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Individual Pension Plan - Frequently Asked Questions

A. IPP Basic Concepts

A1. What is an Individual Pension Plan (IPP)?
A2. Who is the IPP member?
A3. Who is the IPP plan sponsor?
A4. Can a "predecessor employer" sponsor an IPP?
A5. How are eligible IPP contributions calculated?

B. IPP / RRSP Relationships

B1. What is a Registered Retirement Savings Plan (RRSP)?
B2. How are DB Plan benefits related to DC Plan contributions?
B3. How is a Pension Adjustment (PA) calculated?
B4. When can the IPP tax-shelter larger contributions than the maximum RRSP?
B5. How is the IPP Member’s Past Service Pension Adjustment (PSPA) Determined?
B6. What is my RRSP deduction limit if I join an IPP in the current year?
B7. What are eligible periods of IPP Past Service?
B8. How can I determine my current RRSP deduction limit?
B9. What are the advantages and disadvantages of the IPP compared to an RRSP?

C. IPP Funding and Investments

C1. What are the possible IPP funding vehicles?
C2. What are the minimum IPP funding requirements?
C3. What is the frequency of minimum IPP contributions?
C4. What are the investment rules?
C5. What are the minimum T4 earnings necessary to produce the maximum dollar Current Service Contribution?
C6. What is the Contribution In-Kind?

D. IPP Eligibility Process

D1. How do I know if I’m a good candidate for IPP?
D2. If the IPP / RRSP comparison is favourable, what do I do next?
D3. Should I set up an IPP with the commuted value transfer from my previous defined benefit pension plan?

E. IPP Services Package and Fees  

E1. What are Westcoast Actuaries Inc.’s annual fees for an IPP?
E2. What services are included in Westcoast Actuaries Inc. Service Package for Actuarial & Administration Services?

F. IPP Terminal Funding

F1. What is terminal funding?
F2. How does terminal funding work?

G. IPP Payouts  

G1. What are the death benefits?
G2. What are the benefit options?

A1. What is an Individual Pension Plan (IPP)?

An IPP is a one-person maximum Defined Benefit Pension Plan (DB Plan) which allows the plan member to accrue retirement income on a tax-deferred basis. As such, an IPP must conform to the Income Tax Act (ITA) and its regulations (ITR) as well as the requirements of the Canada Revenue Agency (CRA) with respect to defined benefit pension plans. Some of these rules and regulations are:

  • The plan sponsor is an incorporated, active company;
  • The plan member is an employee of the corporation who earns T4 or T4PS income from the corporation;
  • The pension plan document indicates a formula defining the amount of benefit to be earned by the plan member;
  • Plan Investments must follow strict guidelines;
  • Plan sponsor contributions, as certified by an actuary, are deductible from corporate income; and
  • Benefits paid out of the IPP are taxed upon receipt.


A2. Who is the IPP member?

The IPP member is a Connected Person or a Highly-paid Employee (who is a non-Connected Person). The ITR defines these members as Specified Individuals.


A3. Who is the IPP plan sponsor?

The plan sponsor is the corporation employing the member and paying the member's T4 income. IPP contributions are essentially a portion of the member’s T4 income transferred via the corporation to the plan funding vehicle.

IMPORTANT: An IPP may have more than 1 plan sponsor, provided each plan sponsor pays (or has paid) T4 income to the member. Our actuarial reports will pro-rate the member’s actuarial liability during a calendar year based upon T4 income from that plan sponsor divided by T4 income from all plan sponsors. Note that our fees increase when the IPP has more than 1 plan sponsor.


A4. Can a "predecessor employer" sponsor an IPP?

Yes, but only if it meets the following definition in ITR 8500: "predecessor employer" means, in relation to a particular employer, an employer (in this definition referred to as the "vendor") who has sold, assigned or otherwise disposed of all or part of the vendor's business or undertaking or all or part of the assets of the vendor's business or undertaking to the particular employer or to another employer who, at any time after the sale, assignment or other disposition, becomes a predecessor employer in relation to the particular employer, where one or more employees of the vendor have, in conjunction with the sale, assignment or disposition, become employees of the employer acquiring the business, undertaking or assets.


A5. How are eligible IPP contributions calculated?

DB Plan contributions must be calculated by an Actuary based on the benefit formula, the member’s age and T4 earnings history, and a set of actuarial assumptions.

Because the IPP only provides benefits to Specified Individuals, the IPP is termed a Designated Plan. While a Designated Plan, the IPP is subject to maximum funding restrictions.

Maximum funding restrictions require the actuary to use ITR-mandated actuarial assumptions.
When the IPP is no longer a Designated Plan, the actuary may use his discretion to determine appropriate actuarial assumptions.
 

B1. What is a Registered Retirement Savings Plan (RRSP)?

An RRSP is a type of Defined Contribution Pension Plan (DC Plan) which allows the owner to accumulate assets for retirement income on a tax-deferred basis. An RRSP must conform to the ITA, the ITR and CRA requirements. Some of these rules and regulations are:

The owner can contribute up to 18% of previous year’s earned income, up to a specified dollar maximum limit for the year; and
The owner is taxed when receiving benefits out of the RRSP.


B2. How are DB Plan benefits related to DC Plan contributions?
 

