IPP Minimum Adequate Knowledge

All parties to an Individual Pension Plan (IPP) should have a certain Minimum Adequate Knowledge (MAK) of the program to ensure that the IPP complies with tax and applicable pension legislation. These parties, other than Westcoast Actuaries Inc. that provides the actuarial and administration services, may include:


  • The person who is involved with the administration of the IPP at the company (employer / pension plan sponsor) level
  • The IPP member and if applicable, the member’s spouse
  • The investment advisor or financial planner
  • The person who handles the T4 reporting and/or filing of the T2 corporation tax return for the company

Westcoast Actuaries Inc. strongly recommends that these parties be aware of the following facts about IPPs:

Eligibility for Pension Coverage

A pension is an employment-related benefit for employee(s) provided by the employer. The two key eligibility requirements are:

  • The employer (the IPP sponsor) and the employee (the IPP member) must have a bona-fide employment relationship.
  • Pension-eligible compensation is the T4-type employment income: salaries and wages; bonuses; taxable benefits and allowances; director’s fees; and distributions from an Employee Profit Sharing Plan (EPSP) that are reported on the T4 or T4PS forms. Self-employment income and dividend income are not pension-eligible.

Eligibility for Past Service Benefits

For the calendar years 1990 and after, any pension benefit provided by the employer in a given year would reduce the pension plan member’s RRSP deduction limit for the following year through the reporting of a Pension Adjustment (PA) on the member’s T4. Before an employer can provide past service pension benefits to, or make a past service pension contribution on behalf of an IPP member, the tax regulations require that the IPP member must satisfy the condition on “RRSP deduction limit lost”. This condition must be satisfied through one or a combination of the following methods:

  • A reduction in the member’s unused RRSP contribution room carried forward;
  • A withdrawal from the member’s RRSP on a taxable basis so as to free up the necessary RRSP contribution room (This method is rarely used as the member makes a taxable withdrawal from an RRSP – defeating the purpose of setting up a new IPP which is to achieve more tax sheltering.); and/or
  • Transfer the amount on a tax-free basis from the member’s existing RRSP account to the IPP. This is the most commonly used method to satisfy the condition and is referred to as a “Qualifying Transfer from RRSP to IPP”. Note – only the member’s own personal RRSP (i.e., the IPP member must be the annuitant of the RRSP) can be used. Spousal RRSP (i.e., a plan under which the IPP member is the contributor but not the annuitant) funds can not be used for this purpose.

If the “RRSP deduction limit lost” condition can not be satisfied, the employer must either:

  • Reduce the number of years of past service benefits being recognized; or
  • Postpone the recognition of past service to a future date until the RRSP funds have accumulated to the required transfer amount.

Some individuals may wish to have a selected number of years recognized immediately and have other past years recognized only when remaining RRSP funds can accumulate to the required transfer amount.

Recognition of past years of pensionable service at IPP implementation is voluntary and at the discretion of the employer. Bear in mind that for a plan that is subject to registration with the federal or provincial pension regulatory body, the company must contribute a minimum amount based on the amount of current service contribution and the amortization of a deficit amount.

Recognition of additional years of past service for the IPP member would also result in additional minimum funding obligation for the employer. The employer should take the mandatory minimum employer contribution into consideration to ensure that they are comfortable with the resulting mandatory minimum pension funding requirements.

Impact on RRSP Deduction Limit

For the Year the IPP is Implemented

In the calendar year the IPP is implemented, a connected person’s RRSP deduction limit for that calendar year is reduced by 18% of earned income for RRSP purposes for the 1990 calendar year, up to a maximum of $11,500.

A connected person is defined in the tax legislation as a person who owns directly or indirectly 10% or more of any class of shares of a company or who is not dealing at arm's length with such a person. The arm’s length test is used to include related family members such as a spouse, parent, child, etc.

This reduction in the RRSP deduction limit of a connected person for the year the IPP is set up applies only if the Pension Adjustment (PA) reported for the year 1990 was $0. If the IPP member who is a connected person had a Pension Adjustment (PA) reported for the year 1990, this reduction in RRSP deduction limit does not apply.

Example 1

The connected person’s 1990 earned income was $50,000. The reduction in RRSP deduction limit is $9,000 (18% of $50,000).

Example 2

The connected person’s 1990 earned income was $100,000. The reduction is $11,500 because 18% of $100,000 (or $18,000) exceeds $11,500.

For the 2005 year, the application of this special rule to a connected person would result in a $5,000 RRSP deduction limit for people at the maximum income level (i.e., $16,500 less $11,500 equals $5,000).

The RRSP deduction limit for a non-connected person for the year an IPP is implemented is not affected.

For Years After IPP Implementation

Any pension benefits earned will reduce a member’s RRSP contribution room. Each year while the IPP is in effect, a Pension Adjustment (PA) must be reported on the member’s T4. The PA reduces the member’s RRSP deduction limit for the following year.

A new IPP member in 2005 can expect to have annual RRSP contribution room of $600 in 2006 and in future years.

