In February 2018 the Federal government introduced new rules surrounding the Small Business Deductions (SBD) and how it treats passive income over $50,000. This change caused great concern for many small business owners across Canada, especially those who have always planned to use that income for retirement.
One possible solution is what’s called an Individual Pension Plan (IPP). IPPs aren’t new – they were first introduced in 1991. An IPP is a Canadian retirement savings vehicle. It is a one-person maximum Defined Benefit Pension Plan which allows the plan member to accrue retirement income on a tax-deferred basis.
The key factors for the IPP centre on compensation history and age, not just current salary. So, for those business owners over 60 and looking for ways to fund their retirement, an IPP may work.
It is important to note that RRSP contribution is limited once an IPP is created. The IPP will create a pension adjustment that will reduce or eliminate new RRSP contribution room. The contributions to IPPs are higher than the RRSP contribution limits.
Here are some important facts regarding the IPP:
- The company must be incorporated.
- The company has been owned for 10 or more years.
- The member of the IPP must be least 45 years or older.
- To be an IPP plan member you must be an employee or a shareholder and earn T4 income (salary that is reported on your annual T4 statement).
- The earnings on the T4 are $75,000 or more.
- You don’t belong to any other pension plan.
In the first year of the IPP you may be able to contribute a large tax-deductible lump sum to the account for net “past service” that has accumulated in your business.
If you don’t show $75,000 T4 income, you may still benefit from an IPP. For example, if you make $50,000 T4 income and have been running your business for 25 years, the IPP may be a great retirement solution.
The rules for IPP are similar to those for RRSP – you must start receiving the income from the IPP by the end of the year you turn 71.
It is always important to consult with your Certified Public Account (CPA) about whether an Individual Pension Plan is right for you.
Angela Mercier is an independent financial consultant that does not work for any banks or insurance companies.