Yes the CRA relief applies equally to PPPs since we also use the ‘money purchase’ rules under the Income Tax Act. However, it is not the end of the story. If the plan is governed under Ontario as well, we need to obtain the same relief from FSRA. I don’t think Ontario has issued guidance on whether they would allow contributions to lapse.
No. But to pay no tax on wind up of the PPP, you can purchase a ‘copy cat’ annuity pursuant to Income Tax Act section 147.4. In that case, the LIRA/LIF tax hit does not take place because it is not governed by Income Tax Regulations 8517.
There is a "Maximum Transfer Value"of pension assets that can transfer to a LIRA/LIF on a tax deferred basis. Please see the table on the last page of the Illustration for examples of the amount that would be taxable at different ages.
Yes, no more annual current service cost contributions are permittedafter the pension is turned on. However, as discussed above, to ensure that the plan remains fully funded, ‘special payments’ could be required by the company on a ‘go forward ‘…these come from the corp, not the employee.
Significant shareholders can reduce accrued benefits at retirement under section 48 of the regulations, thereby creating surplus and extending the life of the pension assets. But as discussed above, there is no need to do this.
Option “A” on the last page of the illustration is misleading in the sense that it presents a sinking fund analysis where assets are growing at 5% and a full pension, indexed to inflation with terminal funding, is paid out. In reality, the PPP would have a corporate sponsor all along, which means that deficits created by the payment of benefits and market downturns and fees, would require the company to make additional “special payments” to keep the plan fully funded. Therefore, the money does not run out at 85 because the company backstops the promise. If the company ceases to exist, or runs out of money, then we are forced by pension legislation to wind up the plan, and either: “B” purchase an annuity from a life insurance company that will guarantee pension payments as long as the client is alive (guarantees can also be purchased), or “C” transferred to a LIRA/LIF in which case INTEGRIS and the PPP is out of the equation. How quickly someone depletes the funds in a LIF will depend on the minimum and maximum LIF payments selected by the client etc.
The life-only optional form of pension is payable as a lifetime pension guaranteed for 15 years. If you have a spouse, the form will be a joint and survivor pension guaranteed for 5 years reducing to 66 2/3% upon your death unless the spouse waives this entitlement. This pension is indexed in accordance with the Consumer Price Index (CPI) minus 1% unless we purchase full indexing under the Terminal Funding rules. The word “guaranteed” can be misleading to the uninitiated because it connotes a loss once the guarantee runs out. While this would be the case with a large pension plan with many plan members (Teachers’, OMERS, GM, HOOPP, Ford etc…) in our context there is no loss of pension dollars because a death after the guarantee period expires simply means that the left over pension fund dollars are now “surplus”. Surplus belongs to the company and the company can pay it out to the survivors… so there is never any loss with a PPP.
All annual contributions to the DB or DC account typically come from the corporation and can be set up monthly. We do have the option of asking the employee to contribute as well, which makes those contributions tax deductible in the hands of the employee instead of the corporation. None of our clients use this option at the current time (not really tax effective because the client can’t spend the salary being redirected to the pension plan and is simply differing taxes at a higher rate).
Advisors often think that if they cannot assemble all of the historical salaries of their clients they cannot establish a pension plan. This is incorrect, since nothing obliges a company to recognize past service at the time of plan establishment. This can always be done at any point in time in the future.
Advisors who want their clients to at least get a corporate tax deduction for current service cost/annual contributions, should consider getting the plan registered as soon as possible without recognizing past service initially.
Yes. You can convert the IPP into a PPP® and gain the advantages of having a PPP®. It is an easy process which involves filing an amendment with the regulators and completing a few documents. If you are interested, please contact us and we can provide you with one of our publications that describes the steps in more detail.
There are several. From a tax benefit perspective, having available years of service (where T4 income is paid in prior years while not in a pension plan) provides the PPP member with an extra tax benefit (through his/her company) since the total cost to buy back this past service is only partially satisfied through a qualifying transfer of RRSP monies. The other portion of funding the past service buyback is through employer contribution. This contribution by the employer is tax-deductible. Additional tax benefits include: deductions for fees, deductions for paying interest on borrowings to make contributions to the pension plan, special payments, terminal funding and the GST/HST administrator rebate.
