Wine Industry Articles
Individual Pension Plan (IPP)
By: Brian Cockburn
February 2006
Those who own and operate wineries know all about risk. Every step in their business process – from harvesting the fragile grape to bottling the finished wine – is fraught with the potential for disaster. Yet when it comes to retirement planning, wineries can secure a measure of control with one financial tool – the Individual Pension Plan (IPP).
Although increasing in popularity, the IPP is not for everyone. Under the law, this defined benefits registered pension can only be created by an incorporated business, and is only for individuals – owners, senior executives and key personnel – who usually make over $81,000 a year. There are administrative costs attached, so it’s not necessarily a good fit for a small business. Also, as a defined plan, the amount paid out upon retirement is pre-determined.
But for enterprises with the right revenue stream, the IPP has many attractive features, especially when it comes to the security of key employees. Among its many advantages, the IPP offers better risk protection than RRSPs, especially where any surplus belongs to the employee. Further, should some unforeseen disaster hit the enterprise, IPPs are protected from creditors.
IPPs have grown increasingly attractive in the last few years thanks to the lackluster performance of many investment portfolios. IPP contributions are made by the company, and depending on age can greatly exceed RRSP limits. While there are limits on how large the retirement benefits can be, the plan’s chief advantage is that with no pre-set contribution limits, any shortfall on investment returns can be made up with higher contributions in the future.
For example, take a 50 year old executive whose annual salary exceeds $100,000. For the 2005 tax year, the employer could contribute $20,807 into that executive’s IPP, compared to only $15,500 for an RRSP. As an added advantage, contributions can be spaced out. There is no legal obligation for an employer to make an annual minimum contribution. Instead, a missed contribution can be carried forward and deducted in a future year similar to the unused portion on an RRSP. The key difference is that unused RRSP room carried forward only accumulates the dollar amount, where the unused pension contribution room is carried forward with interest.
The IPP has also become an effective recruitment and retainment tool. What was once a surplus labour market has become increasingly competitive – especially when it comes to skilled staff. For long-term employees, the offer by an employer to establish an IPP speaks to a strong commitment to that person’s welfare. Contributions can be made for past service benefits without any restriction starting from the year 1991.
There is, however, a catch. Tax rules prevent doubling-up RRSP and IPP contributions for those past years. Where a past service contribution is made, the employer is subject to a retroactive past service pension adjustment. This mean RRSP contribution room for those years will be reduced.
The IPP does have its disadvantages. Unlike RRSPs, IPPs come with administrative costs. Although actuarial fees have dropped sharply in the last few years, it costs an average $3,500 to implement the plan, with an additional $1,750 every three years for actuary to recalculate the contributions required. On top of this is an annual $600 administrative fee. Although the contributions are tax deductible, the IPP expenses are not.
Under the IPP your funds are locked-in, unlike regular RRSPs where you have access to your money, although any withdrawal is heavily taxed. And while RRSPs have the option of spousal contributions, IPPs do not. Further, participation in an IPP greatly reduces and sometimes eliminates the amount you can contribute to your RRSP, and an excess surplus in the IPP may reduce future contributions.
As with any retirement plan or strategy, companies should seek professional advice. A qualified financial advisor can determine the structure that’s right for you and your employee.
Brian Cockburn is a Partner in the Vernon BC office of BDO Dunwoody LLP. He is involved in all areas of client service including accounting, auditing, taxation, business consulting and succession planning. He can be reached at tel. 250.545.2136; bcockburn@bdo.ca
