Changes to IPP Restrict Surplus Contributions

Evelyn Jacks

The CRA recently released an important technical newsletter to make changes to Independent Pension Plan (IPP) rules. Some experts in the personal pension planning space think that this is a good thing.  Here is what’s at the centre of the  issue and why.

The new rules concern IPPs that use a money purchase provision to circumvent rules under subsection 147.1(5) of the Income Tax Act, which limit the employer contributions made to a defined benefit provision of an IPP or designated plan.  

Some definitions are in order to understand the ramifications of the new rules.  According to CRA:

A designated plan is defined in subsection 8515(1) of the Regulations. In general, an RPP with a defined benefit provision is a designated plan throughout a calendar year if “specified individuals” have more than 50% of the total defined benefit pension credits for the year.

A specified individual is an individual who is connected to a participating employer or who earns more than 2½ times the year’s maximum pensionable earnings (YMPE) for the year from participating employers. The YMPE for 2021 is $61,600. 

The designated plan definition also includes a plan that was a designated plan in the previous calendar year unless a waiver has been granted.

An individual pension plan (IPP) is defined in subsection 8300(1) of the Regulations. In general, an RPP that has a defined benefit provision is an IPP if the plan has fewer than four members and at least one of the members is related to an employer participating in the RPP. An RPP is also 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 plan exist primarily to avoid being categorized as an IPP.

JP Laporte, who is the co-author of a new certificate course on PPPs offered through the Knowledge Bureau, is in agreement with the changes and provides his opinion in the following commentary about the changes and what they mean, below:

“In its newest newsletter, CRA imposes some additional conditions on IPPs that often try to emulate the Personal Pension Plan ("PPP") but for abusive tax reasons. We totally agree with CRA in imposing these conditions.

Some IPP actuarial firms try to emulate the INTEGRIS PPP by adding a Defined Contribution account to a basic IPP when the IPP is in excess surplus. While incredible to us at INTEGRIS, they actually tell their clients to continue making contributions to the newly added DC account!

Other firms promoting IPPs are now filing plan texts that look like PPPs in that they have both Defined Benefit and Defined Contribution components, but they then only allow the money purchase provision to be used for annual (current service) in an effort to avoid turning the plan into a "Designated Plan", thus subject to the more restrictive maximum funding rules found in Income Tax Regulation 8515. Again, this 'cute' attempt to avoid the designation plan rules and to thus create much larger contributions/deductions - did not escape the attention of the Registered Plans Directorate and their colleagues in the Department of Finance. I am glad the CRA caught those bad apples that try to ruin the entire barrel for our law-abiding clients.”

Additional Educational Resources:  Enrol now in the Personal Pension Planning Course for Corporate Owner-Managers.