Subsection 147.1(1) - Definitions
Administrative Policy
Newsletter 20-1, “Registered Pension Plan Annuity Contracts” 24 July 2020
Conditions for application of, and effect of. S. 147.4
Section 147.4 of the Act applies when an individual acquires ownership of an annuity contract in full or partial satisfaction of their entitlement to benefits under an RPP. A purchase of an annuity can occur either before or after lifetime retirement benefits have commenced to be paid from a particular RPP. Often referred to as a buy-out annuity, it occurs when a plan administrator pays a premium to a licensed annuity provider to purchase an annuity contract on behalf of the member or their survivors. The member (or survivor) is both the annuitant and the owner of the contract.
If the conditions below are met, subsection 147.4(1) of the Act deems that the individual has not received an amount from an RPP by acquiring the annuity. It also deems amounts received under the contract to be amounts received under the RPP. As a result, the individual is not immediately taxed when they acquire the annuity, and they must include the annuity payments in their income in the year received. For subsection 147.4(1) of the Act to apply, the following conditions must be met:
- the rights provided under the contract are not materially different from those provided under the RPP,
- no further premiums will be paid after the contract is acquired, and
- unless waived by the Minister, at the time of the acquisition, the registration of the RPP is not revocable.
Example of material variation
Annuity purchases, therefore, must not allow for a reconfiguration of the amount or form of benefits that are provided under the particular 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.
Examples of acceptable variations – COLA
Many RPPs provide cost-of-living adjustments that are based on the full Consumer Price Index (CPI). However, in general, licensed annuity providers do not offer life annuities with this feature. Provided that the annuity contract matches all other benefits provided under the RPP, the CRA will accept one of the following fixed-rate adjustments in lieu of a full CPI indexation adjustment:
- the midpoint of the Bank of Canada’s inflation-control target range at the date of purchase,
- the spread between the yield of Government of Canada long term bonds and real return bonds in the month of or the month preceding the date of purchase, or
- a fixed rate that is between these two alternatives.
Some RPPs provide indexation that is less than CPI, such as CPI less 1% or 40% of CPI. To make sure the annuity is not materially different from the RPP in this situation, you have to modify the fixed-rate adjustment appropriately.
Commutation of PV of RPP benefits to acquire life annuity
[T]he terms of the plan … might allow a member to use their commuted value to buy a life annuity from a licensed annuity provider. … A commuted value cannot be used to purchase an annuity that is materially different from the RPP, based on the plan as registered.
If commuted value falls short, annuity can provide lower benefits
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 … [t]he 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. An annuity that provides less benefits than what would have been provided from the RPP will have the protection afforded under subsection 147.4(1) of the Act, on the understanding that the payment of the commuted value is in full satisfaction of the member’s benefits under the RPP.
Any excess must be distributed on a taxable basis
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 can be paid in cash to the individual and must be included in income for tax purposes. …
Use of excess assets e.g., in IPP to purchase further benefits
If there are excess assets in the RPP, to the extent that lifetime retirement benefits and ancillary benefits are not at the maximum allowable under the Act, benefits can be enhanced through a plan amendment before being settled by an annuity purchase.
Money purchase (a.k.a. defined contribution) plans
[S]ome money purchase RPPs might not have specific forms of retirement benefits and can have general portability provisions. However, upon retirement or termination of employment, the plan terms must allow members the opportunity to purchase an annuity from a licensed annuity provider using their account balances.
Buy-in annuities not subject to s. 147.1
A buy-in annuity policy is issued by an annuity provider to an RPP administrator in order to de-risk certain liabilities under the RPP. Under the annuity policy, the annuity provider deposits the total periodic annuity payment to the pension fund. The responsibility to pay the pensions to individual retired members rests with the pension plan administrator and no individual certificates of insurance are provided to the retired members whose retirement benefits are subject to the buy-in annuity policy. In these situations, subsection 147.4(1) of the Act has no application as the contract is issued to and owned by the RPP and not any individual plan members. The buy-in annuity contract is an investment of the RPP.
Compensation
Administrative Policy
1C 98-2 "Prescribed Compensation for Registered Pension Plans".
3 June 1992 External T.I. 5-921532
A retiring allowance is not included in "compensation".