Yes. Companies that are considered Personal Service Businesses can set up a PPP and claim corporate tax deductions.
There is increased funding each year because under a defined benefit plan, the promised pension must be funded by streams of invested pension assets made along the way. A contribution made at age 64 only has 1 year to grow, whereas funds deposited when a member is age 20, have 45 years of compounding and can therefore be less than those made in later years.
To ensure that a balance is kept between funds required and time invested, the values in prescribed actuarial tables assume an increase in contributions each year.
No, all administration and investment management fees of the PPP are tax-deductible to the employer.
While the price of funding a buy back in the INTEGRIS PPP is settled in cash by the plan sponsor, the RRSP component (the qualifying transfer) can be settled in-kind. The company portion of the buy back cost is settled in cash.
If a defined benefit plan has assets representing 125% of liabilities promised under the plan, it is said to be in excess surplus. No other contributions can be made to the pension plan after that stage is reached until the assets fall below the 125% level. The penalty for contributing to a plan that is in excess surplus is extreme: the plan becomes revocable. If a registered pension plan is revoked, the assets in it become fully taxable.
There are 2 key instances where a PPP would not be suitable for a prospect:
Yes. Corporation XYZ sponsoring the PPP can assign the responsibility and assets of the PPP to Corporation ABC. This is done via an Assignment and Assumption Agreement entered into between the two corporations.
There is no need to wind up the PPP and suffer the adverse tax consequences of transferring to a locked in account. There is also no need for regulatory approval for such an assignment. A plan amendment is needed to reflect the new corporate sponsor.
The corporate sponsor of the PPP can reduce its cash contributions to the PPP in three ways:
(a) the member elects to go to the Defined Contribution component of the plan on January 1st and the company only makes the mandatory 1% employer contribution (and continues to fund special payments over 5 years);
(b) if investment returns increase, a new actuarial valuation report showing that the underfunding has disappeared can be filed, thereby eliminating the special payments;
(c) for significant shareholders in Ontario, a joint declaration can be filed under Pension Benefit Regulation 48 with the Superintendent to amend the plan and reduce the accrued benefits down to the level of funding available, thereby completely eliminating the underfunding.
If the client wants this to occur, he or she must ensure that the spouse waives the entitlement to the survivor pension prior to pension commencement.
Moreover, when retirement begins, a 15 year guarantee period must be selected, and the family trust designated as the beneficiary under the guarantee period.
If death occurs after the 15-year period, the will of the individual should specify that the assets of the corporate sponsor of the PPP belong to the family trust, if that isn’t already the case.
In almost every case, an upgrade is beneficial from an economic point of view because, while a PPP requires that additional fees be paid to maintain the plan in operation, it is important to remember that the more generous tax deductions available under tax laws not only eliminate these fees, but provide an actual increase to the client’s overall net worth depending on the circumstances.
For example, if a client were to purchase past service and the additional tax-deductible contribution required of the company was $200,000 and the company paid corporate tax at 15.5%, the tax refund of $31,000 (new funds otherwise unavailable to the client) would be enough to pay all of INTEGRIS’ fees for 17 years. Moreover, the additional tax deductions and credits offered under a PPP, would add (rather than subtract) value to the client above and beyond what is possible under a RRSP. To this, one must also take into consideration that the client will have substantially more registered assets available at retirement.
The first $2,000 of pension income received is eligible for the pension credit (reducing the taxes otherwise payable). Moreover, spouses can use the pension income splitting rules to allocate up to 50% of the pension income to a spouse who is not in receipt of a pension, thereby potentially moving the PPP member’s tax bracket to a lower bracket and reducing the couple’s overall taxes in the process. When pension income splitting is used, the first $4,000 of pension income can be claimed as a ‘pension amount’ credit to further reduce individual taxes.
