Dynamic Salary Strategies: Unlocking the Full Potential of Your IPP

Last week, we covered the fundamentals of Individual Pension Plans (IPPs). This week, we explore a critical question: what is the most effective way to fund your IPP throughout your career?

Many advisors present compensation planning as black and white. You either take a high salary every year to maximize pension contributions, or you pay yourself entirely through dividends. Recent research from PWL Capital reveals that the most effective strategy is not one or the other, but a dynamic combination that can significantly increase long-term wealth.

The Traditional Approach

For most incorporated professionals, the default strategy has long been to pay themselves entirely through dividends. It is simple, eliminates payroll administration, and avoids CPP contributions.

However, this approach provides no access to pension-style tax deferral or the ability to adjust income strategically over time. While dividend-only compensation can work in the early years of a business, it often leaves meaningful tax advantages unrealized.

Introducing an Individual Pension Plan allows business owners to combine dividends and salary intelligently. The IPP becomes a framework for shifting compensation over time, balancing tax efficiency with retirement funding.

The Hidden Cost of Maximum Salary

Once an owner moves beyond dividend-only pay and begins using an IPP, the next question is how much salary to take. Many advisors recommend the same number every year: the maximum allowable salary, currently around $175,833, to generate the largest possible IPP contribution.

While that may sound logical, it often ignores the broader corporate tax ecosystem that established professionals operate within.

As your corporation grows, it accumulates notional accounts that can be powerful tools for tax-efficient withdrawals:

• Capital Dividend Account (CDA): Holds tax-free capital dividends from realized gains.
• Refundable Dividend Tax on Hand (RDTOH): Represents taxes that can be recovered when dividends are paid.
• General Rate Income Pool (GRIP): Allows for lower-taxed eligible dividends.

These accounts do not grow with inflation. When they sit unused, their real value declines. A $100,000 CDA balance loses nearly 40 percent of its purchasing power over 20 years and more than two-thirds after 50.

Taking maximum salary every year can lead to overpaying personal tax while letting valuable corporate tax credits stagnate. A more efficient approach is to use salary strategically and distribute corporate earnings through these accounts in a coordinated way.

The Dynamic Salary Solution

The research examined what happens when IPP owners adjust compensation over time based on portfolio growth, consumption needs, and corporate balances. The most effective structure prioritized withdrawals in the following order:

1. Capital dividends first (tax-free)
2. Dividends that trigger RDTOH refunds (highly efficient)
3. Eligible dividends from GRIP (preferential tax rate)
4. Salary to fill any remaining income gap and create IPP contribution room

This approach is not about abandoning salary or the IPP. It is about timing each form of compensation when it produces the greatest overall benefit.

By taking salary strategically, and dividends when most efficient, you reduce taxes while maintaining the long-term growth of your IPP.

How This Plays Out in Alberta

Consider a 30-year-old incorporated professional in Alberta earning $500,000 per year, spending $8,000 per month, and retiring at 65. A dynamic compensation strategy could look like this:

• Ages 30 to 35: The corporate portfolio is small ($100,000 to $200,000). Take a higher salary ($100,000 to $150,000) to purchase past service and build a foundation in the IPP.
• Ages 35 to 50: The portfolio grows to $2 to $3 million. Lower salary to $50,000 to $80,000 and fund personal spending through CDA and dividend distributions. Continue contributing to the IPP at efficient levels.
• Ages 50 to 60: The corporate portfolio reaches $3 to $5 million. Many years, compensation is primarily dividends as CDA and GRIP accounts fund lifestyle spending efficiently.
• Ages 60 to 65: IPP contribution room expands significantly, up to 66 percent more than RRSP limits. Temporarily increase salary again to take advantage of the final, high-value contribution years.

This structure preserves corporate liquidity, protects tax efficiency, and ensures that IPP growth accelerates when it delivers the greatest benefit.

The Research Results

PWL Capital analyzed over seven million retirement planning scenarios comparing dynamic and static compensation methods. The findings remain relevant to Alberta professionals, with adjusted magnitude:

• Wealth Maximization: Dynamic salary strategies with IPPs produced roughly 2 to 4 percent higher after-tax estate values in Alberta scenarios, with greater advantages at moderate spending levels.
• Consumption Maximization: Maximum salary was only optimal when spending exceeded approximately $14,000 per month. Below that threshold, dynamic salary remained superior.
• Asset Allocation: With balanced portfolios (50 percent equity), IPPs outperformed RRSPs by approximately 20 to 30 percent in Alberta. Even with 100 percent equity, IPPs still led by 5 to 8 percent.
• Capital Dividend Utilization: Incorporating CDA and RDTOH distributions increased final net worth by 5 to 10 percent, depending on the investment mix.

The result is a measurable and repeatable improvement in long-term wealth creation even under Alberta's lower tax regime.

Why the Dynamic Approach Works

The dynamic model solves two persistent problems:

• Inflation erosion: It prevents corporate notional accounts from sitting idle and losing real value.
• Age-based efficiency: It recognizes that IPP contribution advantages are smaller before age 50 but rise sharply after 55. Taking lower salary early and higher salary later aligns contributions with when they provide the highest return.

This approach produces smoother income, stronger compounding, and greater flexibility in retirement.

Alberta's Advantage: Funding Flexibility

Under Alberta's Employment Pension Plans Act, IPP sponsors are not required to make annual contributions if cash flow is limited. This provincial flexibility allows business owners to temporarily reduce or pause funding during slower years without jeopardizing plan registration.

This feature aligns naturally with the dynamic compensation model, giving Alberta professionals additional room to optimize salary and dividend timing while preserving long-term IPP integrity.

When Maximum Salary Still Makes Sense

There are scenarios where a fixed maximum salary remains effective, such as when:

• Monthly personal spending is above $12,000
• The corporate portfolio is under $1 million
• Retirement is within 10 years
• Notional accounts such as CDA and RDTOH are minimal

In these situations, consistent salary contributions may outweigh the benefits of dividend optimization.

The Bigger Picture

An IPP is not a rigid structure that requires a single approach to compensation. It is a flexible tool that can be adapted as your income, lifestyle, and corporation evolve.

A business owner who pays themselves a flat salary of $175,833 every year for 35 years is not making a mistake, but they may be leaving 2 to 4 percent of lifetime wealth unrealized.

Because the IPP's most powerful advantages occur later in your career, flexibility in the early years can enhance both corporate efficiency and retirement value over time.

Working With the Right Team

Implementing a dynamic compensation strategy requires collaboration between your financial advisor, accountant, and actuary. Together, they ensure that IPP funding, corporate income, and notional account tracking remain aligned.