The Case for an Individual Physician Pension Plan
Planning for Retirement: The Best Pension Plans for Canadian Physicians
Planning for retirement is a critical aspect of financial well-being, especially for physicians in Canada who often lack access to traditional employer-sponsored pension plans. Fortunately, several tailored pension solutions are now available to help doctors secure their financial future. This article explores the best pension plans for Canadian physicians, focusing on Personal Pension Plans (PPPs) and other viable options.
2024 Capital Gains Tax and Use of Medicine Professional Corporations
Curious why there's no individual physician pension plan in Canada to help you save for retirement in a tax efficient way other than passive income in your Medical Professional Corporation (MPC) or RRSP? Considering that many physicians use their MPC to save for retirement, since 2014 federal government legislation has made it more and more unattractive from a tax perspective.
The likelihood that you will pay more tax as part of the federal budget passed in 2024, the old way of using the medical professional corporation doesn't seem tax efficient anymore for the long term.
Understanding the Need for Physician Pension Plans
Unlike many professionals, physicians in Canada typically operate as independent contractors or through Medical Professional Corporations (MPCs), which historically excluded them from participating in traditional pension plans like the Healthcare of Ontario Pension Plan (HOOPP). This lack of access has led to a gap in retirement planning, making it essential for doctors to seek alternative solutions that offer both tax efficiency and robust retirement savings.
Do You Have 'Pension Envy'?
No more need to envy those on HOOP, the Teachers Pension Fund, or the like. Incorporated healthcare professionals using a Medicine Professional Corporation can also enjoy the benefits of a pension under their professional corporation and maintain full control.
The Emergence of Personal Pension Plans (PPPs)
Personal Pension Plans have emerged as a viable solution for incorporated professionals, including physicians. A PPP is a registered pension plan designed specifically for business owners and incorporated professionals, allowing them to make significant tax-deductible contributions toward their retirement. This plan offers a structured approach to retirement savings, providing higher contribution limits compared to Registered Retirement Savings Plans (RRSPs) and potential for enhanced retirement benefits.
Key Features of Personal Pension Plans
Higher Contribution Limits: PPPs allow for larger annual contributions than RRSPs, especially beneficial for high-income earners like physicians.
Tax Deductibility: Contributions made by the corporation to the PPP are tax-deductible, reducing the overall taxable income.
Creditor Protection: Assets within a PPP are generally protected from creditors, offering financial security.
Flexibility: PPPs can be tailored to individual financial situations, accommodating varying income levels and retirement goals.
15 Reasons to Have a Personal Pension Plan for Physicians
Higher Contribution Limits: Physicians can save more annually compared to RRSPs.
Enhanced Tax Deductions: Corporate contributions are tax-deductible, reducing overall taxable income.
Tax-Deferred Growth: Investments grow on a tax-deferred basis, maximizing compound growth.
Creditor Protection: Assets held in a PPP are safeguarded from potential creditors.
Flexible Investment Options: PPPs offer a wider array of investment choices than many traditional plans.
Income Splitting Opportunities: Retirement income can be split with a spouse, optimizing tax savings.
Combines Defined Benefit and Defined Contribution Components: Offers stability and growth potential.
Greater Retirement Security: Structured savings lead to more predictable retirement outcomes.
Legacy Planning: PPPs can be structured to pass wealth to beneficiaries in a tax-efficient manner.
Catch-Up Contributions: Physicians can make past service contributions to enhance savings.
Inflation Protection: Defined benefit components can offer cost-of-living adjustments.
Maximizes Corporate Tax Efficiency: Reduces active business income through corporate contributions.
Works with the Lifetime Capital Gains Exemption (LCGE): Enhances wealth preservation when selling qualifying shares.
Customizable Contribution Schedule: Adaptable to changing income levels and financial goals.
Long-Term Wealth Building: Provides a comprehensive strategy for building and preserving wealth.