Contributions made within 120 days of the corporate year-end are deductible in the immediately preceding corporate year. For example, if corporate year-end is October 31, 2014, then 120 days after is Feb 28. Therefore contributions must be made no later than Feb 28 for them to be deductible in 2014. However, while a PPP may be established after the corporate year-end, it must be submitted for registration before the calendar year end.
To ensure a contribution is deductible within a fiscal year for a new PPP, it is recommended that the plan be implemented (i.e. submission of application made to Canada Revenue Agency) prior to the end of the fiscal year. Despite the fact that a Company has 120 days after the fiscal year-end to make the contribution and have it deducted, a PPP should be implemented before the fiscal year-end to avoid situation where Canada Revenue Agency denies the deduction by arguing that the PPP was not in effect within the fiscal year.
Yes, pension plans can hold direct holdings of real estate (act as the landlord) or shares of real estate holding corporations that in turn, are the landlord of the property. The holding companies are tax-exempt because the shareholder is a registered pension plan (ie. The INTEGRIS PPP).
Terminal funding is a one-time tax-deductible funding opportunity to enhance the pension plan's basic pension with ancillary benefits. This is an additional amount that the corporation can contribute at the time you retire or terminate the PPP.
Yes, if you choose to delay your retirement to age 71, your professional corporation must continue to make contributions. The pension payable will be higher than had you retired at the normal retirement age of 65.
Yes, if the corporation has the cash to upgrade benefits (indexing or early unreduced pension or CPP Bridge) then a further deduction can be claimed at that time to ‘purchase’ these indexing benefits. This process is called “terminal funding”.
No, the CRA does not receive PPP assets. If both the member and the spouse die (say a car crash after the celebratory retirement party), and no guarantee period was selected at the time of pension commencement, then the plan is said to be in surplus. The plan has discharged its liabilities so there are no other uses for the money except as provided by the terms of the plan. The surplus can be paid back to the sponsor company, or distributed as the company sees fit.
The terms of the plan state that surplus belongs to the corporate sponsor of the plan. Since it belongs to the sponsor of the plan (the company), the owners of the company can pay it back to the company and flow it through dividends to the shareholders. That said, when the plan is first established, it is possible for surplus to be made payable to the plan member.
CRA allows retirement income to commence as early as age 55 and the latest December 31st, in the year the member turns 71.
The company or Professional Corporation sponsors the plan. The trustees hold the assets on behalf of the members and their beneficiaries. No one truly ‘owns’ the pension plan, since it is a bundle of liabilities/promises and corresponding assets.
Your RRSP room will be adjusted once you set up your pension plan. This adjustment is called a Pension Adjustment (PA).
In a PPP, no more than 10% of the portfolio can be held in any one stock. Moreover, a pension plan cannot hold more than 30% of the voting shares of a particular entity. Also, certain investments are considered “related party transactions” and are prohibited. A pension plan would not be allowed to invest in the shares of the sponsor of the PPP, even if it otherwise met the other tests discussed above.
Under an IPP, pension contributions must normally be made each year unless pensionable service is suspended. The plan sponsor may borrow to fund the plan. Under a conventional defined benefit only IPP, if this is not an option, the plan sponsor can elect to wind up the plan and turn it into a Locked-in Retirement Account (LIRA) or purchase an annuity from the assets of the fund. Under an INTEGRIS defined benefit/defined contribution PPP, the plan sponsor has the option to switch from the defined benefit component to the defined contribution component of the plan where only 1% of the annual salary is the required contribution to the plan. In this way, there is no need to wind up the plan and the plan can continue as it is and until the corporation has the cash flow to maximize plan contributions.
Provincial laws require pension plan assets to be treated in a manner similar to RRSP assets, as matrimonial assets to be divided between the member and spouse. Each province has its own matrimonial property division regime and you should consult an INTEGRIS Pension Officer to discuss your specific circumstances.
If Sam has no RRSP assets (gave everything to his ex-wife), and also has no RRSP room (he might have maximized his RRSP contributions when he was still married), then his ability to buy back past service would be greatly reduced.
