Frequently Asked Questions
1. Who determines when the member can collect?
CRA allows retirement income to commence as early as age 50
2. What are the maximum allowable benefits available to the member?
Pension discrimination occurs at 2005 earning levels of $100,000. If the member earns over this amount, CRA does not permit the excess to be factored into the calculations of the benefits and contributions.
3. Who owns the pension plan?
The company or Professional Corporation sponsors the plan. The trustees hold the assets on behalf of the members and their beneficiaries.
4. What if the plan does not earn a 7.5% rate of return?
Every three years there is a valuation completed by the actuary. This analysis of the plan will indicate its funded status. In the event a 7.5% per annum compound rate of return was not earned by the assets of the fund, the sponsoring company must make additional tax-deductible contributions to bring the fund back on track. This is not a penalty
It is simply to ensure that the pension plan is properly funded. In fact, this gives a distinct advantage over defined contribution pension plans and RRSPs. These contributions can be amortized over a period, generally, of up to 5 years.
If the fund earns more than 7.5%, the surplus can be retained in the pension plan to grow or be used to create contribution holidays.
5. What happens to my RRSP room?
Your RRSP room will be adjusted once you set up a pension plan. This adjustment is called a Pension Adjustment or (PA).
6. Can the plan be indexed to cost of living increases?
A lump sum additional contribution can be made at the time of retirement to increase the indexation of the pension by an additional 1% per annum compound over that previously assumed by the actuary.
7. What are the restrictions on investments held in an IPP; are they the same as RRSPs?
In an IPP, no more than 10% of the portfolio can be held in any one stock. The same foreign content rule of 30% applies as in the case of RRSPs. With respect to mortgages, the maximum overall holdings are 25% of book value with no more than 5% invested in any single mortgage.
8. What happens if the sponsoring company cannot afford to make the minimum annual contributions to the IPP?
Pension contributions must normally be made each year unless pensionable service is suspended. The plan sponsor may borrow to fund the plan. 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.
9. What happens to the IPP in the event of a marital breakdown?
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.
10. What is past service?
CRA allows pension plans registered today to capture past service as if the member was in the pension plan as far back as January 1, 1991. Past service can only be captured for service when the company was incorporated and the member was an employee receiving income from that incorporated company.
In addition, the member will be required to rollover a specified portion of RRSP assets. The plan sponsor will be permitted to make past service contributions to the IPP in addition to current service contributions
11. Why combine multiple family members working in the same business into one IPP?
A single plan works best with family members such as parents and children. The member has the ability to "succession plan" where family members are working in the business.
Where siblings own a business it is advisable to establish multiple plans.
12. What is "projected additional funding" that the plan sponsor can make upon retirement, if any?
Upon retirement, plan sponsors are permitted to make a tax-deductible lump sum payment into the pension plan. This amount is calculated by the actuary to create the additional benefits available at retirement which would include unreduced early retirement benefits, bridging benefits (replacement for OAS and CPP to age 65) and full CPI indexing.
13. How do you calculate a Pension Adjustment (PA)?
Membership in a pension plan reduces the member's RRSP contribution room as determined by CRA. Once an individual enrolls in a pension plan a PA is used to calculate their remaining RRSP contribution room, if any by using the formula:
9 x annual benefit entitlement) - 600 = PA
14. Why the need for incorporation?
CRA regulations for Individual Pension Plans require a corporate plan sponsor. Professionals may create a Professional Corporation (PC) to act as plan sponsor however past service benefits do not apply prior to the establishment of the PC.
15. Who administers the Individual Pension Plan (IPP)?
The pension plan will be registered and administered by G.M. Baxter & Associates ltd.
16. Who is responsible for the investment of the IPP assets?
The investments are the responsibility of the member (who is generally appointed Investment Manager) who in turn arranges for his financial advisor to place the plan assets into suitable investments.
Reprinted with permission from Gordon B. Lang
President & Chief Executive Officer
Gordon B. Lang & Associates Inc.
http://www.gblinc.ca/