Personal Pension Plans

By Mark Borkowski

As Canadians we are fully aware of the taxes we must endure. However, there is several tax saving strategies that individuals can employ. One in particular is RRSPs. And while RRSPs provide some form of tax relief, they are limited to personal deductions and by the amount of contributions that are allowed each year. Fortunately, there are other means by which Canadians can utilize beyond the limits of RRSPs. Henry Foradori of Argosy Securities Inc. has been advising clients on personal pension plans, these personal pension plans have become very popular.

Since 2014 Canadian business owners and incorporated professionals have the ability to create true pension plans for themselves, putting them on par with teachers and civil servants with it comes to generous retirement savings. The plan in question is known as the Personal Pension Plan or PPP (through INTEGRIS Pension Management Corp). PPPs from a legal perspective are first and foremost registered pension plan as are governed in part by the Income Tax Act. As compared to an RRSP, the PPP offers several additional ways of reducing taxes while contributing more towards retirement, all through a tax-deferred savings plan.

Foradori explains what are PPPs? Think of it as a “high performance engine” RRSP. Larger contribution limits, higher corporate tax deductions and predictable retirement income are a few of the advantages available to incorporated business owners and professionals. The time has finally arrived where PPP clients can receive some of the same benefits that teachers and government employees enjoy through their own pension plans.

Because the PPP allows a member to contribute well in excess of the RRSP maximum limits, the advantages are two-fold: an ability to claim much larger tax deductions and an ability to compound more money in a tax-deferred account until retirement. As stated above one the greatest benefits of PPPs is building a larger retirement nest egg. The contribution limits are much greater through a PPP compared to an RRSP. Assuming a 55-year-old, he/she can contribute up to $40,610 to a PPP vs. the maximum RRSP contribution of $25,375. This creates greater corporate tax deductions and tax deferred compounding growth while in the plan.

The key advantage of the PPP design is that it provides flexibility with respect to the amount of contributions made each year: in good years, a business owner might utilize the DB (defined benefit) component of the PPP to tax-deduct as much as possible. In lean years, the same business owner may elect to save under the DC (defined contribution) component and reduce contributions to a mere 1% of salary. When business subsequently picks up again, the member could look back to the years where contributions were small and retroactively effect a “buy back of past service”, thus creating additional contribution room.

Foradori explains that there are several tax advantages and considerations; buy back of past service, used to fund the cost of enhancing the pension benefits promised by retroactively ‘buying back’ years of credited service. Terminal funding, used to fund the cost of enhancing the pension benefits who decides to retire early. RRSP double dip, in the year that the PPP is established you can claim a deduction for the PPP and RRSP.

Another benefit PPPs offer over RRSPs is that all fees are tax deductible to the corporation: investment management, actuarial, administrative and trustee fees. The same cannot be said for RRSPs, creating further tax deductions for the corporation sponsoring the PPP.

Are all pension assets protected from creditors? A PPP provides creditor protection in the event your corporation files for bankruptcy. Creditors that have claims against your company cannot recover your PPP assets. As well you can transfer existing RRSP assets into your PPP providing further credit protection, since RRSPs are generally not trade-creditor protected. Business owners and incorporated professionals can also choose how to accrue their retirement savings: either defined benefit (DB) or defined contribution (DC). Each method has its advantages.

The PPP pension plan gives you the flexibility to switch between defined benefit (DB) or defined contribution (DC). As financial circumstances warrant, you can change how you fund your Personal Pension Plan.

Finally, incorporated business owners and professionals have the flexibility to invest in a wide variety of assets classes, similar to large pension plan in Canada. This is just a primer of what the PPP can do for incorporated business owners or professionals, each individual circumstance can and will vary.

If you want to learn more, contact Henry Foradori at [email protected] or 905-709-7066 Ext 2236. Argosy Securities Inc. is member of IIROC and CIPF.

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp Mercantile is a mid-market Business Brokerage and M&A firm.