His age may allow him to nonetheless exceed the current year RRSP room substantially: at 61, he’d be able to claim an additional tax deduction for $13,817 above the current RRSP limit.
Depending on the number of years he’s eligible to buy back, the fact that he still has some RRSPs available (albeit a fraction of what he had pre-divorce) would still enable his company to also make a tax-deductible contribution.
There are two main sources of cash that can be made to the Additional Voluntary Contribution subaccount:
This would enable you to claim the HST credit and get creditor protection that is not available when the assets are inside an RRSP account.
If your daughter works with you in your business, she could also become a plan member in the PPP that is set up for you and any surplus that could develop in the plan would pass to your daughter without creating any probate issues, upon your death.
There are two situations where you would not suggest a PPP:
Not if the PPP is collapsed in the normal course because the company decides to no longer sponsor it, or for any other business reasons.
e.g. Corporation paid $100,000 into the PPP and takes its 15+% in write-offs; then the PPP is collapsed, is the 15+% in write-offs now payable?
In the example above, once the deduction is taken, it is permanent. There are no other accounting or other equalization that must be taken into consideration.
We don’t encourage 3 connected shareholders to be in a single PPP, rather we encourage the company to sponsor 3 individual PPPs, one for each connected person. In exceptional circumstances, where we agreed to have 3 connected persons join a single PPP, INTEGRIS would look to the company sponsoring the PPP for direction as to what the investment portfolio would look like. It would be up to the company (and their own internal processes, whether based on % of shares owned or some other mechanism) to tell us how the investments are to take place.
Yes, under pension law, each plan member has a right to designate a personal ‘beneficiary’ in instances of death (where the member has no spouse, since a spouse is an automatic beneficiary upon a member’s death (unless a written waiver has been used to waive away this statutory right)). There is therefore no cross-subsidization of wealth across the estates of connected members in a single PPP. This is a moot point when each member has his or her own PPP.
Yes. The Ministry of Finance has released a technical bulletin setting out the principles under which it would find that an existing hybrid pension plan would be considered a "Comparable Plan" and thus, exempt from the scope of the Ontario Retirement Pension Plan ("ORPP").
Because the defined benefit component of the PPP has an accrual rate that is 4 times higher than the minimum required for ORPP exemption purposes, the PPP qualifies as a "comparable plan".
Technical information on this can be found on the website of the Ontario Ministry of Finance: http://www.fin.gov.on.ca/en/pension/orpp/bulletin-100815.html
Yes, the strategy is to use the DC model to beat the RRSP limits ($440 more this year), but more importantly to allow the corporation to tax-deduct all of the investment and administration fees from corporate income tax at the same time. If the RRSP holder used to pay $10,000 a year in fees, none of those were tax-deductible. With the DC plan, the RRSPs can be rolled into the AVC subaccount, and the $10,000 now becomes a new tax deduction to the company. This has two impacts: at 15.5% corporate tax rate, this creates a $1,500 tax refund (fresh new money in the pocket), and it means that at the end of the year, there are $10,000 (+ interest) more money compounding in a tax-deferred account than in the case of the RRSP (since those funds were withdrawn at source).
Imagine a business owner with $500,000 in RRSPs and paying a Management Expense Ratio of 2%. This person is paying $10,000 a year in fees, and because it is an RRSP, he/she is not allowed to claim any deductions (see paragraph 18(1)(u) of the Income Tax Act (Canada)).
This same business owner sets up a (modest DC-only) PPP. The owner decides to roll all of the $500,000 in RRSPs into the Additional Voluntary Contribution subaccount found inside of the PPP. Under paragraph 18(1)(a) of the Income Tax Act, the corporate sponsor of the PPP can now claim a tax deduction of $10,000 from its corporate income tax, in addition to whatever it contributes to the PPP on behalf of the business owner. With a $1 M account, the deductions could reach $20,000. This is why we call them 'large'.
