Private Pension plan for professional corporation section – Ontario Tax Lawyer Comments
Private Pension Plan
Another advantage of incorporating a professional corporation is the ability to set up an Individual Pension Plan for the business owner/shareholders who are also employees of a professional corporation. It is important to begin planning for retirement early in your career by contributing to a private pension plan… A private pension plan can be registered or unregistered with the Ministry of Revenue. An employer’s contribution to the registered pension plan is not a taxable benefit for the employee whereas it is a taxable benefit if employer contributes to an unregistered pension plan for employee.
An Individual Pension Plan has many advantages over an RRSP, and it can be set up for high income earning incorporated professionals to obtain more immediate tax deductibility advantages than compared with an RRSP. An Individual Pension Plan is a registered and defined benefit pension plan Private Pension Plans have to be created by a corporate employer with the main purpose of “providing periodic payments to individuals after retirement and until death in respect of their service as employees.” Contributions to the Individual Pension Plan are tax-deductible for employer and if the corporate employer borrowed money to sponsor the contributions for the Individual Pension Plan, the interest can be deducted as well. Because it is a defined contribution plan, it generally will allow the contribution room to increase as a person ages.
There are limits to making contributions to an Individual Pension Plan, as the actual calculation of allowable contribution to an Individual Pension Plan is based on an individual’s age, employment earnings and a formula prescribed by the Canada Revenue Agency (CRA). Due to these factors, larger contributions to an Individual Pension Plan will likely be required as the individual gets older, since the expected time to retirement is shorter. Tax deductible contributions for past services can also be made. In addition, if the pension plan portfolio underperforms (meaning that if the return is less than 7.5% per annum), then the employer must contribute more to the pension plan. Earnings of the pension plan fund are not taxed while they are still in the pension plan. However, the assets of the Individual Pension Plan fund are locked in until retirement; this means that they cannot be withdrawn before retirement.
If the employee no longer works for the corporate sponsor of the employee’s Individual Pension Plan, or if the plan is terminated before the employee retires or turns 71 years old, then the plan must be transferred into a Locked-In Retirement Account or a locked-in RRSP account. No more contributions to the plan can be made and no cash can be withdrawn from it if it is transferred to a Locked-In Retirement Account or a locked-in RRSP account. Any gains that accumulate in the Locked-In Retirement Account and a locked-in RRSP account will continue to be tax-deferred. At retirement age, or when the employee turns 71 years old, the funds in the Locked-In Retirement Account or a locked-in RRSP account must be converted to a Life Income Fund (LIF), Locked-in Retirement Income Funds (LRIF), or a Registered Retirement Income Fund (RRIF), or used to purchase life annuity.
If you are an owner of a professional corporation, as an employer you will generally need to consult with an actuarial or an accountant to determine the necessary and optimal contribution for employees for a given year. An employer’s contribution to the employee’s IPP is not a taxable benefit for the employee. The cost of establishing and administering an Individual Pension Plan for employees is deductible for the corporate employer as an expense.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."