The Federal Government has created the magic factor of 9 whereby $9 of contributions is deemed equivalent to $1 of annual pension payable from age 65. This magic factor ‘equalizes’ the tax-assisted savings between DC Plans and DB Plans. This equalization is reported administratively on the plan member’s T4 Slip Box 52 – Pension Adjustment (PA).

IMPORTANT: The magic factor of 9 represents an average over a plan member’s entire working career. Because of the power of compound interest, the ‘true’ relationship is $2 - $3 at younger ages and $13 - $14 at older ages for each $1 of annual pension payable from age 65.


B3. How is a Pension Adjustment (PA) calculated?

The PA reduces the member’s RRSP contribution room in the following calendar year.

DC Plans can provide a maximum tax-sheltered contribution of 18% of earnings up to $22,970 in 2011, $23,820 in 2012, $24,270 in 2013, $24,930 in 2014 and indexed to the increase in the average industrial wage after 2014. The maximum dollar contribution limit for RRSP is always one year behind the maximum dollar contribution limit for DC Plans to allow for the lag in the reduction of RRSP deduction limit resulting from the reporting of the PA.

For a DC Plan, the PA equals the actual contributions made to the member’s credit during a calendar year, up to a dollar maximum.

DB Plans can provide a maximum annual pension equal to 2% of earnings up to a dollar limit of $2,552.22 in 2011, $2,646.67 in 2012 , $2,696.67 in 2013, $2,770.00 in 2014, and indexed to the increase in the average industrial wage after 2014.

For a DB Plan, the PA equals 9 times the member’s pension accrual during a calendar year less $600, up to a dollar maximum.

The IPP provides an annual pension equal to 2% of the member’s Indexed Earnings for each year for Connected Persons subject to the maximum pension limit for DB Plans. The annual pension for a non-connected individual can be based on best 3-year average earnings basis rather than on indexed earnings each year. Our IPP Pension Adjustment Calculator determines the PA for a maximum benefit IPP.


B4. When can the IPP tax-shelter larger contributions than the maximum RRSP?

Because of the magic factor of 9, older plan members can gain an advantage by being in an IPP instead of being in a DC Plan.

To maximize the tax-effectiveness of an IPP, the plan member should be between age 40 and age 71, and have Pensionable Earnings equal to the maximum pension limit divided by 2.0% (e.g., $132,333  for a member retiring in 2012 and $134,834 for a member retiring in 2013, and $138,500 for a member retiring in 2014) or more. For a plan member with these age / earnings characteristics, the IPP will be able to tax-shelter larger contributions than the maximum RRSP contributions from plan inception to retirement age.

IMPORTANT: For a plan member age 40 or older with Pensionable Earnings of less than the maximums shown above, the IPP will provide a proportional contribution advantage over the RRSP. In other words, for members at least age 40, the IPP will generate a Current Service contribution greater than 18% of T4 earnings.


B5. How is the IPP Member’s Past Service Pension Adjustment (PSPA) Determined?

The 2011 federal budget imposes additional conditions in determining the PSPA determined when an IPP is implemented for connected persons.

The new regulations specify that the PSPA (and, therefore, the required qualifying transfer to be made to the IPP on plan implementation) is based on the greater of:

  • The PSPA calculated on the old basis: or
  • The connected person's accumulated RRSPs (also including RRIFs and Money Purchase Pension Plan account balances) prorated over the period from age 18 to current age up to a maximum of 35 years, plus any unused RRSP contribution room. For further information on this additional condition, see our federal budget changes commentary.

Unless the individual has a relatively high RRSP balance, the old basis will still apply. The calculation for a connected member who has sufficient T4 Earnings to accrue benefits at the maximum permissible level for the period January 1, 1991 to December 31, 2013 is as follows:

 Year

Maximum T4 Earnings ($)

Dollar Offset ($) 

Maximum PSPA ($) 

 1991

 69,444

 1,000

 11,500

 1992

 69,444

 1,000

 11,500

 1993

 75,000

 1,000

 12,500

 1994

 80,556

 1,000

 13,500

 1995

138,500

1000

 23,930

 1996

138,500

1000

 23,930

 1997

138,500

 600

 24,330

 1998

138,500

 600

 24,330

 1999

 138,500

 600

 24,330

 2000

 138,500

 600

 24,330

 2001

138,500

 600

 24,330

 2002

 138,500

 600

  24,330

 2003

138,500

 600

24,330

 2004

138,500

 600

24,330

 2005

138,500

 600

24,330

 2006

138,500

 600

24,330

 2007

138,500

 600

24,330

 2008

138,500

 600

24,330

 2009

138,500

 600

24,330

 2010

138,500

 600

24,330

 2011

138,500

 600

24,330

 2012

 138,500

  600 

 24,330

2013

 138,500

600

24,330

The PSPA amounts are not to be used for PA reporting. See our IPP Pension Adjustment Calculator for PA reporting purposes.


B6. What is my RRSP deduction limit if I join an IPP in the current year?

If you are not a Connected Person, your RRSP deduction limit is not impacted for the year you join an IPP.

If you are a Connected Person and your 1990 Pension Adjustment (PA) was $0, your RRSP deduction limit for the year you join an IPP is reduced by a special amount prescribed by ITR 8308(2). This reduction is 18% of your earned income for RRSP purposes for the year 1990, up to a maximum of $11,500.

