Westcoast-Actuaries Inc. - IPP Contributions

Individual Pension Plan
(IPP)Contributions

Deductibility of Company Contributions

Since an IPP is a defined benefit pension plan, the deductibility of Company contributions is governed by Sections 147.2(1) and 147.2(2) of the Income Tax Act.

Under Subsection 147.2(1) of the Income Tax Act, an employer contribution to a registered defined benefit pension plan is deductible in computing the employer’s income for a taxation year if:

¨      it is paid in the fiscal year or within one hundred and twenty (120) days from the end of the fiscal year;

¨      it was not deducted in the previous year; and

¨      it is an eligible contribution under Subsection 147.2(2).

Subsection 147.2(2) of the Income Tax Act defines an eligible contribution as one which:

¨      is made on the recommendation of an actuary;

¨      is approved in writing by the Minister;

¨      is based on an actuarial valuation prepared as of a date that is not more than four years before the day on which the contribution is made; and

¨      is not in excess of prescribed limits if the plan is a designated plan. A designated plan is one in which the total pension credit for members who either are connected with the employer or earn more than two and a half times the Year's Maximum Pensionable Earnings exceeds 50% of the total pension credit for all the members under the defined benefit provisions of the plan. The prescribed limits are determined by using actuarial assumptions set forth in Section 8515(7) of the Income Tax Regulations.

Furthermore, the actuarial valuation must be:

¨      based on an actuarial funding method that produces a reasonable matching of contributions with accruing benefits;

¨      prepared based on generally-accepted actuarial principles; and

¨      prepared based on assumptions that are reasonable both at the time the valuation is prepared and at the time the contribution is made.

If an excess actuarial surplus exists, the Company must apply this "excess" surplus against Company current service contribution requirements (Paragraph 147.2(2)(d)). Excess actuarial surplus is defined as the amount of actuarial surplus which is in excess of the lesser of 20% of the actuarial liability; and the greater of 10% of the actuarial liability or twice the current service contribution (employee and employer combined) for the ensuing year.

Deductibility - Timing of IPP Implementation

To ensure a contribution is deductible within a fiscal year for a new IPP, it is recommended that the plan be implemented (i.e., application submitted to Canada Revenue Agency) prior to the end of the fiscal year. Despite the fact that a Company has 120 days after the fiscal year-end to make the contribution and have it deducted, an IPP should be implemented before the fiscal year-end to avoid a situation where Canada Revenue Agency denies the deduction by arguing that the IPP was not in effect within the fiscal year. Please note that there is a one-time implementation surcharge for late submissions to Westcoast Actuaries Inc. (less than 28 days before implementation deadline). Please click here for details.

Minimum Company Contributions

For provinces where the provincial pension legislation provides exemption for IPPs from registration and minimum funding requirements, there are no minimum contributions by the Company. For IPPs that are subject to registration with the federal/provincial pension regulators, the minimum contributions by the Company each year are 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* (on a going-concern basis) over a period of 15 years; plus
the annual amortization payment required to liquidate the solvency deficiency* (on an assumed plan termination basis) over a period of 5 years.

* As identified in the latest actuarial valuation report.

Maximum Company Contributions

The maximum contribution is identified in our actuarial valuation report and is generally the total of:

Current service contributions to fund for benefits being earned in the current year. Please note that Canada Revenue Agency requires that current service contributions for a connected person be made based on a percentage of the individual's T-4 earnings for the year; and
The unfunded liability (deficit), if any, under the plan.

If the actuarial valuation report identifies an excess actuarial surplus, the amount of excess actuarial surplus must be applied against Current Service Contributions (CSC) before any further tax-deductible contributions can be made to the plan. Please refer to the two examples below:

Example 1	Example 2

Year 1 Maximum CSC = $32,000	Year 1 Maximum CSC = $32,000
Year 2 Maximum CSC = $34,400	Year 2 Maximum CSC = $34,400
Year 3 Maximum CSC = $37,000	Year 3 Maximum CSC = $37,000

(1) Amount of Actuarial Surplus = $72,000	(1) Amount of Actuarial Surplus = $135,000
(2) Allowable Actuarial Surplus = $64,000	(2) Allowable Actuarial Surplus = $64,000
(3) Excess Actuarial Surplus = $8,000 [ = (1) - (2) ]	(3) Excess Actuarial Surplus = $71,000 [ = (1) - (2) ]

Maximum Allowable Contributions	Maximum Allowable Contributions
Year 1 = $24,000 [ $32,000 CSC less $8,000* of excess ]	Year 1 = $0 [ $32,000 CSC less $32,000** of excess ]
Year 2 = $34,400	Year 2 = $0 [ $34,400 CSC less $34,400** of excess]
Year 3 = $37,100	Year 3 = $32,400 [ $37,000 less $4,600** of excess]
* Total excess of $8,000	** Added up to total excess of $71,000

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).

	OPTIMUM PENSION SOLUTIONS