Individual Pension Plans (IPPs) for Incorporated Business Owners

Where an RRSP is a personal, self-directed account with contribution room based on a formula applied to your earned income, an IPP is a formal pension plan registered with the Canada Revenue Agency and, depending on the province, provincial pension regulators as well. The corporation is the plan sponsor, an actuary determines the funding required to deliver a defined future pension, and the corporation makes the contributions, which are generally a deductible business expense.

IPPs tend to fit incorporated professionals and owner-managers who are past the early stage of their career: typically people in their mid-40s or older, drawing consistent salary (not just dividends) from their corporation, with a corporation profitable enough to fund the plan on an ongoing basis. Because it is built around one specific person's age, salary history and expected retirement date, an IPP is a personalized structure rather than a one-size-fits-all account.

RRSP room is calculated as a percentage of your prior year's earned income, up to an annual dollar maximum that adjusts periodically. An IPP works differently: an actuary calculates what needs to be contributed today, and each year going forward, to fund a defined pension payable at retirement, factoring in your age, years of past service, and salary. For younger owners the two numbers can be similar. For owners in their 50s and 60s with a strong salary history, the IPP-permitted contribution can exceed the RRSP maximum, sometimes by a meaningful margin.

There are also features unique to IPPs, such as the ability to fund for past years of service with your corporation and, in some cases, top-up contributions if the plan's investments underperform the actuarial assumptions, an obligation an RRSP never places on you. None of this comes with a guaranteed dollar figure of tax savings. What it comes with is a set of factors, age, income, years of incorporation and the actuarial numbers, that we can model with your accountant or actuary to see what your specific room could look like.

Age and salary history matter most. An IPP tends to make the most sense for owners roughly 45 and older with a steady T4 salary and several years of incorporation behind them; for younger owners with lower income, an RRSP is often simpler and cheaper to maintain. Your corporation's structure and cash flow matter too, since the corporation is on the hook for the contributions an actuary calculates are required, including potential top-ups, which asks more of the business than an RRSP ever does of you personally.

An IPP also costs more to run. There are setup fees, actuarial valuations every few years, and annual administration, costs an RRSP simply does not have. In exchange, many owners value that an IPP generally offers stronger creditor protection than a personal RRSP, and that it can be funded for past years of service. The flexibility trade-off runs the other way: an RRSP can be adjusted or paused easily, while an IPP is a formal pension plan with rules around funding, amendment and wind-up. None of these factors decide the question alone. They are worth weighing together against your own numbers before deciding either way.

At retirement or wind-up, an IPP typically offers choices that echo a defined-benefit workplace pension: continue the plan and draw a pension from it, or commute the value and transfer it to a locked-in retirement account, subject to the same kind of Canada Revenue Agency transfer limits that apply to commuting any DB pension. If the plan holds more than the commuted value requires, the surplus is generally taxable and needs its own plan to withdraw or otherwise manage; if it holds less, the corporation may need to fund the gap.

This is why we treat winding down an IPP as a modelling exercise, not a formality: the health versus longevity, spousal, and control questions that apply to commuting any defined-benefit pension apply here too, alongside the tax mechanics specific to a corporate-sponsored plan. Our pension commutation analysis on the investment side walks through those trade-offs before a decision is made.

An IPP can be a meaningful piece of the picture for the right incorporated professional or business owner, and unnecessary complexity for someone it does not fit. The way to find out is not a rule of thumb, it is running your numbers: your age, your corporation's salary and profitability, your years of incorporation, and what an actuary's projection would actually show for your contribution room.

We work through questions like this with the incorporated professionals and business owners we work with, modelling the possibilities in real time until the picture is clear. This page is general information, not tax or legal advice. Establishing an IPP should be discussed directly with us and with your accountant or a tax professional before you act.