IPP AND RCA versus KEEPING RETAINED EARNINGS: A TWENTY‑YEAR NUMBERS CHECK

Introduction 

Individual Pension Plans (IPPs) and Retirement Compensation Arrangements (RCAs) often feel abstract until you see the arithmetic. Using one set of assumptions, the figures below compare a corporation that contributes to an IPP with a corporation that keeps the same pre‑tax dollars inside the company, pays the regular taxes, and invests the after‑tax cash in a passive portfolio.

Assumptions used for both scenarios 

• Annual pre‑tax amount available: $100,000 

• Investment growth before tax: 8 % per year, compounded annually 

• Corporate tax on active income: 20 % 

• Tax on passive investment income earned inside the company: 50 % 

• No withdrawals for twenty years; all investment income is reinvested

Quantifying the advantage:

Scenario A – IPP contributions The company deducts each $100,000 deposit, so the full amount is invested in a tax‑deferred pension trust earning 8 %. After twenty years the IPP holds roughly $4,576,000.

Scenario B – retain earnings and invest passively 

The same $100,000 is first reduced by 20 % active‑income tax. The remaining $80,000 is invested inside the company. Each year the investment return is taxed at 50 %, leaving a 4 % after‑tax growth rate. After twenty years the passive account holds about $2,382,000.

Result:

The IPP strategy produces an extra $2.19 million, nearly doubling the corporate passive approach (ratio ≈ 1.92 : 1). A similar deferral effect applies to an RCA, although its 50 % refundable deposit with the CRA slows the compounding; the refund is recovered when benefits are eventually paid.

How the same plan design supports other tax strategies:

Inter‑generation wealth transfer 

Because the IPP or RCA assets are held in a separate trust, they bypass the company’s balance sheet.

Shares left to the next generation need not include this pool of value, allowing a cleaner roll‑out of dividends or capital in future and reducing exposure to the 21‑year deemed‑disposition rule for trusts.

Reducing estate‑freeze value:

When performing an estate freeze, accruing surplus inside an IPP or RCA instead of building retained earnings means the preferred shares received by the founder can be capped at a lower value. Future growth then accrues to the children or a family trust, easing the funding of the ultimate buy‑out when the founder passes away.

Buy/sell transactions:

An acquiring party usually prefers to purchase assets or newly issued shares that do not come with excess cash. Placing surplus into a pension arrangement strips liquid assets out of the operating company in a deductible way, improving negotiating leverage on price while still keeping those funds available to the vendor in retirement.

Departure‑tax planning:

An individual who emigrates from Canada faces a deemed disposition of most assets. IPP and RCA rights are exempt from that departure tax; building retirement capital in these vehicles instead of corporate or personal investment accounts can materially lower the taxable exit bill.

Closing thoughts:

Under the assumptions above, shifting $100,000 a year into an IPP almost doubles the capital available after twenty years compared with leaving the money inside the corporation and paying annual passive‑income tax. Beyond the balance‑sheet benefit, IPPs and RCAs also serve as flexible tools for inter‑family transfers, estate freezes, sale negotiations and emigration planning. As always, precise outcomes depend on investment returns, contribution levels, future tax rates and personal circumstances, so formal actuarial and tax advice is essential before implementation.

(This article is for information purposes only and does not constitute professional advice.)