What is changing?
The Government of Ontario is making changes to OHIP+, effective April 1, 2019
Designed for owners and key employees of incorporated small businesses, an Individual Pension Plan (IPP), is exactly what it sounds like - your own version of a company pension plan.
Registered with both the provincial and federal governments, IPPs are governed by the same legislation that governs regular pension plans. Contribution amounts are based on a number of factors, including your age, income, length of service with the company, the rate of return achieved within the IPP and the rate of inflation. These on-going contributions can be higher than the contribution limits of an RRSP. Contribution amounts are calculated by an actuarial service, with a tri-annual evaluation to ensure that the IPP is achieving the prescribed rate of return over a three year period. Contributions become a corporate deduction, as opposed to the personal deduction for an RRSP account. An Individual Pension Plan replaces your RRSP.
There are four opportunities to fund an IPP. In addition to the on-going contributions, IPPs have the option of past service contributions, fully indexing the IPP to inflation at retirement, and the purchase of a "bridge benefit".
The past service contribution is possible when you have been employed by the corporation for several years, without the benefit of the IPP. Past service allows you to receive credit for the time that you worked before the IPP started. Fully indexing the IPP to inflation allows for a lump sum contribution at retirement. The actuarial calculations used for the on-going contributions use a factor of inflation minus 1%. At retirement, which coincides with the sale of the business for many small business owners, there is an opportunity to fully index the plan to inflation. In other words, you can 'make up' for the running deficit that exists because of the inflation minus 1% calculation.
This is a tremendous tax-sheltering opportunity, at a time when you have the money available. The bridge benefit is applicable to those retiring before age 65. It is designed to cover the gap between your retirement, and receiving the Canada Pension Plan and Old Age Security. Similar to the fully indexing option, the bridge benefit provides an opportunity to tax shelter a lump sum, which for many will coincide with the sale of their business.