IPP AND RCA: AN OWNER‑MANAGER’S GUIDE TO ADVANCED CORPORATE PENSIONS IN CANADA

1. Why look beyond the RRSP?

Registered Retirement Savings Plans (RRSPs) have long been the default vehicle for entrepreneurs who pay themselves a salary, but their fixed annual dollar limit— $32,490 for 2025—can become restrictive once earnings rise. Two specialized, employer‑sponsored arrangements let you go further:

• Individual Pension Plan (IPP) – a defined‑benefit pension registered under the Income Tax Act, usually established for a single shareholder‑employee of a private corporation.

• Retirement Compensation Arrangement (RCA) – a contractual, trust‑based promise to pay retirement income over and above the limits of registered plans. An RCA is not registered as an RPP and is therefore governed by a separate set of tax rules.

  
  

2. Larger tax‑deferred room as you age

For an incorporated professional or business owner in their forties or older, IPP annual actuarial contributions quickly outpace the RRSP limit because they are tied to both salary history and age. A 52‑year‑old earning $165,000 of T4 income, for example, can deduct roughly $39,000 through an IPP—about 20 % more than the RRSP ceiling for the same year. The investment growth inside the IPP is tax‑deferred until benefits are paid out, allowing the pension assets to compound free of annual tax drag.

RCA contributions have no numerical ceiling at all; the funding target is whatever is required to deliver the promised supplemental pension. Half of each deposit is remitted to the CRA as refundable Part XI.3 tax, but both the contribution and the refundable tax are deductible to the corporation in the year paid.

3. Past service top‑ups

When an IPP is first installed, the actuary can credit “past service” back to 1991 (or the date the corporation started paying you a salary, if later). That retroactive benefit is paid for with a one‑time lump‑sum contribution—often the largest single corporate deduction an owner‑manager will ever book. Any related Past Service Pension Adjustment (PSPA) is filed with the CRA to track the extra pension room that has been used. 

RCAs have similar flexibility: the corporation can fund an immediate benefit entitlement for prior years without limitation, subject only to the 50 % refundable tax. This makes the RCA a useful complement once IPP limits are fully exploited.

4. Income‑splitting possibilities

Pension income‑splitting rules allow up to 50 % of eligible pension payments (including IPP benefits after age 65) to be reported by a spouse or common‑law partner. That shift can reduce the couple’s combined tax bill and improve their access to means‑tested benefits. In addition, the retiree chooses when to start receiving the IPP or RCA pension, which makes it possible to coordinate withdrawals with RRSP/RRIF income, dividends or capital gains for optimal marginal‑rate management.

5. All contributions are paid—and deducted—by the corporation

Whether you fund an IPP or an RCA, every dollar the company contributes is deductible in computing corporate taxable income. For an IPP, deductible items also include actuarial fees, investment‑management expenses and even interest on borrowed funds used to make required contributions. For RCAs, the corporation deducts both the amount deposited to the trustee and the matching 50 % refundable tax it remits to the CRA in the same fiscal year. When benefits are eventually paid to the retiree, the trustee recovers the refundable tax at a rate of one dollar for every two dollars of pension paid—effectively deferring half of the tax until benefits flow to the member. 

6. Choosing the right vehicle

• IPP first: ideal for owner‑managers drawing consistent T4 income who are over 40 and want larger, predictable, tax‑sheltered savings that mirror a traditional defined‑benefit pension.

• RCA supplement: appropriate when compensation exceeds IPP limits (e.g., C‑suite executives or professionals with seven‑figure earnings) or when flexibility in plan design and investment choices is paramount.

  
  

7. Key take‑aways

1. IPPs provide age‑indexed contribution room that frequently outruns RRSP limits after age 40, plus the chance to “catch up” through past service funding.

2. Both IPPs and RCAs shift the cash‑funding burden to the corporation while deferring personal tax until retirement.

3. Strategic use of pension income‑splitting and benefit‑timing can further compress lifetime taxes for the family.

4. RCAs fill the gap where registered plan limits end, albeit with a 50 % refundable tax mechanism that defers, rather than eliminates, taxation.

   
   

As always, proper actuarial valuation, trust documentation and ongoing compliance are critical. Consult a pension actuary and tax advisor before implementing either structure to confirm suitability, funding requirements and integration with your broader retirement‑income strategy.

This article is intended for informational purposes only and does not constitute tax, legal or actuarial advice. Speak with professional advisors about your specific circumstances before acting on any strategy described above.