The conundrum of new IPP rules

When a revised version of the March federal budget is released next week, some actuaries hope it will reverse painful changes for Individual Pension Plans. IPPs are a type of Defined Benefit pension tailored to entrepreneurs and business owners.

Annex 3 of the budget proposed IPPs be subject to minimum withdrawal rules comparable to Registered Retirement Income Funds (RRIFs) once members reach age 72, coming into effect in 2012.

Few object to that change. More contentious is a change in how entrepreneurs can fund IPPs from past years of service. This is important to business owners who chose to build companies in their younger years rather than contribute to personal RRSPs. They tend to set up their IPPs relatively late in life.

Rules from 1990 let companies deduct the cost of funding IPPs from their corporate income for tax purposes, with generous provisions for "past-service" contribution room. But if the new rules laid out in March are retained in the revised budget, contributions for past years of employment would have to be funded first from money accumulated in existing RRSPs.

A joint submission from Gordon B. Lang & Associates Inc., Westcoast Actuaries Inc. and other firms asks Ottawa to rescind these proposed changes. It argues the revisions punish business owners who built large RRSPs: the bigger the RRSP, the less past service contributions they can put into their IPPs.

The government considers past service contributions to an IPP to constitute "a significant tax advantage," says Jamie Golombek, managing director of tax for CIBC Private Wealth Management, "Should these proposed rules be preserved in next week's June Budget, one of the biggest benefits of a establishing a new IPP for a mature business owner or incorporated professional will have been eliminated."

However, IPP specialists argue the original rules merely levelled the playing field, providing the same kind of Defined Benefit pensions as are enjoyed by the federal civil service or executives in large corporations.

Asked if Ottawa wants to shut down IPPs altogether, Gordon B. Lang executive vice-president Trevor Parry replied: "I don't think so. I don't think they understand one iota of what they propose. It's totally vague."

Stephen Cheng, managing director of Westcoast Actuaries, says the changes mostly affect those with large RRSPs. Those who made poor RRSP investment decisions in the past are rewarded while those who made prudent investments end up penalized for having too much RRSP funds.

That's because under the new rules, those with sufficiently large RRSPs to satisfy the whole IPP funding amount would get no past service, hence no corporate tax deduction. "If they made annual contributions to their RRSP and didn't hit any landmines they don't get tax relief," Parry says, "The government punishes prudence."

However, those who missed several years of contributions (often while building their business) can still get Past Service Contribution deductions for their company. The budget generally cracked down on several perceived tax loopholes but the IPP changes don't seem consistent with the government's support for new retirement programs like the Pooled Registered Pension Plans.

The latter are Defined Contribution (DC) in nature and aimed at pensionless workers in small and medium sized firms. IPPs by contrast appeal to an elite of successful business owners and entrepreneurs. There are about 10,000 such plans in Canada. Actuaries warn the IPP changes may also handicap the Canada Pension Plan. Many incorporated professionals take their compensation as dividends from their corporations, forgoing salaries and hence the requirement to remit contributions to the CPP. But professionals in IPPs often pay themselves salaries in order to qualify to fund their IPPs.

Fred Vettese, chief actuary of Morneau Shepell, says there is one pension playing field for those who save in DC-like arrangements such as RRSPs; another for the fortunate few in DB plans.

The budget measure effectively moves IPPs from the DB playing field to the DC field, he says. This may be fair in one sense, he says, since the raison d'etre of IPPs is to make larger tax-deductible contributions and accumulate more tax-sheltered monies than under RRSPs.

Even so, "the change in IPP treatment is quite unfair," Vettese says, "It hurts business owners and incorporated professionals who have IPPs but it doesn't apply to employees in other DB plans who purchase past service pensions."

Past-service pension buybacks apply to any DB plan but are more common in the public sector. Vettese says it's "disingenuous" for Ottawa to "position the change in IPP treatment as the closing of a loophole when more favourable treatment continues to be accorded to public sector employees."

A better solution might be to extend the change to all past service buybacks, he says.

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