Yes, all contributions rolled into the AVC from RRSPs, or any voluntary employee contributions are exempt from “locking-in”. They can be withdrawn prior to retirement (unlike regular pension contributions) of the PPP. This requires a plan amendment to eliminate the AVC subaccount.
The defined benefit under the plan is calculated based on a formula set out in the plan. It is 2% of the average of the highest 3 consecutive years of indexed salary paid by the company multiplied by the member's years of service. The member's defined benefit is subject to a maximum pension amount set by the Canada Revenue Agency.
To be eligible for a PPP under which a person accrues a pension, that person must be in receipt of T4 income. A person who is paid dividends, is not eligible to have a PPP.
The INTEGRIS PPP has been pre-approved by the Canada Revenue Agency.
The buyback of past years of service for a PPP member is calculated from the date of incorporation of the company sponsoring the PPP for years during which the member was not a member of a pension plan. The cost to buyback service for a year is based on the annual income earned by the member for that year.
The variables used by the actuary to calculate the total cost of the buyback are as follows:
The tax-deductible contributions that can be made to an individual pension plan (or under the defined benefit component of a Personal Pension Plan) depend, in part, on whether the pension plan is considered a “designated plan” or not.
It will be considered a “designated plan” when most of the plan members are classified as “specified individuals”.
To be considered a “specified individual” one usually falls under one of two categories:
So long as the PPP member who has opted for the DC component of the Plan for a number of years maintained T4 income throughout, he can do a plan conversion prior to retirement turning the DC years into DB years, and then doing the past service buy back. If the member opted for DC because there was no money around and he didn’t want to wind up his PPP, then you are correct that by selecting a lower salary while under the DC rules, there would be less financial gains to convert to DB. There is still some advantage, but it isn’t as pronounced.
Note that terminal funding creates a new tax deduction for the company at retirement that doesn’t exist in the money purchase provision, even if the lifetime retirement benefits are lower than what is possible to get.
The CRA T3P slip is prepared by INTEGRIS
Yes, a PPP can be transferred to another firm provided that the recipient firm agrees to and has the system, processes and mechanisms in place to administer the PPP. If they want to take their PPP elsewhere, they can.
The death benefits arising under the PPP is administered in accordance with the terms of the plan and in accordance with the death benefit provisions under applicable legislation. Death Benefits are generally paid to spouses, beneficiaries and estates.
In Canada, there are about 1.2 Million Canadians who could avail themselves of the PPP and only 15,000 IPPs registered with the Canada Revenue Agency.
The INTEGRIS PPP Plan design offers three subaccounts under one plan registration: DB (IPP), DC and AVC. Member gets to pick each year which subaccount to save under. DB allows for maximum tax deductions (since it operates exactly like an IPP). The flexibility comes in being able to elect to move to DC where the contribution is set at 1% of T4 income. Additional and voluntary employee contributions are also allowed (0% to 17% of T4 income) and are deposited into the AVC subaccount.
Normally, yes… however, please note that the full RRSP contribution amount may not be available in that year if you are considered a connected person. Click here for more details.
 Someone who owns 10% or more of any class of shares of the employer corporation that sponsors the Personal Pension Plan.
There are three components to the costs: the INTEGRIS fee, the investment management fee and if you have selected a trust company to hold your assets, the trustee fee. When combined, INTEGRIS clients pay less than holders of equity mutual fund. Moreover, our clients do not pay any hidden trailers, commissions to sales people nor deferred sales charges common to mutual funds RRSPs. The INTEGRIS fee covers all set-up, actuarial valuation and administration costs.
Yes. If you haven't incorporated, INTEGRIS can provide you with a corporation for $400.
From as low as 1% of salary paid by your professional corporation, all the way up to about 30% of salary (depending on your age).
Depending on your preference: pooled funds, mutual funds, GICs, shares and bonds are available.
Pension legislation is complex and cumbersome. Financial institutions prefer to act as service providers for a fee and leave the administrative burden with the client. We fill a niche in the market for busy professionals who want the tax advantages of a pension plan without the administrative obligations.