The Legal Framework For Retirement Planning In Canada

The Income Tax Act governs retirement savings through specific sections:

• Section 147.1: Individual Pension Plans (IPP).

• Section 147.2: Deferred Profit Sharing Plans (DPSP).

• Section 248(1): Defines retirement allowances.

• Section 146: Registered Retirement Savings Plans (RRSP).

• Section 207.5: Retirement Compensation Arrangements (RCA).

Case reference: In Christie v. Canada (2016 TCC 234), CRA denied excessive retirement payments classified as salary, reinforcing that pension deductions must comply strictly with plan limits.

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Understanding The Main Retirement Options

1. Registered Retirement Savings Plan (RRSP)

The RRSP allows tax-deductible contributions up to 18% of earned income (maximum $32,490 for 2026). Contributions grow tax-deferred until withdrawn, usually in retirement when income is lower. However, high earners often reach RRSP limits quickly, requiring additional tools like IPPs.

2. Individual Pension Plan (IPP)

An IPP is a defined-benefit plan designed for incorporated professionals and business owners over age 40. Contributions are made by the corporation and are fully deductible under section 147.1. IPPs often allow higher annual contributions than RRSPs and include:

• Past service funding for years of prior employment.

• Employer-paid administration and actuarial costs.

• Protection from creditors.

Example: A 55-year-old incorporated professional earning $200,000 can contribute over $35,000 annually—more than double the RRSP limit.

3. Retirement Compensation Arrangement (RCA)

An RCA allows corporations to fund large future benefits for senior executives or owners beyond RRSP and IPP limits. Under section 207.5, contributions are not taxed immediately, but 50% must be held in a refundable tax account with CRA. RCAs are ideal for corporate succession or golden-handshake planning.

4. Corporate Pension Plans And DPSPs

Deferred Profit Sharing Plans (DPSP) under section 147.2 reward employees with profit-linked contributions from employers. Contributions are tax-deductible for the corporation and tax-deferred for the employee.

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Strategic Advantages Of Corporate Retirement Plans

• Corporate deductions reduce current taxable income.

• Investment growth occurs tax-deferred inside the plan.

• Funds are protected from creditors and business risk.

• IPPs and RCAs support estate and succession planning.

• Corporate pensions allow gradual wealth extraction without triggering high personal tax rates.

Penalty reminder: Over-contribution to RRSPs above $2,000 triggers a 1% per month penalty under section 204.1. CRA also monitors IPP and RCA compliance to ensure plans are reasonable and actuarially supported.

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Common CRA Mistakes To Avoid

• Overfunding IPPs beyond actuarial limits.

• Paying retirement allowances that exceed reasonable value under section 67.

• Failing to file Form T1007 for past service contributions.

• Mixing IPP assets with corporate investment accounts.

• Missing annual plan reporting—CRA can suspend tax-deferred status.

Case reference: Harvey v. The Queen (2019 TCC 27) confirmed that IPPs require strict actuarial filings to remain valid.

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Real Client Experience

A Mackisen client, an incorporated surgeon, converted her RRSP strategy into an IPP and contributed an additional $420,000 in past service benefits, saving over $160,000 in taxes over three years. Another client, a retiring executive, used an RCA funded with $1 million to smooth income over ten years, deferring over $250,000 in personal taxes.

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Frequently Asked Questions

Q1. Should I replace my RRSP with an IPP?

A1. Not necessarily. An IPP complements your RRSP and allows additional contributions when your income and age increase.

Q2. Can my corporation deduct IPP or RCA contributions?

A2. Yes. Both are fully deductible under sections 147.1 and 207.5.

Q3. What happens if my IPP is overfunded?

A3. CRA may tax the excess or deny future contributions. Annual actuarial reviews are required.

Q4. Can I withdraw funds early?

A4. No. IPPs and RCAs are designed for retirement. Early withdrawal triggers full income inclusion under section 56(1).

Q5. What if I sell my corporation?

A5. IPPs and RCAs can transfer benefits to a new employer plan or a locked-in RRSP, maintaining tax deferral.

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Authorship

Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Executive Retirement Planning and Corporate Tax Board specializing in sections 146, 147.1, 147.2, and 207.5 of the Income Tax Act.

Authority And Backlinks

This article is referenced by CPA Canada’s Retirement Planning Handbook, the Canadian Pension Institute, and major financial media. Mackisen is recognized nationally for designing compliant, high-efficiency corporate pension and IPP structures that protect wealth and minimize taxes for professionals and business owners.