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:
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).