Setting up an IPP as a way to park money for retirement could make sense for some, but experts caution the plans are situation-dependent.dolgachov/Getty Images/iStockphoto
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Proposed changes to the capital gains inclusion rate are likely to make individual pension plans (IPPs) more attractive to certain business owners as retirement saving vehicles that can cut their corporate tax bill.
On June 25, Canada’s federal government plans to increase the capital gains inclusion rate to 66.7 per cent from 50 per cent, as stipulated in April’s budget.
“The day these proposed changes came out, an actuary I work with on IPPs e-mailed me right away and said, ‘Well, if you liked IPPs before, you’re going to love them now,’” says Mark McGrath, a financial planner with PWL Capital Inc. in Squamish, B.C., whose clients are mainly doctors.
While the proposed change is not an unprecedented shift in the tax ecosystem (the inclusion rate was 75 per cent before being lowered to 50 per cent in 2000), there’s concern among financial professionals and business owners across sectors about its impact, especially since the changes are not yet set in stone.
For individuals, the increase will apply to capital gains of more than $250,000, but the higher inclusion rate will apply to all capital gains for corporations and trusts. Many Canadians – including doctors, dentists, IT consultants and real estate agents – who hold investments within their corporations for tax efficiency may be looking for other options.
IPPs are defined-benefit pensions most suitable for high-earning business owners and self-employed people over 40 years of age, and can be set up for one person or a few people.
An IPP is often set up once a company has generated significant earnings and wants to avoid paying too much taxes. The corporation can make tax-deductible contributions to the IPP and the employee gets tax-deferred growth inside the plan as well as guaranteed retirement income. Assets in an IPP are also exempt from creditors.
Setting up an IPP to park money for retirement could make sense for some, but experts caution the plans depend on the situation.
“Anybody who’s in the scenario in which they’re retaining money inside the company to invest passively, such as for retirement, is going to be hit with the new proposed [higher] capital gains [inclusion rate] on every single dollar of capital gains,” Mr. McGrath says. “The question is to what degree, because every situation and every individual family is going to be a bit different in how they’ve invested, what the gains are, how much they have, and everything else.”
While he has many clients who are asking about the capital gains changes and what it means for their retirement or other savings, Mr. McGrath warns that making any rash decisions – such as setting up an IPP before June 25 – could be ill-advised, as the plans are complex and require time and expertise to set up.
“In a lot of cases, if you weren’t going to trigger that capital gain for a few years anyway, then it doesn’t make sense to rip off the Band-Aid,” he explains. “If you already had something planned – say, you’re going to take a whole bunch of money out [of your corporation] in the next two years … then maybe you want to get ahead of this rule. If you weren’t going to do that, deferring into the future can make sense.”
IPPs allow more money to be saved for retirement than a registered retirement savings plan (RRSP), which is why business owners may consider them regardless of the capital gain changes, says Matthew Ardrey, portfolio manager and senior financial planner at TriDelta Private Wealth in Toronto.
“There are great benefits in terms of being able to put more into [an IPP] than an RRSP,” he says. “You can do these top-up payments, termination payments, all based on actuarial calculations.”
Mr. Ardrey notes that at retirement, clients can buy an annuity with their IPP or transfer the funds into a locked-in retirement account and over to a registered retirement income fund.
But before jumping into an IPP, Mr. Ardrey also talks to his clients about whether this is the right step for them, regardless of the changes to the treatment of capital gains.
“If you’ve been a business owner and you’ve taken just dividends out of your corporation for the past 20 years, this [structure] is not going to work for you,” he says, and IPPs are subject to pension legislation and more complicated to set up, requiring accountants, lawyers and actuaries.
While IPPs are complicated, Lea Koiv, president of Lea Koiv and Associates Inc., a retirement and tax planning firm in Toronto, says “if somebody is a suitable candidate, the IPP could be set up” before the June 25 changes.
Like Mr. McGrath and Mr. Ardrey, Ms. Koiv says there are many advantages to IPPs but cautions strongly that the client needs to be aware these vehicles should be set up only in “appropriate circumstances.”
Ms. Koiv’s biggest problem with the proposed capital gains changes, aside from the impact on business owners and their corporate taxes, is that no one knows for sure if they’re going to happen. The Liberal government hasn’t yet tabled legislation to implement the budget proposals.
“I hate it when people have to make decisions in the absence of legislation,” Ms. Koiv says. “That’s totally unjust.”
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