How to use IPPs

IPPs are ideal for owners and senior executives whose earnings are high enough to easily exceed the RRSP contribution cap ($22,450 for 2011). And tax advisors point out they can be a useful tool for encouraging valued employees to hang around.

The allowable contributions can also rise over time, unlike an RRSP, which is fixed regardless of age. But if business owners want to shelter income in IPPs, they should realize Revenue Canada regards them as defined benefit plans that need to satisfy actuarial scrutiny. The government requires a triennial review to determine if the plan is running a surplus or showing a deficit; if the latter, the owner must make up the difference.

Ian Burns, a partner with Pension Specialists Inc., in Whitby, Ont., points out companies should expect to pay at least $4,500 in actuarial costs and other ongoing compliance fees. He adds Revenue Canada has been looking closely at IPPs with large surpluses.

Another option is a Retirement Compensation Arrangement, which owners can set up for employees or key executives. Under RCA rules, the firm must deduct a 50% refundable tax on all contributions and deposit them in a government account.

John Lorinc is an investigative journalist who has contributed to Toronto Life, The Globe and Mail, National Post, and Report on Business.

This article was originally published on capitalmagazine.ca.