Fact Sheet - Buying Past Service
Originally posted on Jun 02, 2012
One of the advantages of setting up a new pension plan is that it allows a plan member, with the consent of the employer, to create a pension entitlement for prior years. Such a member might have missed out on years of contributions when the plan was not yet established and can now purchase past service under the newly set up pension plan. These extra contributions are added to the plan and are tax deductible to the corporation.
A concrete example serves to illustrate this principle:
ABC Corporation has been employing Ms. X for 10 years. Ms. X is also a majority shareholder of ABC Corporation, and on the advice of her financial advisor decides to establish a PPP for herself.
The PPP is established effective January 1, 2014. Because Ms. X has been paid salary income from ABC Corporation over the period 2004-‐2014, the newly established PPP can provide her with a pension for these 10 years of past service. The actuary for the PPP will calculate the total cost of funding these 10 additional years of pension (the “Total Buy Back Cost”). The Total Buy Back Cost must be satisfied through 2 sources: a transfer of assets from Ms. X’s personal RRSPs (called the “Qualifying Transfer”) and a corporate contribution for the rest.
The Qualifying Transfer typically represents the lion’s share of the Total Buy Back Cost. It does not generate any tax deductions and is simply a transfer from one registered account (Ms. X’s RRSP) to another (the PPP). However, the corporate contribution to the Total Buy Back Cost is tax-‐deductible to ABC Corporation.
In light of the new tax rules that penalize passive investments within CCPCs, advisors must understand how pension legislation can become a powerful tool to deal with wealth succession, business succession, and tax optimization within a corporate environment.Learn more about the ppp101 course
You can receive more posts like this directly in your inbox by subscribing to our mailing list below.
Join the mailing list
Rest assure we won't send any spam.
Only high qualify posts about the Pension space and updates with regards to INTEGRIS