8 May 2012 Roundtable, 2012-0435781C6 - CALU CRA Roundtable - May 2012 - Question 11

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. Where the commuted value of a member’s benefits under a defined benefit RPP exceeds the annuity purchase price, can the excess be paid to the member? 2. Will subsection 147.4(1) apply in the opposite situation where the commuted value is not sufficient to purchase an annuity with the same payout as the plan?

Position: 1.Yes 2. Yes.

Reasons: 1.Provided that the excess is required to be paid under pension benefits standards legislation, ITR 8502(d)(ix) permits the amount to be paid to the member as a taxable lump-sum. 2. The fact that the annuity payments are less than the benefits provided under the plan will not in and of itself cause the annuity acquisition to lose the protection afforded by subsection 147.4(1).

CALU CRA Roundtable - May 2012

Question 11 - Purchase of an Annuity Contract with the Commuted Value of a RPP

Background

Subsection 147.4(1) of the Act applies where an individual acquires ownership of an annuity contract in satisfaction of the individual's entitlement to benefits under a RPP. Subsection 147.4(1) provides that the individual is deemed not to have received an amount from the RPP as a result of acquiring the annuity and any amounts received under the contract are deemed to be amounts received under the RPP, but only where the following conditions are met:

• the rights provided for under the contract are not materially different from those provided for under the RPP;
• the contract does not provide for any further premiums to be paid after it is acquired by the individual; and
• at the time of acquisition, the registration of the plan is not revocable, unless the Minister has waived this requirement.

In the historical technical notes that accompany subsection 147.4(1), the Department of Finance provides the following example of RPP annuity acquisition that is not considered to satisfy the conditions for the deeming rules in subsection 147.4(1) to apply:

On retirement, Catherine, a member of a defined benefit RPP is entitled to an indexed pension of $20,000 per year. Under the terms of the plan, Catherine is given the option of either transferring the value of her benefits to a locked-in RRSP (subject to the transfer limits) or acquiring from a life insurance company an indexed annuity of $20,000 per year. Catherine elects the annuity option, but foregoes the indexing in exchange for additional lifetime annuity payments of $5,000 per year (an option that was not provided for under the plan). Subsection 147.4(1) does not protect the acquisition of the annuity contract since it provides for rights that are materially different from those provided for under the RPP.

It is clear that subsection 147.4(1) requires that the annuity payout not be “materially different” from what the corresponding defined benefit RPP would have paid. In Compliance Bulletin No. 3, dated February 3, 2006, the CRA reiterated this requirement.

In recent years, there have been situations (i.e. concerns about solvency) where plan members have been offered an opportunity to remove the commuted value of their entitlements from the plan. Some provinces, such as Ontario, recently amended their pension legislation to permit the payout of the commuted value.

Question 11.1

In circumstances where the commuted value of the pension is greater than the purchase price of an annuity (that has the same payout that was expected under the RPP), we understand that the CRA permits the excess (not the entire commuted value) to be paid out as a taxable lump-sum amount. The CRA commented on this at the 2009 RPP Practitioners’ Forum. Can the CRA confirm that this is the CRA’s administrative practice?

CRA Response

The response provided at the 2009 RPP Practitioners’ Forum continues to reflect the CRA's position. Briefly, where the payment of the excess is required by the governing pension benefits standards legislation, subparagraph 8502(d)(ix) of the Regulations permits the amount to be paid to the member as a taxable lump-sum. This is explained in more detail at www.cra-arc.gc.ca/tx/rgstrd/cnslttns/rpp_cq09-eng.html#q2.

Question 11.2

There may be circumstances where the commuted value is not sufficient to purchase an annuity with the same payout. Will the CRA consider that the requirements of subsection 147.4(1) have been met in these circumstances so long as the entire commuted value was used to purchase an annuity contract?

CRA Response

Yes. The fact that the annuity payments in this situation are less than the benefits provided under the plan will not in and of itself cause the annuity acquisition to lose the protection afforded by subsection 147.4(1) of the Act.

Jeff Boxer, Registered Plans Directorate

Dave Wurtele
2012-043578