T1007 Form (Connected Person Information Return) will be filed with CRA. CRA reduces the RRSP deduction limit for the year the Connected Person joins a pension plan by the prescribed amount as calculated in the previous paragraph.

IMPORTANT: If the member has already made full RRSP contributions for the year; the member should use a T3012A (Tax Deduction Waiver On The Refund Of Your Unused RRSP Contributions Made) Form to withdraw the excess on a tax-free basis and claim only the allowable RRSP deduction limit for the calendar year.


B7. What are eligible periods of IPP Past Service?

The granting of Past Service is optional.

Past Service commences at the later of: the member’s date of hire; the Company’s date of incorporation; and January 1, 1991. Past Service ends the day prior to the effective date of the IPP. For example, if the IPP is effective on January 1, 2014 then Past Service could be from January 1, 1991 to December 31, 2013.

IMPORTANT: The entire period of Past Service need not be granted at Plan implementation.

IMPORTANT: The granting of Past Service requires satisfaction of the PSPA through a Qualifying Transfer, certification of a provisional PSPA, or a combination of both.

B8. How can I determine my current RRSP deduction limit?

Go to the CRA website and access their My Account online service or phone the Tax Information Phone Service at 1-800-267-6999.

IMPORTANT: The information CRA has available will only be correct if they know you are a member of an IPP, and if a Pension Adjustment has been entered on your T4 slip for every year that you have been an IPP member.


B9. What are the advantages and disadvantages of the IPP compared to an RRSP?
 


The advantages of the IPP are:

  • Higher contribution amounts;
  • Creditor-proof assets;
  • Flexible benefit settlement options;
  • Higher investment standards -- e.g., maximum of 10% invested in any one company; and
  • Deficits can be made up using pre-tax dollars.

The disadvantages of the IPP are:

  • No access to funds while employed;
  • Locking-in;
  • More legislation, therefore higher expenses; and
  • Excess Surplus may reduce future contributions.


C1. What are the possible IPP funding vehicles?

The two types of IPP funding vehicles are the life insurance deposit administration contract and the pension trust. The pension trust may be either a corporate trustee, or a group of individual trustees (at least 3 individual trustees, all Canadian residents). (For certain jurisdictions, one of the three individual trustees must be independent of the company sponsoring the plan).

Westcoast Actuaries Inc. does not provide investment services. The plan sponsor is responsible for selecting and executing the IPP funding vehicle.


C2. What are the minimum IPP funding requirements?

The Qualifying Transfer should be satisfied within 90 days of the Plan being granted formal registration status by CRA. The Qualifying Transfer can be completed by using Income Tax Form T2033.

Company minimum funding requirements depend on the province in which the IPP is registered.

British Columbia (BC) & Manitoba (MB) provincial pension legislation exempts IPPs from registration and minimum funding requirements. Thus, the Company’s minimum contribution for all IPPs is $0.

The following rules would apply to contributions not made:

If the Company can’t make a contribution in a particular calendar year, then the Company will not have a tax-deductible IPP contribution for that calendar year. If the plan is for a Connected Person or Highly-paid Employee, there is no legal obligation on the part of the Company to make any minimum amount of contribution. The ‘missed’ contribution may be made up and deducted in the following calendar year(s) with interest (by contrast, unused RRSP room is carried forward without interest).

Prince Edward Island (PE) has not yet proclaimed its provincial pension legislation. Thus, the Company’s minimum contribution for all IPPs is $0.

Quebec (QC) provincial pension legislation exempts IPPs for Connected Persons from registration and minimum funding requirements. Thus, the Company’s minimum contribution is $0 for IPPs for Connected Persons.

Other Applicable Jurisdictions Minimum funding requirements apply. The Company must make minimum contributions as specified in the most recent actuarial valuation report. The minimum contribution by the Company each year is generally (please refer to the actual governing pension legislation for exact details on minimum funding) the sum of:

  • the Company's Current Service contribution for the year*; plus
  • the annual amortization payment required to liquidate the unfunded liability* with respect to Past Service (on a going-concern basis) over a period of 15 years; plus
  • the annual amortization payment required to liquidate the solvency deficiency* with respect to Past Service (on an assumed plan termination basis) over a period of 5 years.

IMPORTANT: The maximum employer contributions over the 3-year period covered by the actuarial valuation report equals the unfunded liability plus the current service costs.

As identified in the latest actuarial valuation report.


C3. What is the Frequency of Minimum IPP contributions?

If an IPP is subject to Company minimum funding requirements, the frequency of minimum IPP contributions is as follows:

Jurisdiction  Frequency 
 Federal  Monthly
 British Columbia (1), (2)  Quarterly
 Alberta  Monthly
 Saskatchewan  Monthly
 Manitoba (1), (2)  Quarterly
 Ontario  Monthly
 Quebec (1)  Monthly
 New Brunswick  Quarterly
 Nova Scotia  Monthly
 Prince Edward Island (3)  Monthly
 Newfoundland & Labrador  Quarterly










(1) Exemption from registration for IPPs for Connected Persons
(2) Exemption from registration for IPPs for Highly-Paid Employees
(3) Provincial pension legislation not yet proclaimed in force 

C4. What are the investment rules?

