Key Market Facts

August 27, 2004

Individual Pension Plans or IPPs are becoming more widely discussed but are still not well understood. They offer those who qualify both greater tax benefits and an enhanced retirement income.

What is an IPP?
An IPP is a maximum defined benefit plan (Super RRSP). All contributions are actuarially determined and past service contributions, where available, can be made upon set up of the plan.

Who Qualifies?
An eligible candidate for an IPP is an incorporated company, professional or highly paid executive over the age of 45 who has had pensionable earnings of $100,000 or greater. Past service contributions can be made as far back as 1991.

Advantages of an IPP

• Higher contribution amounts versus an RRSP
• Creditor-proof
• Significant past service contributions
• Flexible benefit settlement options
• Employer contributions are tax deductible
• Interest on funds borrowed for contributions is tax deductible
• Contributions can be made within 120 days after corporate year-end
• Ability to make further tax-deductible contributions if there is a deficit
• Higher investment standards (quality & diversification)
  

Disadvantages of an IPP

• Lacks income splitting similar to spousal RRSP
• No access to funds while employed
• No lump sum cash withdrawals
• More legislation, so higher expenses and more paperwork
• Excess surplus under plan may reduce future contributions
  

Investments Held in an IPP
The plan itself can hold all the same types of investments that are currently eligible for a self directed RRSP with one exception, the concentration restriction. You cannot place more than 10% of the plan into any one individual security apart from a Government of Canada bond. The investments include:

• Stocks
• Bonds
• Mutual Funds/ Pooled Funds
• T Bills, GIC, Term Deposits, Bonds

How Is My Pension Benefit Paid?
The preferred and recommended settlement option for the IPP is to have the pension paid directly from the IPP investment account. The retirement benefit under an IPP is based on a 2% earnings formula. The benefit calculation is dependent on whether the member is a connected or non-connected person.

The maximum pension limit for 2004 is $1,833.33 for each year of service and for 2005 it is $2,000. After that it will be indexed to the industrial wage index.

As an example, if you were to commence benefit payments in 2005, you have 20 years of service and your indexed earnings are $127,038 then your pension would be 2% of 127,038 = $2,540.76 (however maximum is $2,000) multiplied by 20 years or $2,000*20=$40,000 of annual pension.

Benefits of Setting up an IPP – An Illustrative Example
Dr. John Doe is 56 years old and is an incorporated professional with past pensionable earnings greater than $100,000 per year back to 1991.

Add Current Service Contribution for 2004 23,678
Maximum Total 2004 Contributions $ 138,259
(initial corporate tax deduction)

In this example by setting up the IPP, Dr. Doe’s corporation receives a tax deduction in 2004 for $138,259. Also it is important to note that the current service contribution of $23,678 is $8,178 more than what a RRSP would allow Dr. Doe to contribute ($15,500) for 2004.

For more information on how you could benefit from this product please call me directly at 604 257-7055.

Q2 Corporate Earnings

The second quarter US earnings season produced respectable results, contrary to the actual price movement of the market.

Revenue growth was just over 12% for the S&P 500 companies and earnings growth was over 20%. It is expected that the earnings growth will taper off to 15% next quarter.

The following summarizes how well companies did on their earnings reports relative to the consensus estimates:

Beat by 5% or more	38%
Beat by less than 5%	31%
Met Expectations	16%
Missed by less than 5%	8%
Missed by 5% or more	7%

Driving the short-term movement of the market has been the price of oil and the uncertainty around the US election. Once these two items settle down we should see reasonable price movements for those fundamentally strong companies that have been doing a great job on the earnings front.

Did You Know?

Bank of America is splitting 2 for 1 on August 30, 2004

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