Have you considered a Registered Pension Plan for your retirement as a business owner & physician or you're still using an RRSP? Don't leave money on the table! See why a RPP is the best 'known unknown' retirement vehicle
Best Tool for Business Owners and Physicians to Save for Retirement: Why a Registered Pension Plan Still Reigns Supreme
Retirement Planning for Self-Employed
For incorporated business owners and physicians, saving for retirement requires careful planning and smart financial decisions. While options like the Registered Retirement Savings Plan (RRSP) or retaining earnings in a corporation seem appealing, a registered pension plan (RPP) — particularly a Personal Pension Plan (PPP) — continues to be the most effective tool for maximizing retirement wealth and minimizing taxes.
A well-researched 2023 paper from PWL Capital demonstrated that when business owners aim to maximize retirement savings, the best-performing vehicle is a registered pension plan. This echoes what INTEGRIS Pension Management Corp. has known for over a decade: RPPs offer unparalleled tax efficiency and wealth accumulation potential.
Let’s explore why registered pension plans stand out as the top retirement-saving tool and how they outperform RRSPs and corporate savings strategies.
Understanding the Tax Efficiency of a Registered Pension Plan
The Non-Registered Corporate Savings Approach
When business owners retain earnings in a corporation and use those funds for retirement, multiple layers of taxation erode wealth over time:
Active Business Income Tax: Corporate income is subject to active business tax rates, which range from 12.2% to 26.5%, depending on the province and income level. Active business income tax applies to the profits earned by a corporation through its regular business activities. The lower rate (around 12.2%) generally applies to small businesses that qualify for the small business deduction, while the higher rate (26.5%) applies once a corporation exceeds certain income thresholds or loses access to the small business deduction.
Passive Investment Income Tax: Retained earnings generating passive income are taxed at high rates, often around 50.17%. Passive income includes earnings from investments like dividends, interest, and capital gains rather than from active business operations. The high passive investment income tax rate is intended to prevent corporations from using their structures solely as tax shelters for investment income. This tax significantly reduces the growth potential of corporate savings and creates a heavy tax drag on long-term investment returns.
Small Business Deduction Clawback: If a corporation earns more than $50,000 in passive income, it progressively loses access to the lower active business tax rate of 12.2% and instead pays the higher 26.5% rate. This clawback was introduced to prevent corporations from accumulating large passive income portfolios while still benefiting from the small business deduction. As passive income grows beyond the $50,000 threshold, the ability to apply the small business rate diminishes, increasing the corporation’s overall tax burden on active business income.
Dividend Taxation: When distributing retained earnings as dividends, the business owner must pay personal income tax on those dividends. Dividends are categorized as either eligible or non-eligible, with non-eligible dividends (typically from income taxed at the lower small business rate) facing higher personal tax rates. This double taxation—first at the corporate level and then at the personal level—further erodes the wealth available for retirement.
Departure Tax: If the business owner becomes a non-resident, they may face a departure tax on the deemed disposition of corporate shares.
Estate Taxation: Upon the business owner’s death, the estate must value corporate shares and may need to sell corporate assets, triggering additional corporate tax.
Probate Fees: Without a corporate will, the estate may face provincial probate fees on corporate shares.
The Registered Pension Plan Advantage
An RPP eliminates many of these tax leakages and simplifies wealth accumulation:
Tax-Free Contributions: Pension contributions avoid active business income tax, allowing 100% of the contribution to grow tax-sheltered.
Tax-Sheltered Growth: Investment growth within the pension plan is exempt from the 50.17% passive income tax.
Preservation of Small Business Tax Rate: Because pension assets are off the corporate balance sheet, passive income from the plan does not reduce access to the small business tax rate.
No Departure Tax: If the business owner becomes a non-resident, pension plan assets are exempt from departure tax.
Tax-Efficient Estate Transfer: Pension plan assets can transfer to surviving family members working for the business as surplus, avoiding immediate taxation.
Avoidance of Probate Fees: Pension assets pass directly to beneficiaries without going through the estate, bypassing probate fees.
By reducing seven tax points to a single tax on pension benefits paid out at retirement, an RPP maximizes long-term wealth accumulation.
Practical Examples: How an RPP Saves on Taxes and Outperforms an RRSP
Example 1: Tax Savings and Investment Growth
Consider a physician earning $300,000 annually and wanting to save $100,000 for retirement.
RRSP Contribution: The physician contributes $100,000, reducing their taxable income by that amount. The investment grows tax-free, but withdrawals in retirement are fully taxed at personal rates (potentially over 50%).
RPP Contribution: The physician’s corporation contributes $100,000 to an RPP. This contribution is a deductible expense for the business, avoiding active business tax. Investment growth remains tax-sheltered, and withdrawals are taxed as pension income, often at lower rates through pension splitting.
Over 20 years, assuming a 7% annual return, the RPP accumulates significantly more wealth due to the lack of corporate and passive income tax drag.
Example 2: Estate and Departure Tax Efficiency
A business owner with $2 million in retained earnings plans to retire abroad.
Corporate Savings Approach: Departing Canada triggers a deemed disposition of corporate shares, incurring departure tax on the value of retained earnings. Upon death, estate taxes further erode wealth.
RPP Approach: Transferring retained earnings into an RPP avoids departure tax. If children employed in the business are added to the plan, the pension surplus can pass to them without immediate taxation.
The RPP preserves significantly more wealth for future generations.
Salary vs. Dividends: Which Compensation Strategy Works Best?
Choosing between salary and dividends as a form of compensation has significant tax and retirement planning implications:
Salary:
Generates RRSP contribution room.
Allows contributions to CPP, which provides a stable and guaranteed retirement income stream.
Qualifies the business owner for participation in a registered pension plan.
Is deductible from the corporation’s taxable income, reducing corporate tax liability.
Dividends:
Do not generate RRSP room.
Avoid CPP contributions, but also miss out on the associated pension benefits.
Are taxed at the personal level, often resulting in higher combined corporate and personal taxes.
Do not qualify as eligible earnings for registered pension plan contributions.
While dividends may offer administrative simplicity, the long-term tax savings and retirement wealth potential of a salary-based strategy far outweigh those benefits.
Implementing a Pension Solution
Steps to Set Up a Pension Plan
- Consult a Pension Specialist: Work with a qualified advisor to determine the most suitable pension plan for your needs, whether Individual Pension Plan or Personal pension Plan.
- Establish the Plan: Register the pension plan with the Canada Revenue Agency (CRA) and the provincial pension authority.
- Determine Contribution Levels: Calculate annual and past service contributions based on age, income, and years of service.
- Invest Pension Funds: Choose a diversified investment strategy to maximize long-term growth.
- Monitor and Maintain: Ensure compliance with regulatory requirements and adjust contributions as needed.
Calculate How Much You Can Save PPP vs RRSP
PPP Frequently Asked Questions
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
retirement planning for business owners & physicians in canada
Conclusion: Best Tool for Business Owners and Physicians to Save for Retirement: Why a Registered Pension Plan Still Reigns Supreme
Don’t Leave Money on the Table
For incorporated business owners and physicians, the RPP — and particularly the Personal Pension Plan — is the superior retirement-saving tool. By minimizing tax drag, avoiding multiple layers of taxation, and offering flexible estate and non-residency planning advantages, an RPP outperforms RRSPs and corporate savings strategies.
If maximizing after-tax retirement wealth is the goal, the choice is clear. It’s time to rethink outdated strategies and harness the full potential of a registered pension plan. Don’t be penny wise and pound foolish — invest wisely in your future.