The big news for 2025 is the introduction of yet another pension plan solution for incorporated physicians (but only for those in Ontario). I’m referring to the recent public announcements by the Healthcare of Ontario Pension Plan (“HOOPP”) indicating that incorporated physicians in Ontario that draw T4 income (salary/bonuses) from their medical corporation would be entitled to join HOOPP as of January 2, 2025.
As pension commentators will tell you, HOOPP is perhaps one of the best-managed defined benefit pension plans in Ontario, and arguably in all of Canada. For example, it has exceeded its internal funding benchmarks for over 20 years and has developed large actuarial surpluses that it routinely uses to provide inflation protection indexing. The staff at HOOPP are top-notch professionals, and if a physician was employed by a hospital directly, my recommendation would be to join HOOPP.
Like all things “pensions”, the devil is in the details. To appreciate what a commitment to HOOPP means, we need a comparator, in this case setting up an IPP under the Canadian Physicians’ Pension Plan (“CPPP”).
The first point to make is related to the amount of tax relief one gets under either HOOPP or CPPP. The maximum percentage of salary that can be contributed to HOOPP in 2025 is 18.45% which is roughly the maximum allowed under a basic RRSP. That contribution breaks down into an Employee contribution (funded from the salary) and an Employer Contributed funded by the Medical Professional Corporation of the physician. For 2025, the top employee deduction is $15,757 and the MPC corporate deduction is $18,908.
By contrast, the MPC of a physician under CPPP would contribute anywhere between 18% and 29.5% of salary (maxing out around $55,411 by age 64). At age 64, by way of illustration only, this represents an absolute contribution/deduction advantage conferred on CPPP of over $20,700 over HOOPP.
To these annual contributions the CPPP offers the possibility of making additional corporate tax-deductible contributions called “Special Payments”. These special payments would occur if the rate of return generated within the CPPP plan is below 7.5% after fees. It is not inconceivable that a physician who cannot tolerate market risk would want his or her CPPP pension dollars invested in safer asset classes that are not likely to lose value, such as guaranteed income certificates or governmental bonds. The ‘drag’ on return is made up by the tax deductions immediately claimed by the MPC when it makes these special payments.
To illustrate better, this quick scenario provides extra context:
- IPP has $1,000,000 in assets.
- IPP is invested in GICs paying 3.5% interest.
- IPP should be earning 7.5% to be considered fully funded.
- After 1 year, IPP has $1,035,000 but it should have had $1,075,000
- MPC pays tax at 20% on average.
In this example, the MPC would be allowed to make an additional tax-deductible contribution (the “Special Payment”) of $40,000. Since the MPC normally pays tax at 20%, it just saved $8,000 in taxes. Not only that, but the IPP is back to being fully funded since it now has $1,075,000 in assets in it.
Under the HOOPP structure, the additional $8,000 tax savings is not possible given the overfunded nature of its pension fund. By way of comparison, if the MPC wanted to get an after-tax income of $8,000 on the same $40,000 of invested dollars, it would have to achieve a rate of return of about 40%.
- $40,000 in corporate passive investment @ 40% = $16,000 income.
- MPC’s passive income is taxed at 50.17% creates tax within MPC of $8,027, netting after tax growth of $7,973.
Arguably, the risk profile of an investment generating 40% is different than one earning 20%. Luckily for the CPPP customer, the 20% is risk-free since it is the result of the application of the Income Tax Act (Canada) and not conditional on taking extra market risk.
Leaving the topic of taxation aside for the time being, the bigger issue with all classic defined benefit pension plans in Canada (including the Canada Pension Plan) is the issue of the ‘actuarial gain’ in the event of an untimely death of the plan member.
With HOOPP, the physician is promised a fixed pension (usually indexed in part to inflation) that is payable for the lifetime of the retiree. Should the retiree pass away, a survivor pension is payable to the surviving spouse of the retiree, and that survivor pension is payable for the duration of the spouse’s lifetime. For those with normal life expectancy, this could mean many payments made out of the HOOPP pension fund over very long periods of time.
But what happens when you die with your spouse
(e.g. car accident) or you happen to be single at time of death and there is no survivor
pension to carry on receiving the HOOPP pension?
In the first 5 years from the point of retirement, the outstanding payments are made to your designated beneficiaries (which are often the children, but not always). This 5-year period is called the “Guarantee Period” because HOOPP guarantees payments will be made even though the primary member is deceased and there is no one to receive the survivor pension.
If death in these circumstances occurs after the expiration of the guarantee period, there are no further payments owed to the survivors of the retiree. In effect, HOOPP has fully discharged its contractual obligations by that stage: it has paid a retirement pension to the physician during the doctors’ retirement, and since there is no surviving spouse, won’t pay anything else.
The millions of dollars that the MPC and physician had faithfully contributed to the plan in anticipation of a long retirement are now retained by the central pension fund at HOOPP and considered an ‘actuarial gain’ to the plan. The surviving children/beneficiaries of that physician get nothing.
By way of comparison, the same physician using CPPP, in the same predicament, faces a different consequence. The millions of dollars no longer required to pay a pension are now considered ‘pension surplus’. Under the CPPP pension surplus rules, that surplus can be paid to the designated beneficiaries such as the children or even a favorite hospital, charity, university etc.