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Individual Pension Plans – Proposed Changes

An Individual Pension Plan (IPP) is a defined benefit Registered Pension Plan set up for as few as one employee, usually owners and/or managers of a business. It allows for deductible contributions and withdrawal mechanisms that can be structured to provide what has been perceived as an unfair advantage over other retirement savings plans. For that reason, the March 22, 2011 budget, recently reintroduced on June 6, has made two significant changes to reduce these benefits, as explained below.

The current rules for IPPs allow the commuted value of a pension to be transferred into an IPP. The result is often a large pension surplus that does not require withdrawals, and that provides a tax deferral that is not available to contributors to other retirement savings plans. The 2011 Federal Budget proposes, therefore, to mandate minimum withdrawals from IPPS, similar to the rules for RRIFs. This will apply beginning in 2012.

Contributions and transfers into any retirement plan will have an effect on RRSP contribution room. Cash contributions are deductible, while transfers from other registered plans are not. Currently, an employee who switches from RRSP savings to RPP savings later in his or her working career, and who is able to have past service recognized under an IPP, is able to fund a far greater amount of past service in an IPP than the reduction in RRSP contribution room and assets required under existing rules. This ability to contribute to an IPP in respect of past service can provide a significant tax advantage.

The 2011 budget proposes that contributions made to an IPP that relate to past years of employment will have to come from all existing RRSP assets and by reducing the RRSP contribution room, before new deductible contributions (i.e. cash) in relation to the past service may be made. This will certainly reduce the tax deduction for past service funding for business owners who have accumulated large RRSPs. This measure is in effect as of March 22, 2011.


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