Individual Pension Plans: Death Declared PrematurelyTrevor Parry
In 2011, the Federal Budget introduced proposed changes to “Designated Pension Plans”, better known as Individual Pension plans (IPPs). These plans had become popular with some business owners and incorporated professionals as it allowed them to enjoy participation in a defined benefit pension plan and at the same time generate handsome deductions for their businesses. The budget called for a reworking of how IPPs were to be funded, and how money was to be withdrawn upon retirement. These proposals were made in response to what some in the Department of Finance considered to be aggressive uses of IPPs, namely the generation of indefinite deferrals and large deductions.
The most offending recommendation was that funding of an IPP by the company would be reformed. If the individual had sufficient RRSP assets they would simply roll those assets into the IPP and the company would be precluded from any supplementary funding for years of past service. For a 55 year old who had worked for their own company since IPPs were introduced in 1991 that would have meant the cancelation of an $185,000 contribution/deduction. However if the individual had been capricious through investment or lifestyle and had insufficient RRSP assets their past service contributions would remain intact.
Many in the financial media and accounting community declared IPPs dead and were quick to recommend alternative strategies (many in my opinion that are far more risky than an IPP). In this nadir of government policy making my firm banded together with competitors in a collegial endeavor to change government policy. In this we were aided by the Conference for Advanced Life Underwriting (CALU) an organization I consider to be the vanguard of financial planning in Canada, and the Canadian Federation of Independent Business, and their intrepid Chair, Catherine Swift.
The lesson learned; don’t consider something law until it becomes the law. Our efforts were successful. The enabling legislation, Ways and Means, introduced in the fall and passed in early December marked a substantial retreat by the government from their earlier budget proposals. I shall expand upon the technical nature of what was passed into law in a later installment. The key element of past service funding however is substantially unchanged. The considerable deductions that were available are almost completely intact.
I am yet to hear a retraction, correction or update from those who were so quick and eager to declare the IPP dead. One would hope that those who feel qualified to comment on legislation might think to read it from time to time?
Posted: August 28th, 2012 under General.