The investment rules for a registered pension plan are outlined in Income Tax Regulation 8502(h) can be found here. It states that: 

The property held in connection with the plan does not include: (i) a prohibited investment under subsection 8514(1); (ii) at any time that the plan is subject to the Pension Benefits Standards Act, 1985 (Canada) or a similar law of a province, an investment that is not permitted at that time under laws as apply to the plan; or (iii) at any time other than a time referred to in subparagraph (ii), an investment that would not be permitted were the plan subject to the Pension Benefits Standards Act, 1985 (Canada).

The permitted investments under Pension Benefits Standards Act, 1985 (Canada) are outlined in Schedule III of the Pension Benefits Standards Regulations, 1985. For provinces where provincial registration of IPP is required, there may be additional requirements imposed by the provincial pension legislation. The key requirements, in brief, are:

IMPORTANT: Investments should follow prudent-man standards with respect to quality and diversification standards in investment of trust funds. Therefore,

  • investments should not be made in the securities of the pension plan sponsor (participating employer) or related corporations;
  • each individual security (e.g., stocks or bonds) must not exceed 10% of the book value of the fund at the time the security is acquired - mutual funds and pooled funds are allowed as they are already diversified;the 10% rule doesn't apply to the securities issued or fully guaranteed by the Government of Canada, the government of a province, or an agency there of. and
  • margin accounts are not allowed - pension legislation stipulates that pension assets must not be assigned, charged, alienated or anticipated and are exempt from execution, seizure or attachment. Thus, pension assets can not be pledged as collateral for loan purposes.


C5. What are the minimum T4 earnings necessary to produce the maximum dollar Current Service Contribution?

For a Connected Person, the Current Service Contribution is a percentage of the member’s T4 earnings. Our actuarial valuation reports show this percentage as well as the maximum dollar Current Service Contribution by calendar year. Dividing the maximum dollar Current Service Contribution by the percentage produces the minimum T4 earnings.

Suppose the actuarial valuation report shows that the contribution percentage is 22.3% and the maximum dollar Current Service Contribution is $30,070. Then the minimum T4 necessary to produce the 2014 maximum dollar Current Service Contribution is $134,843 ($30,070 divided by 22.3%).


C6. What is the Contribution In-Kind?

Pension contributions do not necessarily have to be made in cash; they can be made in kind.  For example, investments can be transferred from the Company's corporate account to the pension account in the amount of the pension plan contribution.  This would potentially save the liquidation costs by the Company and the acquisition costs by the pension fund.  Attention should be paid to the following:

  • The contribution amount is based on the market value of the investments at the time of the transfer;
  • The investments being transferred or made in kind satisfy the investment rules for pension funds; and
  • The investments transferred from the company's corporate account to the pension account would be treated as a deemed disposition. The company's accountant should be consulted to determine the effect of this deemed disposition (vis-à-vis capital gains or losses).

D1. How do I know if I’m a good candidate for an IPP?

If each answer to the following 11 questions is “yes” then an IPP is feasible – otherwise, the IPP is not recommended at this time. The questions are:

  • Does the Employee want a pension from a “Super sized RRSP”?
  • Does the Employer want larger deductions than an RRSP can provide?
  • Do the Employer and Employee want the IPP for the long-term?
  • Is the Employee at least age 40?
  • Does a bona-fide Employer - Employee relationship exist?
  • Does the Employee receive T4 income?
  • If the IPP is subject to provincial pension regulation, is the Employer willing to make regular contributions?
  • Is the Employee willing to follow investment guidelines?
  • Is the Employee willing to have IPP monies locked-in?
  • If the actual experience with respect to the IPP account invesment income and wage inflation differ from the assumed rate resulting in an experience loss,  is the Employer willing to make additional contributions?
  • If the IPP account investment income exceeds the assumed rate resulting in an excess surplus in the plan, is the Employer willing to forgo making contributions?

If all the above answers were “yes” then the next step is to utilize our free IPP On-Line Quoting System©. Enter the Employee’s data (date of birth, gender, province of employment, T4 earnings history, current RRSP market value and current RRSP unused contribution room) to generate a quotation. Each quotation shows an IPP Contribution Summary Report and an IPP/RRSP Comparison. These reports show contributions made, total registered assets accumulated each year to age 71, and estimated pension under both the “With IPP” option and the “Without IPP” option. You will then be able to judge whether the IPP is a better option than an RRSP.


D2. If the IPP / RRSP comparison is favourable, what do I do next?

Download our IPP Implementation Data Sheet. Once Westcoast Actuaries Inc. has received the data, we will prepare all implementation documentation and our invoice for implementation services. Sign the necessary documents and return them along with Westcoast’s implementation fee, and the registration fee for the provincial regulator, if applicable. Westcoast will then file the implementation package with CRA and with the provincial regulator, if necessary. Please refer to the section on IPP Implementation Time Table for expected time lines.


D3. Should I set up an IPP with the commuted value transfer from my previous defined benefit pension plan?

The primary purpose of every registered pension plan must be for the employer (pension plan sponsor) to provide retirement benefits to individuals in respect of their service as employees.

Lately the Registered Plans Directorate has noticed a trend in which individuals near retirement age leave large public or private sector employers and establish their own corporation. An Individual Pension Plan (IPP) is established to recognize the pensionable service the individual accrued under the prior employer pension plan. and to accept the transfer of the full commuted value from the prior plan.

There is a maximum transfer limit under Income Tax Regulation 8517 (click here for details) as to how much can be transferred from a defined benefit pension plan to a money purchase type program such as a locked-in RRSP, Locked-In Retirement Account (LIRA), etc. However, there is no prescribed maximum transfer limit for a transfer between two defined benefit pension plans.

