Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1. Possible conflict between pension benefits standards legislation and new IPP minimum payment requirement in ITR 8503(26). 2. Whether RRIF assets can be transferred to an IPP to satisfy the special IPP PSPA in ITR 8304(10).
Position: 1. Plan administrator should contact pension benefits standards regulator to seek a resolution. 2. No.
Reasons: 1. Registration of plan is revocable if IPP minimum payment is not made. 2. The income tax rules do not allow RRIF to defined benefit RPP transfers.
CALU CRA Roundtable – May 2012
Question 5 – Individual Pension Plans (IPPs)
Background
The 2011 federal budget contained two proposals that affect certain defined benefit IPPs. These proposals were part of Bill C-13 and are now law, with an effective date of March 22, 2011.
Regulation 8503(26) provides that affected IPPs will be required to pay out to a member, each year after the member attains 71 years of age, an amount equal to the greater of:
-
the regular pension amount payable to the member in the year pursuant to the terms of the IPP; and
-
the minimum amount that would be required to be paid from the IPP to the member if the member’s share of the IPP assets was held in a RRIF of which the member was the annuitant (the “IPP minimum amount” as defined in Regulation 8500(1)
For IPP members who reach the age of 72 in 2011 or earlier, the required withdrawals will start in 2012. For IPP members who attain the age of 72 after 2011, the required withdrawals will start in the year in which they attain 72 years of age.
Regulation 8304(10) provides that for past service contributions made after March 22, 2011, the cost of certain past service benefits under the terms of the IPP must first be satisfied by transfers from RRSP and RRIF assets (as well as money purchase registered pension plan assets) belonging to the IPP member and then by a reduction in the member’s unused RRSP contribution room, before the new past service contributions are permitted.
These new rules will apply to a defined benefit IPP (as defined in Regulation 8300(1)) that:
-
has fewer than four members, if at least one member is related for tax purposes to a participating employer in the plan; or
-
is a designated plan, if it is reasonable to conclude that the rights of one or more members under the plan exist to avoid this new proposal.
Questions
a) It is our understanding that the IPP minimum payment requirement may conflict with the legislation governing the terms and conditions of pension plans registered in certain provinces. Could the CRA comment on how they plan to deal with situations where provincial legislation may restrict the payment of the IPP minimum amount as required under Regulation 8503(26).
b) For the funding of past service benefits from an RRSP or RRIF, if the “designated savings arrangement” is a RRIF, it is our understanding that many financial institutions will not allow an inter-plan transfer without first disbursing the RRIF minimum for the year to the owner. This will result in a shortfall in the funds available to satisfy the PSPA. How will the CRA deal with this situation in relation to the funding of past service benefits?
CRA Response
(a) Subsection 8503(26) of the Income Tax Regulations requires an IPP to pay an annual amount, following the year in which the member attains 71 years of age, that is equal to the greater of the retirement benefits under the plan terms and the “IPP minimum amount”. Failure to comply with subsection 8503(26) makes the particular plan a revocable plan and the Minister may issue a notice of intent to revoke the registration of the plan as set out in paragraphs 147.1(11)(c) and (l) of the Income Tax Act.
We would expect that the potential for conflict with pension benefits standards legislation will be somewhat limited as:
-
many jurisdictions exempt IPPs from the application of their pension benefits standards legislation; and
-
if the plan is in a surplus position, the IPP minimum payment can be made out of the surplus, which is permitted under pension benefits standards legislation.
In cases where there is in fact a conflict, we suggest that the plan administrator seek a resolution by contacting the pension benefits standards regulator. CALU may also wish to pursue this matter further with the Department of Finance.
(b) The Act does not contain a provision that permits a transfer to be made from a RRIF to a defined benefit provision of a registered pension plan. Similarly, paragraph 8502(b) of the Regulations does not include a provision to allow such transfers as permissible contributions to defined benefit registered pension plans. As a result, the funding of past-service benefits within a defined benefit provision of a registered pension plan (including IPPs) cannot be made via a transfer of property from a RRIF.
In addition, for the purposes of the PSPA calculation, we refer you to the definition of a qualifying transfer in subsection 8303(6) of the Regulations, which provides for the various transfers that may be used to offset a provisional PSPA associated with the crediting of past-service benefits.
In regards to IPPs, a provisional PSPA is calculated in accordance with new subsection 8304(10) of the Regulations. The IPP PSPA calculation is determined using the formula A – B.
Variable A is the greater of two amounts, described in paragraphs (a) and (b) respectively. The amount described in paragraph (a) is the provisional PSPA otherwise determined under subsection 8303(3) or 8304(5), calculated on the assumption that the provisional PSPA under that other subsection is not reduced by any qualifying transfers made in connection with the past service event.
The amount described in paragraph (b) is itself the lesser of two amounts. The first of these two amounts is, in general terms, the total of the fair market value of the assets held under the individual’s “designated savings arrangements” plus the individual’s unused RRSP room. “Designated savings arrangement” is a new definition in subsection 8300(1) that in general terms refers to an individual’s RRSP, RRIF or money purchase account of a registered pension plan. The second amount is, in general terms, the amount of the actuarial liabilities associated with the past service.
Variable B is the amount of the individual’s qualifying transfers made in connection with the past service event. An individual’s qualifying transfers made in connection with a past service event are determined under subsection 8303(6).
To summarize, while property within a RRIF is considered to form part of an individual’s “designated savings arrangements” for the purposes of the PSPA calculation in subsection 8304(10), there is nothing in subsection 8303(6), subsection 8304(10), or paragraph 8502(b) that suggests that a RRIF to defined benefit RPP transfer is required or permitted to fund the past-service benefits.
Jeff Boxer, Registered Plans Directorate
Dave Wurtele
2012-043573
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2012
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2012