Individual pension plans and the family business

Tax managed strategy 12

With changes to pension limits and the ability to include an individual pension plan (IPP) in a succession plan, IPPs have become the registered retirement savings plan (RRSP) alternative for many business owners. Normally, on the death of the surviving spouse,¹ registered assets create a tax liability in the estate. An IPP for a family business can be an effective way of transferring registered assets to the second generation on a tax-deferred basis.

What’s an individual pension plan?

An IPP is a defined benefit pension plan. If you’re a business owner, an IPP offers both maximum tax relief and a maximum retirement pension.

The result?

You won’t have to rely solely on your RRSP’s performance to provide a long and happy retirement. That’s because IPPs also offer guaranteed lifetime income and any surplus in the plan may be payable to you.

Why are IPPs so popular?

The maximum pension limit for 2021 is $3,245.56 per year of service. This limit is subject to increases based on the average industrial wage.

At age 50, the annual maximum contribution is $9,170 higher than the maximum contribution to an RRSP. As you get closer to retirement, the cost to provide the benefit increases. You can also include service back to 1991. This is optional, but if you decide to include extra years, it’ll significantly increase the amount that can be deposited into the plan.

Opportunities

The family business

Normally on the death of the surviving spouse, registered assets create a tax liability in the estate. An IPP is an ideal way to keep the assets in a tax-deferred vehicle when involving a family business.

If the business is continuing after the parent retires, the family member (usually a son or daughter) taking over the business can be added as a member of the existing plan. By leaving the plan intact, any assets not used to provide benefits to the retired parent will remain and can be transferred to the second generation without triggering tax.

Sale of a business

Some small businesses are sold to family members or partners. The proceeds from these types of asset sales are treated as taxable income. By setting up an IPP and using terminal funding, a deduction can be created against this income.

Early retirement

Legislation requires funding projections to be based on a retirement age of 65. However, any time after reaching age 60, a member of an IPP can retire and supplement the benefits provided in the plan by adding unreduced early retirement benefits, cost of living increases, and bridging benefits. These early retirement benefits can provide a significant tax deduction for the company.

Ideal candidates

  • Owners of an incorporated company
  • Individuals age 40 or older
  • People who earn employment income, reported on a T4, of at least $162,300 from the company sponsoring the IPP

Take action

  • Request a quote from your advisor showing the deposits that can be made based on your age and length of service while incorporated.
  • Compare the benefits of an IPP to an RRSP.
  • Work with your advisor to establish an IPP if you determine it's right for you.

Contribution comparison 2021

Age IPP ($) RRSP ($) Difference ($)
40 30,700 27,830 2,870
45 33,700 27,830 5,870
50 37,000 27,830 9,170
55 40,700 27,830 12,870
60 44,700 27,830 16,870
For illustration purposes only.

Investment options available through Manulife Investment Management

Manulife and its subsidiaries provide a range of investments and services.

Mutual funds

Mutual funds can help meet your specific financial needs throughout your life. Whether you’re just starting out, accumulating wealth, or nearing/in retirement, mutual funds offered by Manulife Investment Management can provide you with solutions to help build a portfolio that meets your needs. Manulife is committed to providing quality investment products and services so you can enjoy life and worry less.

Segregated fund contracts

For conservative investors looking to grow their wealth but who are also concerned about minimizing risk potential, segregated fund contracts may provide an ideal solution. The appeal of these contracts is the combination of the growth potential offered by investment funds and the unique wealth protection features of an insurance contract.

Segregated fund contracts can help investors minimize their exposure to risk through death, maturity, and, in some cases, income guarantees, potential creditor protection features, and estate-planning benefits — all from a single investment. These contracts may be ideal for mature investors planning their estate, investors concerned about the effects of market volatility, and small business owners.

However, with an IPP, the annual pension required to be paid at retirement will usually be greater than the income guarantees offered by a segregated fund contract with an income benefit guarantee. Therefore, this type of product may not be ideal as an investment held by an IPP trust.

Guaranteed interest contract

For individuals seeking a guaranteed rate of interest while protecting their initial investment, a guaranteed interest contract (GIC) may be a suitable option. GICs available from an insurance company may also offer unique protection features, such as the potential for protection from creditors, plus estate-planning benefits. For Canadians looking for a low risk investment with a guaranteed rate of interest, Manulife Investment Management GICs may offer benefits that are different than other financial institutions’ guaranteed investment certificates.

Includes a spouse or common-law partner, as defined by the Income Tax Act (Canada)

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.

Manulife Funds are managed by Manulife Investment Management Limited (formerly named Manulife Asset Management Limited). Manulife Investment Management is a trade name of Manulife Investment Management Limited. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. The Manufacturers Life Insurance Company (Manulife) is the issuer of insurance contracts containing Manulife segregated funds and the guarantor of any guarantee provisions therein. Manulife Investment Management is a trade name of The Manufacturers Life Insurance Company. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

MK1721E 03/21

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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