Canada Revenue Agency (CRA) is concerned that some new IPPs are being implemented to accept a transfer from a prior pension plan and to circumvent the maximum transfer limit in the income tax legislation; they do not meet the primary purpose of a registered pension plan. The Registered Plans Directorate of CRA has posted a question and answer on this issue at their website at the following link:

http://www.cra-arc.gc.ca/tx/rgstrd/rpp-rpa/fq-eng.html#q11primary 

The content at that link is reproduced below for your convenience:

There is a new trend where certain Individual Pension Plans are being established primarily to accept a transfer of funds from a prior registered pension plan. What is the CRA's opinion of these plans?

We have noticed a trend in which individuals near normal retirement age leave large employers and establish their own corporation. The individual is hired by the corporation, and the corporation sponsors an IPP for the individual that recognizes the prior service under the public sector pension plan. Once the IPP is established, the full commuted value of the individual's prior pension is transferred to the IPP, as the transfer rules of the Income Tax Act do not limit transfers from one defined benefit plan to another. We are concerned that while some of these IPPs may be acceptable, many will not meet the requirements for registration under the Act.

The primary purpose of every registered pension plan must be to provide retirement benefits to individuals in respect of their service as employees. This requirement is reflected in the Act as a condition of registration. If it is determined that a plan is established for a reason other than this primary purpose, it will not qualify for registration under the Act.

The first issue we have with these arrangements is the legitimacy of the employee/employer relationship. Our concern is that the reason the corporation and the pension plan are being established is to avoid the transfer rules of the Act. If there is not a bona-fide relationship that has the employee rendering legitimate services to the employer, the plan will fail the primary purpose test.

Even if this relationship is established and nominal earnings are received, there may still be an issue with the primary purpose test. The Act only permits a pension plan to base retirement benefits on the earnings received from an employer who participates in the plan. In most cases, the earnings with the new corporation are much lower than what was received with the prior employer, and therefore the benefits under the IPP are significantly lower than the benefits that the individual would have received from the prior plan. This creates a large surplus in the IPP.

When an individual foregoes a substantial retirement benefit by transferring the associated funds to a recently established IPP that provides a much smaller retirement benefit, it can be argued that the primary purpose test is not met. In these cases, we may conclude that the primary purpose of establishing the IPP was to facilitate a transfer of funds from a prior plan that would have been limited by the Act had it been transferred to an RRSP. The conclusion that the primary purpose condition is not met is further supported by the fact that following the transfer, the IPP holds significant surplus assets rather than providing retirement benefits of a level comparable to those that would have been paid from the prior plan. As mentioned earlier, if the primary purpose of a plan is for any reason other than providing retirement benefits with respect to the individual's service as an employee, the plan will fail to qualify for registered status.

If it is apparent at the time of registration that the IPP will not meet the primary purpose test, the CRA will refuse to register the pension plan. Unfortunately, in many cases, it will not be apparent until a year or two later that the primary purpose test was not met. This situation can be more problematic for individuals as they may have already transferred funds into the IPP.

If it is determined that a registered plan does not, and never did, meet the primary purpose test, the plan's registered status can be revoked as of the original effective date. . The consequences to the member could be financially devastating if the CRA was to revoke the registration of the plan upon discovering that the purpose for incorporating a company was simply to establish a pension plan to hold the transferred pension for a specific member. The impact of this action is that all the assets of the plan would become taxable.

It is for this reason that we want to ensure that individuals are made aware of these concerns. We will be asking individuals for evidence of the following:

  • the company was established for a reason other than to establish a pension plan for the purpose of transferring benefits from a prior plan;
  • there is a bona-fide employer/employee relationship between the plan member and this company; and
  • the plan member expects to receive earnings at a level comparable to the earnings they received from the prior employer.
  • If these facts cannot be confirmed, we will consider that the plan does not meet the primary purpose and it will not be registered.


E1. What are Westcoast Actuaries Inc.’s annual fees for an IPP?

Westcoast’s initial fee for the first calendar year becomes payable immediately upon the submission of data for Plan implementation. Thereafter, the annual fee is payable each February 1st. The annual fee is subject to adjustment referencing wage inflation. The annual fee rate varies based on various factors such as number of plan members and the  jurisdiction.


E2. What services are included in Westcoast Actuaries Inc.'s IPP Service Package for Actuarial & Administration Services?

The services covered by the Westcoast Actuaries Inc. IPP Service Package for Actuarial & Administration Services are as follows:


Plan Implementation

Preparation of the following documents:

  • Board resolution to adopt pension plan.
  • Canada Revenue Agency (“CRA”) Application To Register A Pension Plan form (T510 Form).
  • Provincial Application For Registration Form and other documents required by the federal / provincial pension regulator, as applicable.
  • Pension plan document and, if required, trust agreement.
  • Initial actuarial valuation report on a maximum funding basis and request for tax-deductibility of pension plan contributions.
  • Submission of application for registration and correspondence with CRA and provincial pension regulator as applicable to secure plan registration.
  • Completion and filing of CRA Connected Person Information Return form (T1007).
  • Completion and filing of CRA Application For Certification Of A Provisional Past Service Pension Adjustment (PSPA) form (T1004), if required.


