For several years, we have serviced the financial needs of both individuals and small businesses.  In that latter group, we have focused on enhancing wealth accumulation and tax efficiency within the corporation, including professionals that are incorporated. Since 2006, physicians have represented an increasing share of that group and, while some of their needs and objectives are the same as any other business owner, they also have some unique requirements. 

 

One area that we have focused on is achieving a growth of capital compared to simply using an RRSP and we do this by setting up an Individual Pension Plan, or IPP. We have discussed this in previous commentaries, but the major advantage of an IPP over an RRSP is the potential for increased capital accumulation and the tax advantages for the physician’s corporation.  The chart below shows the projected increase in capital for an RRSP compared with an IPP, in this case for a 55yr old individual, prepared by the consulting group Arthur J. Gallagher & Co. (formerly Buck Canada). The assumptions underlying this chart are shown below.

 

 

Assumptions:

Age of participant	55	RRSP assets available	$950,000
Date of hire	Jan 1, 1991	Fund accumulation rate	7.5% per year
Starting salary	$125,000	Salary increase rate	5.5% per year
Past service date	Jan 1, 1991	Inflation rate	4.0% per year
Effective date of IPP	Jan 1, 2024	Retirement age	65 to max 71
Current salary	$200,000

 

Recently, however, physicians have been introduced to an alternative, which is described as a Multi-Employer Pension Plan, or MEPP.  This arrangement is portrayed as an improvement over an IPP in areas such as cost, but at the end of the day the IPP may be more beneficial on a number of fronts.

 

Let’s begin some key differences. First of all, IPPs exist across all provinces that fall under federal pension jurisdiction, whereas the MEPP in question is not available in Newfoundland, New Brunswick, Quebec, Manitoba or Saskatchewan. When setting up an IPP, the physician can apply past service back to the date he or she incorporated. For non-physician business owners, this past service calculation can go back to 1991. Second, contributions to both types of pensions are made by the sponsoring corporation, however, contribution to an MEPP is limited to 18% of T4 earnings, while IPP contributions increase according to age. For example, at age 40 the contribution would be just under 19%, but at age 65 it rises to almost 29%. Third, an IPP is available to not only the physician, but also the spouse if he or she earns a salary from the corporation. For the MEPP in question, a spouse cannot participate unless he or she is also a physician.

 

As its name indicates, the IPP is individual to each physician’s corporation, rather than being a pooled pension among several corporations.  While pooling means that the longevity risk of the pension is spread across physicians, what ends up happening is that those that do not live to the average life expectancy of the plan will effectively subsidize those that live longer.

 

The argument that the costs associated with an MEPP might be true in terms of the actual management fees, it is important to note that the fees are embedded in the pension and paid out of contributions and investment income. For an IPP, that portfolio management fees are negotiated between the physician the wealth advisor and can be tax-deductible if billed to the corporation. Also, the administrative fees for the IPP can also be deducted, but this should be confirmed with a tax professional. This tax deductibility advantaged is enhanced even further by the fact that a physician can roll in all their RRSP assets into the IPP, over and above what is required at start-up.  We call these additional voluntary contributions and while the management fees on RRSPs cannot be deducted for tax purposes, once they make up part of the IPP’s total assets, that increased IPP fee now is deductible.

 

From an investment standpoint, the pooled pension follows one asset allocation strategy and portfolio management is centralized.  If a physician wanted a unique strategy or customization over the types of securities that the pension will be invested in, that is not going to happen.  By contrast, the IPP will have its own unique investment policy statement (IPS) that the physician will discuss with their advisor. Regulators have correctly focused on the need to have regular reviews with an investor to ensure that the portfolio is consistent with that person’s risk capacity and tolerance. As one ages, both areas of risk will typically moderate and might be lower than the levels of risk in a pooled pension. And it goes without saying that reviews of performance and all aspects of the IPP takes place with that advisor, who is also the portfolio manager. A physician does not have that same degree of direct and personal access in a pooled setting.

 

Finally, the IPP affords a level of flexibility to the physician not found in a pooled plan, including the contributions that the company makes each year.  Deciding on whether or not to establish an IPP begins with a thorough examination of the physician’s situation and retirement goals in a comprehensive financial plan. Once created, the IPP now becomes fully integrated in that plan and regularly reviewed. In my experience, it is this holistic approach that resonates with not only physicians, but all incorporated professionals and business owners. If you are in this group and have not explored the benefits of an IPP, then I encourage you to contact us to discuss.

 

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle

 

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This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2024.

 

Given the complexities involved, specialized tax and pension advice must be sought to ensure an Individual Pension Plan (IPP) is appropriate to individual situations. An IPP strategy must be considered within the context of a comprehensive financial and estate plan.

 

Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.

 

The contents of this communication are for informational purposes only and are not being provided in the context of an offering of any security, sector or financial instrument, and is not a recommendation or solicitation to buy, hold or sell any security.

 

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

 

Please note that rate of return projections are for demonstration purposes only. They are based on a number of assumptions and consequently actual results may differ, possibly to a material degree.

 

The information contained herein was produced by Arthur J. Gallagher & Co (formerly Buck Canada) and is intended for illustration purposes only. It is not intended to provide investment, tax, actuarial, legal or any other type of purpose. Buck does not assume any responsibility for any loss or damage you or any third party may suffer as a result of your or the third party’s use of, or reliance on the information contained herein. It is recommended that you seek professional financial advice.