Individual Pension Plans no longer a rare breed.

In 2004, at the annual consultation held by the CRA on registered pension plans, the topic of discussion was how individual plans, a rare breed only a few years ago, now represent more than one-third of defined benefit pension plans.

The plan design, however, presents more compliance risk as the growth of this segment continues.

An IPP requires disproportionate attention even though it typically covers only one member, compared to plans covering hundreds. Consequently, audit activity has been focused on the segment. As a result, the CRA’s Registered Plans Directorate intends to enhance its focus to monitor IPP compliance.

Industry experts believe registered IPPs will grow to more than 300,000 representing $200 billion in assets by 2020, given that contributions to IPPs greatly exceed RRSP payments for individuals 40 and older. That’s largely because the divide increases with age between what can be contributed into an IPP versus an RRSP. In 2006, maximum current service contributions that can be made into an IPP for an individual could be as high as a $41,000, instead of the maximum RRSP contribution of $18,000.

The other reason for the growth in IPPs is that these plans allow companies to contribute for the IPP member for years of service prior to the set-up of the plan, going back to 1991. If the first year of the set-up of an IPP is 2006, the past service and current service funding contribution/ corporate tax deduction and tax deferral for an IPP member could be as much as $361,000.

It must be remembered that IPPs are registered pension plans that must be set up and maintained properly. If it is determined that an IPP is not in compliance with the Income Tax Act/ regulations and CRA’s Registered Plans Directorate regulations, the registration of an IPP may be revoked at anytime. To remain registered with CRA, the plans need to satisfy four criteria:

The IPP must comply with all laws and regulations governing registered plans and all filings must be up to date.

The IPP was established to create a pension plan prior to the plan being set up and/or the transferring of pension benefit assets from another defined benefit plan from another employer to the IPP;

The employee/employer have a bona-fide relationship between the plan member and his/her company;

If assets from another defined benefit plan have been transferred to an IPP members of the IPP can expect earnings similar to those earned as an employee.

If an IPP’s status is revoked it immediately turns into a retirement compensation arrangement. The formerly registered IPP will forward 50 per cent of assets to CRA on behalf of the plan member. These funds will be refunded to the RCA plan member at a later date when money is withdrawn from the RCA. On withdrawal of funds from the RCA taxes will be paid at the RCA beneficiary’s marginal tax rate. In the worst scenario CRA may not permit the assets from the IPP to be rolled over into a RCA and taxes will be charged on all assets held in the former IPP.

Heavy interest charges may be leaved by CRA for overdue taxes owed by both the IPP sponsor and member of the plan, plus there may be large fines charged for noncompliance. If an IPP is in violation of the Pension Benefits Standards Act, 1985, provincial acts, or the Income Tax Act individuals can be guilty of an offence and can be fined up to $100,000 or imprisoned for a term not exceeding 12 months, or both. In addition a corporation/ sponsor of an IPP that is convicted for violating these acts and regulations may be fined up to $500,000.

Individual pension plans may be the best deferred income plan available in terms of tax relief but myriad pension, tax, legal and investment rules apply.

Written by Peter Merrick

Peter Merrick, FMA, CFP, FCSI, Instructor at George Brown and Seneca Colleges, President of Merrick Wealth Management, a boutique financial planning, employee and executive benefit consulting firm.

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