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Individual Pension Plan (IPP)

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An individual pension plan is a defined benefit registered pension plan with very few members — often just one — typically established by an incorporated business for an owner-manager or a senior executive. It is an ordinary registered pension plan in law, subject to the same registration conditions and the same defined benefit rules, but because its membership is small and usually connected to the employer, it attracts an additional layer of restriction under the designated plan rules. Those restrictions exist because a plan with one member who also controls the employer can otherwise be funded far beyond what a genuine pension arrangement would require — which is why an IPP file draws scrutiny that an ordinary DB plan of the same size would not. This tutorial covers what an IPP is, the designated plan constraints, the annual cycle, past service funding, and the minimum withdrawal requirement that surprises people.

How to work through this tutorial

This follows an IPP from establishment through the annual cycle to wind-up: 1. Understand what an IPP is and why anyone establishes one. 2. Register the plan — it is an ordinary RPP registration with additional scrutiny. 3. Understand the designated plan rules and the funding constraints they impose. 4. Work the annual cycle: valuation, contributions, the annual return, and the pension adjustment. 5. Handle past service funding, which is a large part of why IPPs are established. 6. Meet the minimum withdrawal requirement once the member reaches the relevant age. 7. Plan for wind-up, which is not optional and needs thinking about early. 8. Check your work against the common pitfalls. 9. Verify every specific against CRA's published guidance before relying on it. This tutorial explains obligations and constraints. It does not calculate contributions, benefit entitlements or pension adjustments — an IPP needs an actuary and this tool is not one.

What an IPP is and why it exists

An individual pension plan is not a separate species of registered plan. It is a defined benefit registered pension plan, registered under the same provisions and subject to the same conditions as any other, that happens to have one member or very few. The term is descriptive rather than statutory. The appeal is straightforward. A defined benefit provision must be funded to deliver the benefit it promises, and for an older individual with high earnings and a long service history, that required funding can be considerably larger than what the money purchase and RRSP limits would permit for the same person. Contributions are deductible to the corporation, and the assets grow tax-sheltered. This is also precisely why IPPs attract restrictions. A plan with one member who also owns the employer has neither the arm's-length tension nor the diversified membership that keeps an ordinary pension plan honest. The member decides the benefit, the member decides the contribution, and the member receives both. The designated plan rules exist to close that gap, and they are the substance of IPP administration. An adviser who presents an IPP as an unconstrained deduction has described the vehicle without its constraints. IPPs also carry real costs — actuarial valuations, registration, annual filings, and eventual wind-up — that a group plan spreads across many members and an IPP does not. Whether the arrangement makes sense is a question about that trade-off, and it is a question for the client's advisers rather than for this reference.

The designated plan rules

A plan with few members, where those members are connected to the employer or are high earners, is a designated plan, and designated plans face additional funding constraints. The central constraint is the maximum funding valuation. An ordinary defined benefit plan is funded on assumptions the actuary considers appropriate; a designated plan must also be tested against prescribed assumptions that cap how much may be contributed. The prescribed basis is deliberately conservative in the sense that matters here — it limits the deduction rather than maximising it. The practical effect is that the contribution an IPP can support is determined by the prescribed maximum funding basis rather than by what the plan's own actuary might otherwise justify. Contributions above that are not deductible and can put the registration at risk. Designated plan status turns substantially on connected persons — broadly, members with a significant ownership interest in the employer. Since the typical IPP member is the owner of the business, most IPPs are designated plans and it is safer to assume yours is than to assume it is not. Actuarial valuations are required periodically rather than annually, and the interval for a designated plan should be confirmed rather than assumed from general defined benefit practice. The benefit itself is capped the same way as in any defined benefit provision: an accrual rate ceiling and the annual defined benefit limit, whichever binds first. The defined benefit limit changes every year and this tutorial does not state it. For the high earners who typically hold IPPs, the absolute limit is usually what binds, which makes using the current year's figure more consequential here than in a plan of ordinary earners.

The annual cycle

An IPP runs the same annual cycle as any defined benefit provision, with the same filings, and the small membership does not reduce the obligations. An actuarial valuation on the prescribed maximum funding basis determines what may be contributed. Between valuations, contributions follow the schedule that valuation set. Because the plan has one member, there is a temptation to treat the contribution as a year-end planning decision — but the amount is determined by the valuation, not chosen. The plan files an annual information return with CRA covering membership, contributions and plan status. This is easy to overlook in an IPP precisely because there is only one member and the plan feels more like an account than an institution. It is nonetheless a registered pension plan and it files. A pension adjustment is determined for the member each year on the defined benefit basis — the benefit entitlement grossed up and reduced by the offset — and reported on their T4. The pension adjustment tutorial covers the method and the reporting. The PA consumes the member's RRSP room for the following year, which is the point people most often fail to explain to an IPP member. Establishing an IPP does not add to the member's total tax-assisted room without cost: the pension accrual reduces their RRSP room the same way any other pension accrual would. Plan amendments must be filed as they are made, on the same footing as any registered plan.

