Financial Planning Tips: Good News Regarding Individual Pension Plans
View the video here on your mobile device.
Ian Quigley: Well, it’s been a long time since we’ve been able to podcast some really good news and we have some great news when it comes to those who plan with these Individual Pension Plans. An Individual Pension Plan is a defined benefit pension plan – something that you usually see in large government or unionized operations. It’s one of these defined benefit pension plans offered usually to a senior executive or an owner-manager. The major benefit when you’re doing an IPP is the ability to backdate the IPP, to retroactively implement it and pick up a really large “past service deduction.” In 2011, March 22, 2011 to be exact, the federal government released their budget for the year and they basically decimated the ability for an owner-manager to do these past service implementations. It really was the end of Individual Pension Plans for owner-managers, which was the largest share of the market. Now what was interesting about this release of the budget was that they didn’t have the legislation drafted to support their policy decisions, so it created an information gap. We’ve been sitting for most of 2011 waiting to see how they’re going to actually clarify these changes, which would be very difficult to do and incredibly unjust to certain taxpayers. We’ve been waiting all year for the codification and now it’s been released.
And here’s why we call the podcast IPPs resurrected – we went from a position where CRA was telling us they were more or less shutting down the ability to do past service on IPPs for owner-managers to a codification or a position that really isn’t going to affect many Canadians at all. What they’ve done is they’ve left the old rules in place so when you set up an IPP for an owner-manager, you still calculate a certain amount of RSP money that has to be transferred into the plan. This is called the “Qualifying Transfer.” Those Qualifying Transfers remain as is. The only thing that’s now being added to the legislation is the Qualifying Transfer or the deduction that’s created for the Qualifying Transfer is tested based on how much RSP money that annuitant had. If that annuitant has RSP balances that are in excess of about $700,000 then they’re going to actually reduce the deduction available for past service. This is just an interesting was for the feds to sort of protect themselves politically – that somebody who’s done very well with their RSP couldn’t go and set up an IPP and do very well with that as well. As bizarre as that all sounds, that’s the rule of thumb: about $700,000 which very few Canadians have in an RSP in their name, as long as they’re under $700,000 roughly in their name, then they’re going to be able to continue to proceed with an IPP, just as they have for the last decade, and get the large past service deductions. This is great news and certainly news that will stimulate many owner-managers in Canada to have a look at IPPs in 2011 or 2012.
Other titles in this series:
Important changes to RSP contributions
Important changes to Canada Pension Plan
Registered Education Savings Programs
Small business owners Employee Profit Sharing Programs
Small business owners Individual Pension Plans
Ian Quigley is a senior consultant with innovative financial advice firm Qube Consulting . He is an expert in investment, insurance and tax strategies and has developed numerous online courses dealing with these subjects. Find Ian’s courses online at ILScorp. All 12 are included in an Annual Life Subscription or are available for individual purchase. Visit ILScorp’s catalog.
