Make Age Work to Your Advantage

Make Age Work to Your Advantage

An Individual Pension Plan (IPP) can be a very powerful, yet inexpensive, retirement savings tool for owner managers, especially those who are close to retirement with inadequate savings.  The IPP allows the use of pre-tax corporate income to help catching-up with their retirement savings.

The maximum 2016 year IPP contributions, if T4 income is over $144,500, are:  


2016 IPP Contribution













These amounts compare favorably with the 2016 maximum RRSP deduction limit of $25,370.  The age factor actually works in the member’s favor – the older the member, the higher the contribution.  If income is less than $144,500, the contribution would be proportionate. For example, at $115,600 (e.g. 80% of $144,500), the contribution amount would be 80% of the amounts shown above.

There is only one set of registered retirement savings limit – either pension or RRSP but not both.  Since the IPP provides maximum pension, the full RRSP deduction limit is eliminated as a result.


Catch-Up Pension Funding for Past Service

The employer can provide IPP past service pension benefits to an owner manager retroactive to the date of employment going as far back as January 1, 1991. To account for the RRSP deduction room which the individual should have lost as a result of their past service pension, the tax legislation requires the IPP member to transfer an amount from personal RRSP to the IPP to qualify. The required transfer amount for 2014 is based on 18% of employment income (note - RRSP is based on 18% of earned income) for each past service year recognized, up to the maximum amounts below:


Maximum Transfer from RRSP

1991 – 1992






1995 – 1996


1997 – 2014



The cost of IPP pension for each year of past service, for T4 income over $144,500 is:


Cost per Year of Past Service













For a 60-year old with 25 years of past service (from 1991 to 2015 inclusive) with T4 income over $144,500 each year, the past service funding room is:

 Cost of Pension = $38,218 per year x 25 years = $955,450

 Required Transfer from Personal RRSP = $581,810, determined as follows:



Transfer from RRSP

Required Transfer

1991 - 1992

$11,500 x 2








1995 – 1996

$25,010 x 2


1997 - 2014

$25,410 x 19




The employer has promised a pension worth $955,450 and there is only $581,810 coming from the member’s personal RRSP. The IPP thus has a deficit of $373,640 ($955,450 - $581,810) which can be funded by employer tax-deductible contributions.

More Catch-Up Pension Funding After Retirement

IPPs are tax motivated and members wish to have as much contributed as possible.  Since IPP contributions require certification by an actuary, the tax regulations specify assumptions for interest, wage and price inflation, etc. the actuary must use for such calculations.  This prevents the use of very low interest rates or high inflation rates to drive up IPP contributions.  For example, the tax regulations mandate the use of a very high interest rate of 7.5% per annum (relative to current interest rates) for valuation of active IPPs (non-retired members).

While the prescribed valuation assumptions would suppress contributions to an active IPP, these assumptions do not apply to IPP members who have already commenced pension.  CRA would allow the IPP to have assets equal to the annuity cost after pension commencement.  Bear in mind that there is no actual annuity purchase; the IPP is simply funded on an “annuity cost” basis after retirement.  The current low annuity rates would mean the annuity cost is much greater than the accumulated IPP assets with contributions calculated using a 7.5% interest rate.  Consequently there is significantly more IPP funding permitted after pension commencement.  Such additional funding is called “Terminal Funding”.

The chart below illustrates the growth in registered assets for a 60-year old male owner manager who set up an IPP three years ago in 2013 at age 57, with a spouse 5 years younger and T4 income in excess of $144,500 (2016) each year from 1991 to 2016 inclusive and subsequently retired in 2016, as compared to someone who did not set up an IPP and stayed with RRSP savings:


The person who set up the IPP three years ago would end up with $1,828,230 more in in pension assets than someone who only has the RRSP.  An IPP is probably the only vehicle that can deliver this much more in registered funds over RRSP in such a short period of time.

As IPPs become better understood, their use will definitely be more prevalent given that the tax advantage is so great. The main tax and pension legislative requirements for an IPP are:

  1. IPP assets must be used for the member’s and the surviving spouse’s pension and are only accessible as a lump sum taxable cash payment by the beneficiaries after both the member and the spouse have become deceased.

  2. The IPP must be properly funded to ensure there are sufficient assets to pay the promised pension. IPP funding is mandatory for all provinces except BC (connected person), Alberta (connected person), Manitoba, Quebec and PEI.

  3. IPP assets must be invested in accordance with investment rules for registered pension fund, i.e. in a diversified and prudent manner. Imagine what an investment in Bre-X or Enron would have done to a pension fund!

Most owner managers will be able to enjoy this million dollar IPP bonus if they do not find the above legislative requirements overly prohibitive.




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.