Past service funding

A large part of the appeal of an IPP is the ability to fund benefits for service already rendered — often many years of it, where the member has worked for their own corporation for a long time without a pension plan. Crediting benefits for past service gives rise to a past service pension adjustment, with the certification process and the forms that go with it. The past service tutorial covers the mechanics; two points matter particularly for IPPs. First, certification depends on the member having enough unused RRSP room to absorb the PSPA. An owner-manager who has contributed to their RRSP diligently for twenty years may have very little room, and may therefore be unable to credit the past service they established the plan to fund. Where they are short, a qualifying transfer from their RRSP to the plan can bridge the gap — which typically means moving RRSP assets into the IPP. Second, additional restrictions apply to past service benefits for connected persons, and the IPP member usually is one. Confirm those conditions before designing the past service credit rather than after committing to it. The order of operations is what matters here. Where certification is required, the benefit cannot be credited until CRA has certified the PSPA. An IPP established late in a year with the intention of funding past service immediately can run into a timing problem that no amount of goodwill resolves.

Minimum withdrawals and wind-up

Once the member reaches the relevant age, an IPP is subject to a minimum annual payment requirement broadly parallel to the minimum withdrawal rules for a RRIF. The plan must pay out at least that amount each year regardless of whether the member wants the income. This surprises people, and it undermines a common misconception about IPPs — that assets can be left to compound in the plan indefinitely. They cannot. Confirm the age at which the requirement begins and how the minimum is determined, and factor it into any projection made when the plan was established. Benefits must also commence by the deadline applying to any registered pension plan, tied to the member's age. Wind-up needs thinking about early rather than at the end. An IPP typically winds up when the member retires or the business is sold, and the plan's assets must then be dealt with — used to provide the promised pension, transferred to a locked-in vehicle within the permitted limits, or otherwise settled according to the plan's terms and the applicable pension legislation. Where the plan holds more than is needed to fund the promised benefit, dealing with the surplus is constrained rather than discretionary, and the treatment should be established well before wind-up. A surplus that seemed like a good outcome during the funding years can be an awkward problem at the end. Wind-up also surfaces every unfiled amendment and every year the valuation was late. A plan administered tidily winds up cheaply; one that was treated as an account rather than a registered plan does not.

Common pitfalls

Treating the IPP as a corporate account rather than a registered pension plan. It registers, it files, it is amended formally, and it can have its registration revoked. Assuming the contribution is a year-end planning choice. The amount is determined by the actuarial valuation on the prescribed maximum funding basis, not chosen. Contributing above what the maximum funding valuation supports. Excess contributions are not deductible and put the registration at risk. Assuming the plan is not a designated plan. Where the member is connected to the employer — the usual case — it is, and the additional constraints apply. Carrying forward a prior year's defined benefit limit. It changes annually, and for the high earners who hold IPPs the absolute limit is usually what binds. Missing the annual information return because there is only one member. Designing a past service credit without first checking whether the member has the RRSP room to have it certified. An owner-manager with a well-funded RRSP may not. Crediting past service before certification where certification is required. Overlooking the additional past service restrictions on connected persons. Expecting assets to compound in the plan indefinitely. The minimum payment requirement applies once the member reaches the relevant age. Leaving wind-up planning, and surplus treatment in particular, until wind-up. Not explaining to the member that the pension adjustment reduces their RRSP room for the following year.

What to verify this tutorial against

This was drafted without a source document. IPPs sit at the intersection of the general defined benefit rules and the designated plan restrictions, both technical, so confirm everything here before acting — and an IPP needs an actuary regardless of what any reference says. CRA's guide to registered pension plans covers registration, the registration conditions, amendments and the administrator's obligations, all of which apply to an IPP in full. The Income Tax Regulations set out the designated plan rules, the prescribed maximum funding basis and the valuation requirements. These are the constraints that make IPP administration distinctive and they should be read directly. The past service pension adjustment guide covers PSPAs, certification, qualifying transfers and the additional restrictions on connected persons — the material most relevant to establishing an IPP with past service. The pension adjustment guide covers the annual PA determined on the defined benefit basis. The Registered Plans Directorate's newsletters carry administrative positions on individual and designated plan questions, including wind-up and surplus, and are frequently the only published guidance on the situations IPPs generate. The defined benefit limit and the other annual limits are published in CRA's limits table and change every year. Take the figure for the year in question from the table. The applicable pension standards legislation governs locking-in, wind-up and surplus, and is not a tax matter. Which regime applies depends on the employment.

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