Lifetime Capital Gains Exemption Opportunity
PPPs can also work in tandem with the Lifetime Capital Gains Exemption (LCGE) to provide additional tax benefits. For incorporated physicians, the LCGE allows a significant portion of capital gains from the sale of qualifying small business shares, like those of a Medical Professional Corporation, to be exempt from capital gains tax. By using a PPP alongside the LCGE, physicians can maximize their wealth preservation. Capital gains generated within a PPP grow on a tax-deferred basis until withdrawal, which can be strategically timed to minimize overall tax liability. This dual strategy enhances long-term financial planning by reducing taxable income through the PPP while shielding eligible capital gains with the LCGE.
Eligibility and Setup of a Personal Pension Plan
To establish a PPP, a physician typically needs to be incorporated, as the plan requires a sponsoring employer to make contributions on behalf of the employee (the physician). The physician must receive T4 (salary) income from the corporation, as dividends are not considered pensionable earnings. This structure allows the corporation to fund the pension plan, providing tax advantages and facilitating systematic retirement savings.
Steps to Establish a PPP
Incorporation: Ensure you have a Medical Professional Corporation in place.
Consultation: Engage with a financial advisor or pension plan provider to assess suitability and design the plan.
Plan Registration: Register the PPP with the appropriate pension regulatory authorities.
Contribution Strategy: Develop a contribution schedule aligning with your financial and retirement objectives.
Comparing PPPs to Other Retirement Savings Options
While RRSPs and Tax-Free Savings Accounts (TFSAs) are common retirement savings vehicles, they may not offer the same benefits as PPPs for physicians.
RRSPs vs. PPPs
- Contribution Limits: RRSPs have lower annual contribution limits, which may not suffice for physicians seeking to maximize retirement savings.
- Tax Treatment: Both RRSP and PPP contributions are tax-deductible; however, PPPs offer additional corporate tax planning opportunities.
- Investment Control: RRSPs provide individual control over investments, while PPPs may offer professional management and broader investment options.
TFSAs as a Supplement
TFSAs can complement PPPs by allowing tax-free growth on investments, though contributions are made with after-tax dollars and limits are significantly lower.
Personal Pension Plans vs. Individual Pension Plans
In Canada, both Personal Pension Plans (PPPs) and Individual Pension Plans (IPPs) offer tax-efficient retirement savings, but they differ in structure and benefits.
- Structure: IPPs are defined benefit plans, meaning retirement benefits are pre-determined based on factors like salary and years of service. PPPs offer a combination of defined benefit and defined contribution components, providing more flexibility.
- Contribution Limits: PPPs often allow for higher contribution limits, especially for younger professionals, while IPPs are generally more suitable for older, high-income earners.
- Flexibility: PPPs offer more adaptable investment strategies and contribution structures, whereas IPPs follow stricter funding requirements.
- Administrative Complexity: IPPs require more rigorous compliance and administrative oversight compared to the more flexible and scalable PPPs.
Tax Implications and Benefits
Implementing a PPP offers several tax advantages:
- Immediate Tax Deductions: Corporate contributions to the PPP reduce taxable income, leading to immediate tax savings.
- Tax-Deferred Growth: Investment growth within the PPP is tax-deferred until retirement, allowing for compounded growth.
- Income Splitting: Upon retirement, pension income can potentially be split with a spouse, optimizing tax liabilities.
Considerations Before Establishing a PPP
While PPPs offer numerous benefits, it's essential to assess their suitability based on individual circumstances. Consider the following:
- Cash Flow Requirements: Ensure consistent cash flow to meet the required contributions.
- Investment Horizon: PPPs are long-term commitments; assess your retirement timeline accordingly.
- Regulatory Compliance: Stay informed about regulatory requirements and ensure ongoing compliance.
Medical Professional Corps. & Physician Pension Plan
There was never a true registered physician pension plan due to the nature of the relationship between provinces and doctors who operated as independent business owners. Because physicians aren't employees of the provinces and their healthcare programs, they couldn't get a defined benefit plan like HOOP and the best they could do was an RRSP.
The allowance for physicians to establish a medicine professional corporation (MPC), leading to a employer/employee relationship, together with the payment of income that's salary and/or bonus based, made it possible for the MPC to sponsor and fund a separate registered pension plan for the physician/employee.
Passive Income Taxation Solution
The act of contributing ‘passive assets’ from the balance sheet of the Medical Professional Corporation into the Personal Pension Plan also generates other advantages.
