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IPPs: Even More Important With Recent Changes

On July 18, 2017, the Department of Finance proposed significant changes to the taxation of private corporations. Should these provisions, (especially those relating to the taxation of “passive income” and “income sprinkling”) be enacted, the significant tax advantages that corporations and their shareholders have enjoyed will be eliminated.

The consultation period for the proposed rules ends in early October. We do not know how the Department of Finance will respond to all the submissions has been receiving. Thus, your corporation should not be wound up until there is greater certainty as to what the new rules will be.

The use of an IPP should be considered by owners of corporations to offset any tax advantages that could be lost if the proposed changes are enacted. While an IPP is a more complex plan than an RRSP, the advantages an IPP provides are significant when implemented in appropriate circumstances. For a certain demographic, an IPP is an essential part of a good tax planning strategy.

In some ways, an IPP is like an RRSP on steroids. IPPs can be a powerful tool for corporate owners with or without changes to the current taxation structure. IPPs come with their own set of rules. Understanding those rules will help determine if an IPP is suitable for your circumstances.

An IPP allows for the maximum retirement income that tax rules permit. This of course maximizes tax-deductible contributions to the employer. And, not only are the contributions to an IPP tax deductible, but administrative and other associated costs could also be deductible.

IPPs provide for income deferral in a similar fashion to an RRSP. Retirement income withdrawn from an IPP is only taxed when received; that IPP income is then accorded tax-preferred treatment. This “life annuity” income can be split with a spouse pursuant to the pension splitting rules. Income from an IPP can start as soon as age 55.

IPP retirement income rules are based on employment earnings of the member going back as far as 1991 (Dividends do not enter into these calculations.) Once the employment earnings history of the member is determined, the exact amount of tax-deductible contribution room available to the IPP is based on tax rules and actuarial formulas. We work with experienced professionals to ascertain these figures.

There are many advantages to having what would otherwise be corporate investment assets form part of the IPP. Prior to the July 18, 2017 proposals, these advantages included creditor protection and mitigation of the risk that a sale of corporate shares would not qualify for the enhanced capital gains exemptions (currently $835,716). Now, with the July 18, 2017 proposals, a transfer of corporate investment assets to an IPP reduces the investment income of the corporation, thus reducing the impact of the proposed rules as they relate to the taxation of passive income.

With tax-free growth, significant tax benefits, and generally higher contribution limits, it may well be worth your time to explore whether an IPP should be part of your financial plan.

At Tall Oak Private Wealth, we are first and foremost financial planners. We understand that a good plan encompasses a good strategy, and at least one plan B. If an IPP is not the solution for your personal circumstances, we will stay with you at the drawing board until we develop the plan best suited to your circumstances.

We invite you to learn more about IPPs. Stay tuned, we will be providing more information in our posts and seminars. Or, call us for an individual appointment to discuss.

The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.