An IPP is a one-person maximum Defined Benefit Pension Plan (DB Plan) which allows the plan member to accrue retirement income on a tax-deferred basis. As such, an IPP must conform to the Income Tax Act (ITA) and its regulations (ITR) as well as the requirements of the Canada Revenue Agency (CRA) with respect to defined benefit pension plans.
DB Plan contributions must be calculated by an Actuary based on the benefit formula, the member’s age and T4 earnings history, and a set of actuarial assumptions. Because the IPP only provides benefits to Specified Individuals, the IPP is termed a Designated Plan. While a Designated Plan, the IPP is subject to maximum funding restrictions. Maximum funding restrictions require the actuary to use ITR-mandated actuarial assumptions. When the IPP is no longer a Designated Plan, the actuary may use his discretion to determine appropriate actuarial assumptions.
The plan sponsor is the corporation employing the member and paying the member’s T4 income. IPP contributions are essentially a portion of the member’s T4 income transferred via the corporation to the plan funding vehicle.
IMPORTANT: An IPP may have more than 1 plan sponsor, provided each plan sponsor pays (or has paid) T4 income to the member. Actuarial reports will pro-rate the member’s actuarial liability during a calendar year based upon T4 income from that plan sponsor divided by T4 income from all plan sponsors. Note that fees increase when the IPP has more than 1 plan sponsor.
Robin Muir, CFP®, CLU®, CH.F.C.