- This purifies the shares of the Medical Professional Corporation should the doctor decide to exercise the lifetime capital gains exemption (LCGE) at some point in the future.
- This removes passive assets off the balance sheet that will no longer count as passive income when applying the TOPI test on passive income. This protects the Medical Professional Corporation’s $500,000 small business limit allowance where corporation taxation is significantly lower than for regular active business income.
Note: not all physicians took advantage of incorporation and opted instead to take dividends over T4 salary income due to the tax benefit. However, in 2014 this advantage of dividends over salary became null and tax inefficient.
Why Personal Pension Plans Get Higher Tax Deductions
The reasons for this significantly higher tax deduction room stem from the wide range of special rules that govern classic Defined Benefit arrangements. The ways in which a Medical Professional Corporation can contribute more money on a tax-deferred basis to a registered Personal Pension Plan than under money purchase arrangements include:
- The ability for the MPC to recognize years of past service when the corporation paid T4 salary/bonus income to the physician.
- The ability in the first year of the Personal Pension Plan for the physician to also make an RRSP contribution that can be rolled into the PPP on a tax deferred basis.
- The ability to make annual contributions to the Defined Benefit component of the PPP that exceed both the RRSP and money purchase limit, at all ages.
- The ability to contribute the ‘Pension Adjustment Offset Amount’ of $600 to one’s personal RRSP every year thereafter in addition to the above contributions.
- The ability to make ‘special payments’ from the Medical Professional Corporation if the rate of return of the assets inside the PPP are below 7.5%. This is particularly useful when large stock market corrections enable the MPC to ‘buy low’ and then ‘sell high’ without incurring taxation with tax assisted dollars.
- The ability to make ‘terminal funding’ contributions if the physician decides to shift from T4 salary income to T4A pension income prior to the normal retirement age. A physician opting for this does not need to cease practicing medicine, simply to stop collecting a salary and rely instead on a mixture of dividends and pension income as their compensation.
physician retirement planning
Conclusion: Best Physician Pension Plan for Doctors in Canada
The long movement towards ‘pension equality’ grew steam when provincial governments allowed doctors who, for tax purposes, practiced/operated as ‘sole proprietors’, to incorporate as medicine professional corporations (MPC) and benefit from lower tax rates and tax deferral.
For incorporated physicians, personal pension plans can provide substantial benefits. Wealth is about having options and autonomy that reflect your income and tax situation and a PPP may be the ticket to help you reduce taxes today and save more for retirement. The Personal Pension Plan™ (PPP®) is a wealth accumulation and tax savings solution specifically designed for doctors.
For Canadian physicians seeking a robust and tax-efficient retirement solution, Personal Pension Plans present a compelling option. By leveraging these tailored pension plans, doctors can secure their financial future, allowing them to focus on providing exceptional care to their patients without compromising their retirement goals.
Physician Pension Plan FAQ
In general yes, you do. One of the main aspects of a pension plan is an employer / sponsor company that will make contributions towards a pension plan in which you, the beneficiary/owner, are a member of.
Not necessarily you don't need to be incorporated as a requirement. In order to qualify, however, you will be required to have an employment relationship with a T4 (salary) income.
A Limited Partnership, General Partnership, Joint Partnership (e.g. engineering or law firm) or even a Sole Proprietor could offer a PPP to its employee such as a spouse if the employee is receiving a salary T4 income. However, the partners themselves or the sole proprietor would not be eligible for a PPP. Why? because they cannot employ themselves and pay themselves T4 income.
If you are looking to setup a pension for yourself and seeking the optimum way to take an income tax efficiently, a mix of salary and dividends is ideal since dividends are not pensionable and thus 100% dividends precludes adopting a Personal Pension Plan.
It's designed specifically to meet your needs today and for the future. Your tax saving and reduction needs today as a business owner in the form of tax deductions. Your retirement savings needs for the future. It recognizes that you as a business owner shouldn't be using a solution meant for the general population, an RRSP, and helps you take advantage of generous pension laws whilst protecting you from creditors.