Annual Administration

  • Assisting the client with reporting of Pension Adjustment (PA) on T4 and claiming pension deduction on T2 corporation tax return.
  • Preparation and filing of CRA Registered Pension Plan Annual Information Return form (T244 Form) or CRA and provincial joint Annual Information Return (AIR) as applicable.
  • Preparation and filing of CRA Employees’ Pension Plan Income Tax Return form (T3P Form) if plan is governed by a pension trust.
  • Preparation of the Summary of Contributions and Investment Information Summary, if required.


Triennial (Every Three Years) Valuation

  • Preparation of the triennial actuarial valuation report on a maximum funding basis.
  • Filing of the triennial actuarial valuation report and request for tax-deductibility of pension plan contributions with CRA.
  • Filing of the triennial actuarial valuation report and actuarial cost certificate with provincial pension regulator as applicable.


F1. What is terminal funding?

IPPs are Designated Plans which must comply with ITR-mandated actuarial assumptions. These assumptions include funding to be based upon retirement from active service at age 65, and a valuation interest rate of 7.5% per year.

The removal of these funding restrictions will result in the company being able to make additional contributions -- terminal funding contributions. Terminal funding can be considered "catch-up" funding when IPP restrictions are removed. Some of these funding restrictions are removed if the member has commenced benefits, or if CRA has approved the removal of the IPP from the Designated Plan category.

IMPORTANT: Terminal Funding is optional.
IMPORTANT: A plan member scheduled to retire early next year may instead consider retirement late this year so as to advance the timing of terminal funding contributions. The member will also benefit from the $2,000 pension income deduction for tax purposes. With an eligible spouse for income-splitting purposes, the member may be able to receive up to $4,000 of pension income tax-free each year.


F2. How does terminal funding work?

For details on how terminal funding works, please refer to our brochure "IPP Terminal Funding".


G1. What are the death benefits?

The value of pre-retirement death benefits is equal to the commuted value of the member's accrued pension payable at age 65.

Post-retirement death benefits depend on the pension option elected by the member at retirement.


G2. What are the benefit options?

The benefit options available on termination, retirement or termination of the pension plan are as follows:

a.) an immediate or deferred pension paid from the pension plan;
b.) annuity purchased from an insurance company; or
c.) a lump sum commuted value of accrued pension benefits, transferred to a locked-in RRSP or locked-in RRIF/LIF up to a maximum amount prescribed by Income Tax Regulation.
d.) Plan assets in excess of the maximum transfer limit will be taxed as income to the member and applicable withholding taxes will apply. (i.e., 10% on a lump sum under $5,000, 20% on a lump sum between $5,000 and $15,000, and 30% on a lump sum greater than $15,000)

Note that choosing either benefit option b) or c) is irrevocable. If benefit option a) is chosen, then either benefit b) or c) is still available.

End of IPP FAQ


Content
【A】

Actuarially Equivalent - A benefit of equivalent actuarial present value when computed on the basis of interest, mortality and/or other rates and tables.

【B】


【C】

Canada Pension Plan (CPP) - A governmental pension plan that provides benefits to workers and their beneficiaries in Canada except Quebec in the event of retirement, disability or death.

CRA - Canada Revenue Agency - also known formerly as: Canada Customs and Revenue Agency; Canada Customs, Excise and Taxation; Revenue Canada, Taxation; and Department of National Revenue.
 
Commuted Value - A lump sum amount that is actuarially equivalent to a pension determined using certain actuarial bases. Most commuted values are determined in accordance with the Canadian Institute of Actuaries Revised Standards of Practice for Determining Commuted Values (CIA Commuted Value Standard), which came into effect April 1, 2011. Prior to April 1, 2011, commuted values were mostly calculated in accordance with the Canadian Institute of Actuaries Standard of Practice for Determining Commuted Values which came into effect on February 1, 2005.
 
Connected Person- A person who owns directly or indirectly 10% or more of any class of shares of a company or is not dealing at arm's length with such person.
 
Consumer Price Index (CPI) - A statistic that measures the change in the cost of living for consumers.  It is often used to measure inflation.

【D】

Defined Benefit (DB) - A pension design that defines the benefits payable at retirement.  The contribution amount is determined through actuarial valuation.  If a plan is registered for tax purposes, the maximum pension payable is defined by tax regulations.
 
Defined Contribution (DC) - A pension design that defines the amount of contributions, usually a percentage of salary.  The benefits payable at retirement depend on factors such as future investment return and annuity rate at retirement.  If a plan is registered for tax purposes, the maximum contribution amount (usually a percentage of earnings or income up to a dollar limit) is defined by tax regulations.
 
Defined Contribution Limit or Money Purchase Limit (Defined Contribution Pension Plans) - The maximum dollar amount of contribution that can be contributed to a defined contribution pension plan on behalf of a member.  Based on current tax rules, the aggregate contribution limit (the total of employer regular, employee regular and employee voluntary)  is $19,000 for 2006, $20,000 for 2007, $21,000 for 2008, $22,000 for 2009, $22,450 for 2010, $22,970 for 2011, $23,820 for 2012, $24,270 for 2013 and $24,930 for 2014. After 2014 the limit will increase at the rate of increase of the Average Industrial Wage Index for Canada.
 
