Principal Issues: General overview of IPPs.
Position: Provided general information, in particular on contributions by employer and employee.
Reasons: See below.
XXXXXXXXXX 2014-055399
P. Tsang
July 23, 2015
Dear XXXXXXXXXX:
Re: Individual Pension Plans
This letter is in reply to your correspondence of November 3, 2014 regarding Individual Pension Plans ("IPPs"). In particular, you asked whether an individual who is also the sole shareholder of the company would be eligible to set up an IPP. Remuneration paid to the individual is mainly in the form of dividends. You were also interested in general information about IPPs.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in information circular (IC)70-6R6, Advance Income Tax Rulings and Technical Interpretations.
An IPP is defined in subsection 8300(1) of the Income Tax Regulations (the "Regs"). In general, it is a registered pension plan ("RPP") that contains a defined benefit provision where the RPP has fewer than four members and at least one of the members is related to a participating employer in the RPP.
Subsection 251(2) of the Act defines related persons. In general, where the employer is a corporation, an individual is related to the corporation if the individual controls the corporation, is a member of a related group that controls the corporation, or is related to a person who controls the corporation or to a person who is a member of a related group that controls the corporation. Accordingly, where an individual employee has a controlling interest in his/her corporate employer, that employee would be related to the corporate employer. Further, where such an employee participates in a defined benefit RPP that has fewer than four members, the RPP would be an IPP for purposes of the Act.
An RPP will also be an IPP if it is a "designated plan" and it is reasonable to conclude that the rights of one or more members to receive benefits under the RPP exist primarily to avoid being categorized as an IPP. In general, a designated plan is an RPP containing a defined benefit provision that is not pursuant to a collective bargaining agreement and the total pension credits of "specified individuals" under the defined benefit provisions of the RPP exceed 50% of all pension credits for all individuals under the defined benefit provisions of the RPP for the year. An individual is a specified individual in a calendar year if: 1) the individual is connected at any time with a participating employer under the plan, or 2) the individual's total remuneration for the year from participating employers and employers not at arm's length with participating employers exceeds 2½ times the Year's Maximum Pensionable Earnings ("YMPE"). The YMPE for a particular year may be found on our webpage: www.cra-arc.gc.ca/limits/.
Registration Conditions
In order for an IPP to be registered under the Act, and maintain its registration, it must comply with certain prescribed conditions. One of these conditions, prescribed under subsection 8504(1) of the Regs, imposes a maximum limit on the lifetime retirement benefits that may be paid under a defined benefit provision to a member in the year that the member starts receiving his/her pension. In general, the maximum limit is the sum of two separate calculations, both of which are, among other things, based on the member's compensation. In general, an individual's compensation includes the salary, wages and other amounts received by the individual, in respect of the individual's employment with the employer and included in the individual's income for the year by virtue of sections 5 and 6 of the Act. Further, dividends are included in a taxpayer's income in accordance with section 82 of the Act, and not sections 5 and 6.
Employer Contributions
Eligible contributions by an employer to an IPP are deductible in computing income for a year. In general, according to subsection 147.2(1), an employer's contribution to an IPP is deductible, if the contribution:
- is made in the taxation year or within 120 days after the end of the taxation year;
- is an eligible contribution as defined in subsection 147.2(2) of the Act;
- is made to fund benefits for the employer's employees in respect of periods before the end of the taxation year;
- complies with the past service pension adjustment certification requirements, where applicable, in subsection 147.1(10) of the Act; and
- was not deducted in computing the employer's income in a previous taxation year.
Employee Contributions
Paragraph 147.2(4)(a) of the Act provides that employee contributions for current or past service will be deductible in computing the employee's income if the contributions are made in accordance with the terms of the plan as registered. The contributions must relate to a period after 1989 and are only deductible in the year the contributions are made.
Where an IPP is a designated plan, there are restrictions on employee past service contributions. In particular, subsection 8515(9) of the Regs restricts the employee past service contribution to those contributions that would have been an eligible contribution under subsection 147.2(2) of the Act if made by the employer on behalf of the employee.
Taxation of Benefits from IPPs
Payments received from an IPP are considered pension benefits pursuant to paragraph 56(1)(a) of the Act. The payment may be a lump sum amount or a periodic amount. It should be noted that IPPs are subject to annual minimum withdrawal requirements beginning in the year a member of the IPP turns 72 years of age. In general, the IPP must pay the member an amount equal to the greater of: 1) the regular pension amount payable to the member in the year pursuant to the terms of the IPP; and 2) the minimum amount that would be required to be paid from the IPP to the member if the IPP were a registered retirement income fund of which the member was the annuitant.
For general information concerning RPPs we would refer you to the information available at the following webpages:
For information specifically concerning IPPs, please refer to the following webpages and documents:
We trust that our comments will be of assistance to you.
Yours truly,
Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