For a pension to be eligible it needs sponsorship. The company or professional corporation in this case sponsors the plan. The trustees (investment or insurance company you invest with) hold the assets on behalf of the members and their beneficiaries. No one truly ‘owns’ the pension plan, since it is a bundle of liabilities/promises and corresponding assets.
You are eligible for the pension credit (reducing the taxes otherwise payable) on the first $2,000 of pension income you receive. In addition, your spouse can use the pension income splitting rules to allocate up to 50% of the pension income to a spouse who is not in receipt of a pension, thereby potentially moving the PPP member’s tax bracket to a lower bracket and reducing the couple’s overall taxes in the process. When pension income splitting is used, the first $4,000 of pension income can be claimed as a ‘pension amount’ credit to further reduce your individual taxes.
There are 2 key instances where a PPP® would not be suitable for you:
- Individuals who will treat the account as a special kind of short-term savings account to be used towards an upcoming expenditure before retirement. While it is possible to withdraw some funds in a certain situation or even opt for early retirement -- treating the PPP as a short-term savings account is not the best strategy.
- Individuals who want to invest all of their money in a single security. If you think you've found the perfect stock and want to leverage all of the funds by concentrating on that stock, you will be prohibited from doing so in a PPP. Like all pension plans, you cannot hold more than 10% of a single security within your Personal Pension Plan.
In short, the new 2018 passive income tax law makes this harder. Retained earnings have already faced corporate taxes, albeit at a preferential tax rate. In addition, those profits will face ongoing further taxation if the annual investment gains exceed a threshold. The benefit of your PPP contributions is that they come straight from your revenues before they face corporate taxes. This is the power of the PPP. Add to all this the new capital gains tax brought forward with the 2024 federal budget, your tax liability is much larger now.
Tax Free Savings Account (TFSA) Contributions
You can always contribute to your TFSA at all times, whether you have a PPP or not.
RRSP - Pension Adjustments
Once you setup a this creates what's called a "Pension Adjustment" or PA. The following year, the PA eliminates a lot of the RRSP contribution room generated during the year due to contributions you make to the PPP. RRSP contribution room in 2021 is based on earned income in 2020, thus the lag.
However, some RRSP contributions are still permitted even with the PA. For instance, in the first year, you can contribute to the PPP and to your RRSP. Why? because the Pension Adjustment will only impact your RRSP room for the next year.
When you setup the PPP, in the first year your RRSP contribution can range from $6500 to $27,230 (2021). In the following years, your RRSP contribution is capped at $600 because of the PA system.
Simply put, the Personal Pension Plan provides more flexibility than and Individual Pension Plan. In short, the PPP improves upon the main objections of the IPP. In particular, the PPP takes away the burden of having to ensure you make mandatory minimum contributions which can become burdensome especially if your cash flow doesn't allow for it. The IPP similar to a Define Benefit Pension has those types of requirements. Whereas the PP< which has the Defined Benefit component, also has a Defined Contribution component which provides flexibility when it comes to contributions. Get the PDF summary of the differences. Or, see a more in depth comparison of PPP vs IPP here.
Yes, you're able to convert the IPP into a PPP® and gain the tax deduction and savings advantages as well as having more flexibility when it comes to your cash flow. The process involves filing an amendment with the pension regulators and completing a few documents.
Yes, as long as you are taking T4 salary income.
For each member:
- Proof of age – copy of driver’s license/passport that shows the name and date of birth
- Latest Notice of Assessment
- Latest RRSP statement for all RRSPs/LIRAs/LIFs/RRIFs etc.
- Document to verify the SIN Number - e.g. a T4 slip or a notice of assessment if the full SIN number is available.
- T4’s for every year buying back past service (PLEASE NOTE THIS CAN TAKE UP TO 6 MONTHS – TIPS ON HOW BEST TO OBTAIN T4s BELOW)
For the company that is sponsoring the plan:
- Articles/Certificate of Incorporation for the company
- Document to verify the CRA Business Number of the company that is sponsoring the pension plan – e.g. the first page of a corporate tax return or the T4 slip that shows the employer number
Tips for obtaining T4s:
- Request from your bookkeeper or corporate accountant
- Request through the CRA website
- Contact CRA by phone 1-800-959-8281