/L will also have an investment account that can be pledged as collateral to obtain a line of credit. These funds will also be available to the business owner. Because the line of credit is not income (but a loan), the monies disbursed under the line of credit are non-taxable.
Thus the blend of taxable pension income ($139,128/annum) and tax-free payments from the secured line of credit, would also reduce the overall tax rate. This is because pension income is subject to pension income splitting and the $4,000 non-refundable pension amount credit, and the non-taxable nature of loans (the withdrawals from the line of credit).
On death, the $1,000,000 face value (minus any indebtedness to the lender if the line of credit was drawn upon) will be paid to the corporation and flow through the Capital Dividend Account of the company. The company can then declare a dividend that does not exceed the death benefit paid to the corporation to the surviving shareholders. That special dividend would typically not trigger any personal taxation because of the Capital Dividend Account.
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