Fact Sheet - Connected persons and tax deductions
Originally posted on Jun 02, 2012
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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:
• The member is a “connected person” or
• The member earns more than 2.5 times the Year’s Maximum Pensionable Earnings (in 2014, the YMPE is $52,500 so the income limit is $131,250.)
A connected person, generally, owns 10% or more of the shares of the company sponsoring the IPP or PPP.
Therefore, someone earning $140,000 and who owns 11% of the shares would be a specified individual under both tests. Someone earning $50,000 and owning 11% would also be a specified individual by virtue of being a connected person. See examples below:
| Share Ownership | Salary | Status |
|---|---|---|
| 9% | 130,000 | Non Specified |
| 11% | 130,000 | Specified |
| 9% | 131,260 | Specified |
| 11% | 70,000 | Specified |
| 15% | 140,000 | Specified |
Ultimately, being a designated plan means that specific funding restrictions and actuarial assumptions must be used in calculating the maximum pension contributions made by the sponsoring company.
Were it not for the application of these maximum funding rules, a company contributing to a pension plan would be allowed to make even larger tax-deductible contributions.
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.
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