Assessing IPPs

1. Assessing IPPs

2. Questions to be Addressed • Assessing potential strategies • Benefits of an IPP • Regulatory Constraints • Issues with an IPP • Are projected contributions attainable? • If yes, does an IPP provide the best result? • How do you get the money out?

3. Assessing Strategies • Consistent with clients goals • Value • Complexity • Flexibility • Cost • Risks

4. IPP Benefits

5. Advantages of an IPP • Enhanced income during retirement over an RRSP • Larger annual tax deduction for current service then would be permitted to an RRSP • Tax deductible past service contributions • Terminal funding opportunity • Ability to make additional contributions if IPP is in a deficiency • Pension splitting provides potential tax savings • Creditor protection • Mitigate against loss of small business deduction due to AAII exceeding $50,000

6. Why an IPP? Higher Contributions… • Higher Assets • Higher Income Does one necessarily lead to the other?

7. Regulatory Constraints

8. Contributions / Withdrawals RRSP • Limited contributions • Unlimited withdrawals IPP • Limited contributions • Limited withdrawals

9. RRSP Contribution Constraints *Average Industrial Wage (AIW)

10. IPP Contribution Constraints The annual contribution required to fund the cost of the expected retirement benefit using prescribed assumptions.

11. IPP Withdrawal Constraints *Average Industrial Wage (AIW) 2% X Years of Service X Income (Capped)

12. Pension Benefit - Example or • 2% per year of service • 30 years of service • Average salary - $200,000 Pension Benefit = least of: • 2% x 30 x 200,000 = $120,000/yr • 2% x 30 x 151,278 = $ 90,767/yr or • 3,025.56 x 30 = $ 90,767/yr

13. IPP Constraints - Designated Plan An IPP for a member who: • Is a connected person, or • Earns income (including bonuses) • Greater than 2.5 times the YMPE ($57,400 in 2019) Restrictions • Prescribed actuarial assumptions • Benefit enhancements at retirement only

14. Are Projected Contributions to an IPP Attainable?

15. Contributions - Type • Current service • Past Service • Terminal Funding

16. Current Service • Yearly contribution for service with employer between now and retirement • Estimated based upon actuarial assumptions • Revised every three years

17. Past Service • Lump sum contribution for prior years of service with employer. • Funded by employer and/or employee • Reduces member’s RRSP contribution room and/or • Forces asset transfer from RRSP to pension • Past Service Pension Adjustment (PSPA) prevents double dip

18. Terminal Funding • Lump sum contribution at retirement to enhance benefits. • Benefits that can be funded • Unreduced early retirement • Full indexing • Bridging

19. How Are Contributions Calculated? Current Service Calculate annual retirement benefit (pension) Calculate capital required at retirement to fund benefit Calculate annual contribution required to accumulate required capital Past Service Calculate annual retirement benefit Calculate capital required at retirement to fund benefit Calculate lump sum contribution required to accumulate required capital Terminal Funding Calculate capital required to fund enhancements

20. Designated Plan Prescribed Assumptions: • Rate of return - 7.5% • Increase in Average Industrial Wage - 5.5% • Inflation - 4% • COLA - 3% • Retirement age - 65

21. Capital Required to Fund Benefit Current Age – 45 Retirement Age - 65 Life Expectancy to age 85

22. Annual Contribution Current Age - 45 Retirement age – 65 Life Expectancy to age 85

23. Risks to Future Contribution Levels • Higher rates of return • Lower increases in Average Industrial Wage (AIW) before retirement • Lower inflation after retirement

24. Historical Rates *Annual Increase in YMPE *Annual Average – Table 18-10-0005-03

25. Impact on Maximum Benefit Average Industrial Wage

26. Impact on Contributions Example: • Female, age 45 • Past service – 10 years • Work 20 more years • Investment return – 7.5% • Current benefit - $2,944

27. Impact on Projected Benefit Example * Capital is depleted by age 90

28. Impact on Annual Contributions Past service contribution & transfer from RRSP total $306,000

29. Cumulative Contributions

30. Impact on Projected Benefit Investment Return is 5.5% * Capital is depleted by age 90

31. Impact on Annual Contributions Investment Return is 5.5% Past service contribution & transfer from RRSP total $306,000

32. Cumulative Contributions Investment Return is 5.5%

33. Are Projected Contributions to an IPP Attainable? Not if…. • Annual increase in Average Industrial Wage is less than 5.5% And/Or • Annual rate of return on investments is greater than 7.5%

34. Does the IPP Provide the Most Income?

35. Measuring Value • Balance Sheet • Income Capacity • Estate Values

36. Assumptions • Business-owner, female, age 45 • Employed since 2008 • Salary - $250,000 • Personal Tax Rate – 53% • Corporate Tax Rate • Active Income – 13% or 29% • Investments - 52% • Investment return – 7.5% • Increase in AIW – 5.5% • Inflation – 3%

37. Alternatives • IPP • Maximum RRSP plus corporate savings • 29% tax rate on active business income • 13% tax rate on active business income • No family trust Note: In each scenario, the retiree receives the same after-tax income

38. Contributions - Methodology • IPP • Age 45: Current and past service contribution • Age 46 – 65: Current service contributions • Non-IPP (Corporate) • Amount of IPP contribution, less amount paid to shareholder for maximum RRSP contribution, is left in the company - Income tax at 13% or 29% paid on remainder • After-tax proceeds invested in non-registered equity investments earning 7.5%

39. Annual Contributions Corporate Investment (29% Tax)

40. Annual Contributions Corporate Investment (13% Tax)

41. Income - Methodology • IPP • IPP is maintained during retirement and income is paid from the plan • Annual income at age 66 is $288,300, indexed at 3%/year • IPP income is split 50–50 with spouse • Non-IPP (Corporate Investments) • Equivalent income is withdrawn from RRSP/RRIF and non-registered investments • Minimum income is withdrawn from the RRIF starting at age 66, split 50-50 with spouse • Supplemented by dividend income from corporation starting at age 66, split 50-50 with spouse - Draw down of accumulated CDA balances and recovery of RDTOH

42. Balance Sheet Corporate Investment (29% Tax) * Investment income taxed at 52.67%

43. Balance Sheet Corporate Investment (13% Tax) * Investment income taxed at 52.67%

44. Estate Values - Methodology • IPP • Shareholder is last to die, remaining IPP balance is taxable and forms part of shareholder’s estate • Non-IPP (Corporate Investments) • Shareholder is last to die - RRSP balance is taxable - Company is wound-up, proceeds distributed to estate and taxed as a dividend

45. Estate Values Corporate Investment (29% Tax) * Investment income taxed at 52.67%

46. Estate Values Corporate Investment (13% Tax) * Investment income taxed at 52.67%

47. Annual Contributions - Differences Summary

48. Balance Sheet - Differences Summary

49. Estate Values - Differences Summary

50. Male, Age 55