The IPP: When It Holds More Than Your RRSP

For salaried employees, the RRSP's math is fair: 18% of income, capped at just over thirty thousand dollars a year under current limits. For incorporated business owners and professionals with meaningful retained earnings, that cap often means something different: the portion of income that can be set aside tax-efficiently for retirement bears no relation to what the company actually earns.

The IPP — Individual Pension Plan — was designed for exactly that position. Under the right conditions it holds considerably more than an RRSP. It also carries its own costs, constraints, and boundaries. This article lays out the mechanics, the advantages, the price, and the conditions under which it makes sense.

What it is

An IPP is a registered defined-benefit pension plan established by your corporation for one person — you, sometimes with a spouse or family members on payroll. In essence, it is a channel that turns the company's money into your pension: the corporation contributes and deducts, investments grow tax-sheltered inside the plan, and retirement income is paid as a pension.

The fundamental difference from an RRSP is how the room is calculated. The RRSP is a flat formula — 18% of income, the same for everyone. The IPP runs on actuarial logic: the target is a defined pension at retirement, and an actuary works backward to what must be contributed now to fund it. The older you are — the closer to retirement — the more each dollar of future pension costs to fund today, so the IPP's contribution room rises with age. The RRSP's doesn't.

The two curves cross around age 40. Before that, the IPP holds less; after, it pulls ahead — by the mid-fifties, annual contributions can run half again the RRSP limit, with the gap widening each year. From the mid-forties to sixty-five, the cumulative extra room typically runs into the hundreds of thousands of dollars. The precise figures come from an actuary working off your salary history; there is no generic answer.

Three features the RRSP doesn't have

Past service. At setup, the plan can fund pension credit for your historical years of T4 salary from the same company — reaching back as far as 1991. For an owner with a long salary history, this one-time funding can be a six-figure amount, largely paid and deducted by the corporation (with a portion offset by a transfer from your existing RRSP).

Losses can become deductible contributions. The plan's prescribed actuarial return assumption is 7.5%. When the investments inside the plan underperform it, the shortfall can, within the limits the rules allow, be topped up by the corporation — whether and how much is governed by actuarial and regulatory constraints — and every dollar of that top-up is a deductible corporate expense. In an RRSP, a market decline is simply a decline. In an IPP, a decline has an exit.

Terminal funding at retirement. At actual retirement, the plan can be enhanced — an early-retirement bridge, indexing — and the funding those enhancements require is a further one-time deductible contribution, arriving in precisely the years when many owners are selling or winding down and most need the deduction.

As a registered pension, IPP assets also generally carry stronger creditor protection than an RRSP (the scope varies by province and circumstance) — not a detail for anyone bearing business risk.

The costs and constraints

It requires T4 salary. Every dollar of IPP room is built on salary — a dividends-only compensation strategy leaves the plan nothing to work with. Whether to shift compensation from dividends to salary for the sake of an IPP is itself a question requiring whole-picture analysis, and the answer differs family by family.

The money is locked. Pension legislation makes these funds far more rigid than an RRSP: no discretionary withdrawals, and effectively untouchable before retirement. Before locking money in, be certain this is genuinely the retirement tranche.

Ongoing administration. Setup requires actuarial design; thereafter there are annual administration and filing costs and a full actuarial valuation every three to four years — fixed costs on the order of one to two thousand dollars a year. The larger the plan, the lighter that weight; small plans can see the advantage eaten by the overhead.

RRSP room is displaced. IPP contributions generate a pension adjustment that consumes nearly all of the following year's RRSP room. The two don't stack — choosing an IPP means replacing the RRSP, not adding to it.

The company must be able to feed it. Funding obligations follow the plan. Volatile profits or an early wind-up complicate matters. The IPP suits corporations with stable earnings and comfortable cash — not ones living season to season.

When it makes sense

As a checklist — when these hold together, the IPP is worth having an actuary price out:

Age 45 or older (the older, the stronger the case)
A multi-year history of T4 salary at or near the pensionable maximum (a high-five to six-figure salary)
Stable corporate profits and ample retained earnings, expected to continue
Money that is genuinely the retirement tranche, with the lock-in accepted
RRSP room that isn't your more important source of flexibility

Conversely, any one of these argues against it: compensation is dividends-only and staying that way; corporate cash flow is unsteady; the money may be needed before retirement; or you're under forty — at which point the RRSP plus corporate investing is simpler, more flexible, and far cheaper.

An angle often missed: it is also an estate tool

Family members on the company's payroll can join the same IPP. Under specific conditions, surplus within the plan passes between members more smoothly than an RRSP does at death — where the full balance lands on the final return. For families planning an intergenerational handover of the business, this is a direction worth evaluating with the actuary and the accountant; the rules in this corner are detailed, and this article only points at the door.

Execution

An IPP is not a product to buy; it is a regulated pension plan to establish. The actuary designs and values it; the accountant handles the corporate entries and filings; the planner answers the first and most important question — whether this tool belongs in your family's overall structure at all, when, and at what size. The order matters: whole-picture judgment first, execution second.

If your corporation is holding profits you're not sure how to deploy, a Structural Diagnostic is a good place to start — the IPP is one possible answer, but the question comes first.

Official references

This article is general information based on rules at the time of writing; limits and costs are magnitudes and change annually. Specific designs are calculated by an actuary from your salary history — weighing the tool inside your overall structure is precisely what planning is, and at the execution stage we work alongside the actuary and your accountant.

This article is general educational information based on rules at the time of writing, not personalized financial, tax, or legal advice. Every family's situation deserves its own analysis.