Letter to the editor

Re: When not to IPP, July 13, 2009

Advisor.ca’s recent article on IPPs reinforces many of the commonly held misconceptions. As a member of a firm that has established almost 2,000 IPPs across Canada, I deal with these myths everyday. It is trite to state that IPPs don’t work everywhere. Of course they don’t, but if that becomes the mantra, without a thorough review of the structure and its benefits, then IPPs will continue to be under utilized and many Canadian business owners and professionals will find themselves worse off for not having established an IPP.

Too often, an exceptional strategy is discarded because the upfront tax benefit is not glaringly apparent. The IPP may create considerable deductions at the point of establishment, but that fact should not prevent the plan going forward on its merits. Financial planning is the integration of solutions to a variety of issues, taxation being just one of them. Issues such as retirement income, estate planning and risk management all must be considered.

We have established many plans where the sponsoring company’s gross revenues do not exceed the small business threshold, resulting is a lower percentage deduction than would be available through an RRSP. This is because the client sees the overall advantage of the IPP.

For instance, if an IPP were to create in excess of $1 million, more money would be available than an RRSP using the same investments. Would that not constitute a tangible benefit that should be considered?

It is correct that a business owner needs stable income and should be over age 40 (at a bare minimum). However, $122,222 is the maximum earnings used to calculate IPP contributions, not the minimum threshold. Also, IPPs begin paying out the year the plan member turns 71, not 72.

Of much greater concern is the idea that business need to earn over $500,000 for the IPP to become viable. In actual fact, the corporation’s taxation level is meaningless to a discussion on IPPs. The IPP is a benefit to the business owner as an individual, not to his or her corporation.

Contributions to an IPP are part of the owner’s compensation package. Whether the business contributes to an IPP or pays the money directly to the owner to be invested in RRSPs, unregistered investments or any other structure, the corporation is still deducting the same money. It is the individual’s tax profile that affects the IPP decision, not the corporation’s. Even if the intention is to leave the assets in the company and make use of the Refundable Dividend Tax On Hand account, the differing tax rates on qualified and non-qualified dividends make a discussion of the $500,000 threshold largely academic.

Although factors, such as age, need for access to capital and income stability, play significant roles in the IPP decision process, corporate tax rates do not. The question business owners should be asking themselves in a purely quantitative analysis of IPPs is: “Would I rather receive $150,000 in income from my business this year, contribute $20,000 to my RRSP, and pay tax on the remaining $130,000 or have my company contribute $26,800 (assuming the owner is 50) on my behalf directly to my IPP, and receive and be taxed on the balance of $123,200?”

Viewed from this prospective, the picture becomes much clearer; whether the business is taxed at 80% or 8%, the IPP will not change its financial situation. It can, however, save the business owner a significant amount of personal tax over his working life and, through the magic of tax-sheltered compounding, provide a significantly greater retirement benefit than RRSPs.

The criticism that IPP funds are locked-in is totally misguided. Virtually every province has reduced or eliminated locking-in provisions on commuted value transfers. Therefore, if the intention at retirement is to wind up the IPP, then the issue regarding locking in is moot. If the client maintains the IPP as a pension paying out a benefit, then they are guaranteed a consistent and indexed flow of income, as they intended to receive when they established the plan in the first place.

Locking in may, in fact, be a good thing. As IPPs are only established when a client meets the financial qualifications, it would only be in the extreme example that all of the client’s assets would be inside the IPP. The IPP simply cannot be used as an ersatz emergency fund. It is my reading of human nature that if the funds are fully accessible, then the client will at some time manufacture the rationale to access those funds. IPPs provide the discipline that too many investors lack.

The author is correct in stating that medical professionals should consider IPPs. The author is wrong is asserting that only doctors making in excess of $500,000 should implement them. The doctor needs to set their financial planning strategy in the context of their financial reality. Doctors are not IT consultants, real estate developers or auto parts manufacturers. Their financial reality is quite different. They are not affected by business cycle fluctuations, so with proper cost management, the IPP contribution will not imperil their enterprise. Also, doctors do not enjoy the possibility of selling their professional corporation. Therefore, funding retirement through the sale of the underlying business is not something that a medical doctor can look forward to.

The only strategy a doctor may implement for successful funding of retirement is accumulation of wealth. The simple fact is that by every measure, an IPP is vastly superior to an RRSP. An IPP is indexed, creditor proof, allows for investment fees to be deducted, creates a certain stream of income in retirement can be supplemental funded with fully deductible corporate contributions and most importantly is a certainty.

The RRSP provides none of these benefits. It is the duty of financial planners to discuss financial planning in an objective fashion. While I agree that IPPs do not fit into every scenario, I firmly believe that they belong in vastly more scenarios than already considered. As accountants realize the overall benefits that IPPs provide, and financial planners learn how to more firmly make their cases, the result will be a safer, more certain and more robust retirement for many Canadians.

Trevor R. Parry, M.A. LL.B, executive vice-president, Gordon B. Lang & Associates Inc.

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(07/17/09)