CRA provides guidance on the “not materially different” requirement of the s. 147.4(1) rollover

S. 147.1 contemplates that the commuted value of an individual’s registered pension plan can be used to purchase an annuity contract in full satisfaction of the individual’s entitlement to benefits under an RPP (with a partial satisfaction scenario also being contemplated). S. 147.1 deems the individual to have not received an amount from an RPP by acquiring the annuity and deems amounts received under the contract to be amounts received under the RPP. Thus, there effectively is a rollover.

One of the conditions for s. 147.1 to apply is that the rights provided under the annuity contract “are not materially different from those provided for under the [RPP].” For example, “an annuity provided from a licensed annuity provider cannot provide payments that have a greater guarantee period than what was available under the RPP.” CRA has provided guidance on this material-difference requirement, including a detailed discussion of COLA adjustments (with some of the issues to be addressed arising from the fact that many RPPs provide full CPI cost-of-living adjustments, whereas licensed annuity providers generally do not offer life annuities with this feature.

In some cases, the commuted value is not enough to provide an annuity that equals the benefits that would have been provided under the RPP. In this case, the individual can choose to receive a reduced lifetime retirement benefit, a reduction in one or more ancillary benefits, or a combination thereof, as long as no element of the benefits under the annuity exceed the amount of that element under the RPP.

If the commuted value is greater than the cost to buy an annuity that replicates the RPP benefits, the excess commuted value cannot be used to provide higher annuity payments under the annuity contract. Under Reg. 8502(d)(ix), the portion of the commuted value that is in excess of the annuity acquisition cost typically must be paid in cash to the individual and included in income.

Neal Armstrong. Summary of Newsletter 20-1, “Registered Pension Plan Annuity Contracts” 24 July 2020 under s. 147.1.