Designated Plan - A Designated Plan is defined in Income Tax Regulation 8515(1) as a Registered Pension Plan that is primarily for the benefit of Connected Persons and Highly-Paid Employees.

【E】


【F】


Flexible Pension Plan - A defined benefit pension plan that allows plan members to earn Optional Ancillary Benefits by making Optional Ancillary Contributions.

【G】


【H】


Highly-Paid Employee - An employee who is paid at least 2.5 times the Year's Maximum Pensionable Earnings as defined by the Canada Pension Plan -- e.g., pension earnings of at least $131,250 (2.5 X $52,500) in 2013.

【I】


【J】

【K】


【L】

Life Income Fund (LIF) - A type of RRIF under which the owner must withdraw each year an amount that is between a minimum percentage prescribed by the Income Tax Act (Canada) and a maximum percentage prescribed by pension legislation (click here for applicable percentages for B.C.).
 
Locking-In - A condition imposed by pension legislation that requires funds either be used to provide a pension at retirement or be kept in a locked-in plan such as a Locked-In RRSP, LIRA, LRIF or LIF.
 
Locked-In Retirement Account (LIRA) - A type of RRSP where the funds are subject to locking-in under pension legislation. These funds must be used to purchase a life annuity, or be transferred to a LIF or an LRIF by the end of the year the owner attains age 71 at the latest. It is available in all jurisdictions except B.C. and under the federal PBSA which provide for the locked-in RRSP that is very similar to the LIRA.
 
Locked-In Retirement Income Fund (LRIF) - A type of RRIF under which the owner must withdraw each year an amount that is between a minimum prescribed by the Income Tax Act (Canada) and a maximum amount prescribed by pension legislation. The LRIF is only available in Manitoba and in Newfoundland and Labrador.
 
Locked-In RRSP - A type of RRSP that is available in B.C. and under the federal PBSA to maintain funds that are locked-in as required by pension legislation. These funds must be used to purchase a life annuity or be transferred to a LIF by the end of the year the owner attains age 71 at the latest.


【M】


 Maximum Pension Limit (Defined Benefit Pension Plans) - The maximum amount of annual pension that can be paid from a defined benefit pension plan to a member for each year of pensionable service (or called credited service).  Based on current tax rules, the limit is $1,722.22 for years up to and including 2003, $1,833.33 for 2004, $2,000.00 for 2005, $2,111.11 for 2006, $2,222.22 for 2007, $2,333.33 for 2008, $2,444.44 for 2009, $2,494.44 for 2010, $2,552.22 for 2011, $2,646.67 for 2012, $2,696.67 for 2013, and $2,770.00 for 2014.  After 2014 the limit will increase at the rate of increase for the Average Industrial Wage Index for Canada.  The limit is defined as the greater of $1,722.22 and 1/9 of the Money Purchase Limit.

2/3 Pensionable - Please note that for pre-1990 pensionable service recognized after June 7, 1990, the limit is only $1,150.00 (instead of $1,722.22) for years up to and including 2003 and 2/3 (two-thirds) of the Maximum Pension Limit for years after 2003.  These years of pre-1990 service are usually referred to as 2/3 pensionable.

Maximum Transfer Limit - The maximum amount that can be transferred from a defined benefit pension plan to a money purchase provision (defined contribution pension plan, RRSP or RRIF) according to Income Tax Regulation 8517.  Please click here for details.

【N】

【O】


Office of the Superintendent of Financial Institutions (OSFI) - The entity that ensures pension plans governed by the Pension Benefits Standards Act, 1985 (PBSA) comply with the act and are administered in accordance with its requirements.
 
Old Age Security (OAS) - A monthly pension paid to Canadians over age 65 out of Government general revenue.
 
Optional Ancillary Benefits (OAB) - Benefits which are provided by Optional Ancillary Contributions under a Flexible Pension Plan.
 
Optional Ancillary Contributions (OAC) - Contributions made under a Flexible Pension Plan in order to acquire Optional Ancillary Benefits.


【P】

Past Service Pension Adjustment (PSPA) - Any pension benefits earned in a year after 1989 would reduce an individual's RRSP deduction limit for the following year through the reporting of a Pension Adjustment (PA).  If post-1989 past service benefits are provided or improved, it would trigger a provisional Past Service Pension Adjustment (PSPA) for the pension plan member which must be satisfied through one (or a combination) of the following means before such post-1989 past service benefits can be provided:

1.     Approval by CRA of Form T1004 (Applying For The Certification Of A Provisional PSPA) filed with them.  CRA will approve the form if the individual has sufficient unused RRSP room carried forward to satisfy the PSPA amount.  Please note that the individual's unused RRSP room would be reduced by the PSPA amount upon CRA's approval; or

2.     Transfer (tax-free) an amount from the pension plan member's RRSP or account in a Defined Contribution (DC) Pension Plan to the pension plan that provides the past service benefits.  Such transfer is commonly referred to as a Qualifying Transfer; or

3.     Withdraw an amount from the pension plan member's RRSP using CRA Form T1006 (Designating An RRSP Withdrawal As A Qualifying Withdrawal).

 
Pension Adjustment (PA) - Starting with 1990, a Pension Adjustment (PA) is reported on a pension plan member's T4.  The PA would reduce the member's RRSP deduction limit for the following year.  PA for a Defined Contribution (DC) pension plan member is the total employee and employer contributions made on the member's behalf as well as any forfeitures allocated to the member.  PA for a Defined Benefit (DB) pension plan member is calculated by a formula.  In simplified terms, it is equal to the annual pension amount earned by the member during the year first multiplied by 9 then subtracted by a prescribed amount ($1,000 for years before 1997 and $600 for 1997 and after).
 