Please note that an IPP is a defined benefit pension plan, not a defined contribution pension plan. The PA for an IPP member is determined based on pension benefits being accrued, i.e., T4 income for the current year, and NOT based on the amount of pension plan contributions made on behalf of the IPP member. Therefore, an IPP member’s RRSP deduction limit or contribution room can not be restored by ceasing employer contributions.

IPP Investment Restrictions

Unlike a self-directed RRSP, the investments held in an IPP must follow pension fund investment rules prescribed by income tax legislation as well as the applicable federal/provincial pension legislation.

The main difference between pension and RRSP investments is the diversification requirement for a pension plan with respect to investments in individual securities such as stocks or bonds. An IPP can not invest more than 10% of the fund in a single security on a book value basis at the time the investment is acquired. This 10% limit does not apply to pooled funds and mutual funds as those funds are already diversified.


Pension proceeds are intended to be used to provide a lifetime pension. Therefore, pension legislation imposes a locking-in condition on funds originated from pension plans. Locking-in means that the member cannot receive a lump sum cash settlement from the pension plan. Upon retirement or termination, the member must elect one of the following options:

  • an immediate or a deferred pension from the plan; or
  • purchase of a non-commutable immediate or deferred annuity from an insurance company; or
  • transfer the commuted value of pension benefits to a locked-in vehicle such as a Locked-In RRSP, Locked-In Retirement Account (LIRA), Life Income Fund (LIF) or Locked-In Retirement Income Fund (LRIF).

Beneficiary Designation

Pension legislation requires that if the member has a spouse (including a same-sex partner), the spouse must be made the primary beneficiary for pre and post retirement death benefit purposes. The IPP member can choose to designate another beneficiary or beneficiaries to receive death benefits only if the spouse signs a waiver form.

The IPP member can however designate a “contingent beneficiary(ies)”. Such “contingent beneficiary(ies)” shall become beneficiary(ies) in the event that the spouse predeceased the member.

Maximum Transfer Limit

If an IPP member elects to transfer the commuted value of pension benefits to a locked-in vehicle as a settlement option, the tax legislation prescribes a maximum non-taxable amount that can be transferred. The commuted value of pension benefits that is in excess of this maximum transfer limit must be either paid to the member in a lump sum or, if the member is not yet age 65, be left in the pension fund to provide a temporary lifetime and bridging benefit.

Because the IPP is designed to maximize benefits, terminating the IPP and transferring the member’s commuted value will most likely generate a significant taxable lump sum.

For further details on this maximum transfer rule, click here.

Mandatory Minimum Company (Employer) Contributions

If the IPP is subject to registration with the federal or provincial pension regulator, the company (employer) must make a minimum amount of pension plan contributions each year.

IPPs for connected persons and highly compensated individuals are exempt from registration with provincial pension regulatory authority in certain provinces. The exempt provinces are British Columbia (BC), Manitoba (MB) and Quebec (QC). Please note that Quebec’s exemption is only for connected persons; IPPs for highly compensated individuals in Quebec are still subject to provincial registration. Prince Edward Island (PE) has not proclaimed the proposed provincial pension legislation into effect, so IPPs in Prince Edward Island do not have to be registered provincially.

The minimum contribution by the Company each year is identified in the most recent actuarial valuation report for the plan and is generally the sum of the current service contribution for the year and the amortization of deficits under the plan over the periods prescribed by pension legislation for such deficits.

Potential Additional Liability on Plan Termination

If an IPP is subject to registration with the federal or provincial pension regulator, an additional liability on termination of the IPP may occur. While an IPP is active and on-going, the maximum funding contribution amounts are determined based on a set of actuarial assumptions prescribed by the income tax legislation. With an on-going pension plan, the maximum funding under income tax legislation overrides the minimum funding requirements under federal and provincial pension legislation.

For IPPs that are subject to federal or provincial registration, the pension plan sponsor must realize that the income tax funding restrictions for IPPs postpone certain mandatory minimum pension contributions to the actual pension commencement date for the member or the plan termination date for the IPP. After pension commencement, the income tax restrictions on IPP valuation assumptions no longer apply, and plan liabilities would increase as a result. At plan termination, the calculation of the lump sum commuted value for the IPP member is mandated by applicable pension legislation and may exceed the amount of IPP assets. These events can potentially lead to additional funding requirements by the employer.

The preceding information is intended solely for educational and informational purposes. Every effort has been made to ensure the accuracy of the information provided. As it is impossible to include all situations, circumstances and exceptions in a publication such as this, no person or firm involved in the preparation or distribution of this commentary accepts any liability for its contents or its use.



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



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.


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 Benefit 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 can be found on the CRA website. 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 Defined Benefit Limit for years after 2003.  These years of pre-1990 service are usually referred to as 2/3 pensionable.

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)  can be found on the CRA website. After 2016 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.



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



Highly-Paid Employee - An employee who is paid at least 2.5 times the Year's Maximum Pensionable Earnings (YMPE) as defined by the Canada Pension Plan. The current YMPE can be found on the CRA website.





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 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 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.


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.

Money Purchase Limit - Refer to Defined Contribution Limit.



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.


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.


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.


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 can be found on the CRA website. 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.


Spouse - See Provincial Pension Acts   – Definition of Spouse.   


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 can be found on the CRA website. 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.



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.




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.