Pension Adjustment Reversal (PAR) - The purpose of a PAR is to restore RRSP contribution room when an employee's membership in a provision of an RPP or DPSP stops and their termination benefit is less than the sum of PAs and PSPAs that have been reported to the Canada Revenue Agency (CRA). The PAR is reported to the CRA so that the employee's RRSP contribution room that was previously reduced by a PA or PSPA can be restored.
A PAR must be reported any time an individual stops being a member of a provision or plan after 1996. An individual does not have to terminate employment, only terminate plan membership.
 
Portability - The legislated right for an individual to transfer vested benefits to another registered retirement plan upon termination of employment or membership.


【Q】

Qualifying Transfer from RRSP - Transfer from a pension plan member’s personal RRSP to satisfy PSPA. For new plans, the Qualifying Transfer must be processed within 90 days of official registration by CRA.

Quebec Pension Plan (QPP) - A governmental pension plan similar to CPP that provides benefits to workers and their beneficiaries in Quebec in the event of retirement, disability or death.


【R】

Registered Disability Savings Plans (RDSP) - A registered disability savings plan is a trust arrangement between a holder and an issuer (a trust company in Canada). The purpose of such a plan is to provide for the long term financial security of a beneficiary who has a prolonged and severe physical or mental impairment and is entitled to the Disability Tax Credit. The RDSP is being administered jointly with Human Resources and Skills Development Canada (HRSDC).
 
Registered Pension Plans - A Registered Pension Plan (RPP) in Canada is a plan that is registered with Canada Revenue Agency for tax purposes under Section 147.1 of the Income Tax Act and if applicable the federal or provincial pension regulator.  The plan can be on a Defined Benefit (DB) or Defined Contribution (DC) basis.
 
Registered Plans - Plans such as Registered Pension Plans, Registered Retirement Savings Plans, Deferred Profit Sharing Plans, etc. that are registered for tax purposes.  Contributions to registered plans by the employer, employee or individual are deductible subject to limits.  Investment income earned by a registered plan is not taxed.  Benefits paid from a registered plan are taxable to the member or beneficiary when received.
 
Registered Retirement Income Fund (RRIF) - An arrangement under which the owner must withdraw each year a minimum amount prescribed by the Income Tax Act (Canada).  Funds usually originated from matured RRSPs or transfers from other registered plans.
 
Registered Retirement Savings Plan (RRSP) - A registered savings vehicle under Section 146 of the Income Tax Act arrangement into which an individual makes contributions for retirement savings purposes.
 
Related Person - Please see 
here for the full definition according to Section 251 of the Income Tax Act.

RRSP deduction limit -
The RRSP deduction limit for a year is the taxpayer’s unused RRSP deduction room at the end of the preceding taxation year, plus 18% of prior year earned income up to the RRSP maximum dollar limit for the current year less the Pension Adjustment (PA) for the prior year.
 
RRSP maximum dollar limit
 The maximum dollar limit for RRSP is:
 

 Year

 Limit

 2003

 $14,500

 2004

 $15,500

 2005

 $16,500

 2006

 $18.000

 2007

 $19,000

 2008

 $20,000

 2009

 $21,000

 2010

 $22,000 

 2011

 $22,450

 2012

 $22,970

 2013

 $23,820

 2014

 $24,270

 2015

 $24,930

*And indexed thereafter.

Please note that these dollar limits are always one year behind the Money Purchase Limit to allow for reporting of Pension Adjustment (PA) on T4.
 
Retirement Compensation Arrangement (RCA) - An arrangement defined in subsection 248(1) of the Income Tax Act (Canada) under which an employer, former employer, or in some cases an employee, makes contributions to a custodian.  The custodian holds the funds in trust with the intent of eventually distributing them to the employee (beneficiary) on, after, or in view of retirement, other severance from employment, or any substantial change in the services the employee provides.

【S】

Spouse - See Provincial Pension Acts   – Definition of Spouse.   

【T】

Tax Free Savings Account (TFSA) - Starting in 2009, Canadian residents who are 18 years of age or older are able to earn tax free investment income within a TFSA during their lifetime. The maximum amount that can be contributed to a TFSA from 2009 to 2012 is $5,000. 2013 and 2014 contribution limits are $5,500. This amount will be indexed to inflation and rounded to the nearest $500 in subsequent years. Unused TFSA contribution room can be carried forward to later years. The total of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year. The CRA is responsible for monitoring and operating the TFSA, as applicable under the Act.


【U】


【V】


Vesting - This term refers to the acquisition of an unconditional right to pension benefits by a pension plan member after the completion of a certain period of employment or membership and sometimes the attainment of a certain age.  If a member is not vested at termination, he or she will be entitled to a refund of his or her own contributions, if any, with interest.

【W】


【X】


【Y】


Year's Maximum Pensionable Earnings (YMPE) - The amount of earnings each year as defined for purposes of determining the maximum amount of contributions payable to and the maximum amount of benefits payable from the CPP/QPP.  The amount increases annually at the rate of average wage growth in Canada.
 
【Z】