Participating Employer
Administrative Policy
Actuarial Bulletin No. 4 - Draft Bulletin for Industry Consultation "Reasonable Methods to Apportion Assets and Actuarial Liabilities" 8 January 2020
Purpose of participating employer requirement
A participating employer … is an employer that has made, or is required to make, contributions to a registered pension plan for its employees or former employees. Applications to register a pension plan or amend a registered pension plan will not be accepted if there is no valid participating employer. This makes sure that a plan will always meet the primary purpose condition that applies to all pension plans, which is to provide periodic payments to individuals after retirement and until death for their service as employees.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 147.2 - Subsection 147.2(2) - Paragraph 147.2(2)(a) - Subparagraph 147.2(2)(a)(vi) | 480 | |
| Tax Topics - Income Tax Act - Section 147.2 - Subsection 147.2(8) | 123 |
26 June 2019 Internal T.I. 2019-0791761I7 - Participating employer in RPP
Where more than one employer participates in a registered pension plan, s. 147.2(2)(a)(vi) requires that the assets and actuarial liabilities be apportioned in a reasonable manner among the participating employers in respect of their employees and former employees.
After noting that the phrase “an employer who participates in the plan” in s. 147.2(2)(a)(vi) was a “grammatical variation” of the defined term, CRA indicated that it considers that for the purpose of s. 147.2(2)(a)(vi) and other uses of the concept of a participating employer, an employer is considered to be a participating employer even if it has been dissolved or otherwise ceased to exist. Thus, in the example of the application of s. 147.2(2)(a)(vi), RPP assets and liabilities continue to be apportioned to the dissolved employer.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 147.1 - Subsection 147.1(2) - Paragraph 147.1(2)(a) - Subparagraph 147.2(2)(a)(vi) | contributing employer who ceases to exist nonetheless considered to be an “employer [who] participates” | 244 |
| Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 33(3) | expansive phrase was as defined in short phrase definition | 29 |
Defined Benefit Plan
Articles
Terra L. Klinck, Susie S. Taing, "How Target Benefit Plans Fit Into the Current Income Tax Act Registered Pension Plan Regime", Taxation of Executive Compensation and Retirement, Special Pension Edition, Volume XVII, No. 2, 2013, p. 1068.
Features of target benefit plan (p.1068)
[W]e refer to TB plans as workplace pension plans with the following three characteristics:
- the TB plan includes a benefit formula which is a "target," and is not guaranteed;
- employer contributions (and where applicable, employee contributions) to a TB plan are fixed, whether by collective agreement or otherwise; and
- both past service benefits and future benefits can be reduced while the plan is ongoing and upon wind-up. [fn 2: Alternatively, when assets are more than sufficient to pay the "target" benefit, benefits may be increased and/or ancillary benefits may be added.]
TB plans have characteristics that resemble both defined benefit ("DB") and defined contribution ("DC") plans. The contributions that an employer is required to make to a TB plan are fixed, similar to a DC plan (e.g., a percentage of an employee's earnings or a flat amount per hours worked). Once contribution levels are known, a benefit formula is set. The benefits payable to members from the TB plan are not directly tied to contributions made to the plan, as is the case with a DC plan. Instead, benefits under a TB plan are similar to a traditional DB plan in that the formula for the "targeted" amount of benefits to be paid are known in advance and calculated based on a plan member's years of service (e.g., a flat-rate benefit formula), or years of service and earnings (e.g., a final-average earnings or career-average earnings formula)….
Characterization as defined benefit plan (p. 1069)
TB plans are similar in design to MP plans in that contributions to the TB plan are fixed. From a policy perspective, one can argue that TB plans should be treated the same as MP plans for PA purposes. [fn 8: As discussed below, the MP PA calculation rules apply to SMEPs, which have many of the same design features as a TB plan.] TB plans do not, however, fall within the MP regime. A MP provision is currently defined as the terms of a pension plan (a) which provide for a separate account to be maintained in respect of each member to which contributions are credited, and (b) under which the only benefits payable to a member are benefits determined by the amount in the member's account. [fn 9: Section 147.1 of the Act.]
As TB plans provide a benefit formula that is not solely tied to a DC account balance, a TB plan does not meet the current definition of a MP provision.
DB Provisions
A DB provision is defined under the Act as the terms of a plan under which benefits in respect of each member are determined in any way other than that described in the definition of "money purchase provision." [fn 10: Section 147.1 of the Act.] Based on this definition, a TB plan would fall within the definition of DB provisions under the current RPP regime in the Act.
Subsection 147.1(2)
Paragraph 147.1(2)(a)
Subparagraph 147.2(2)(a)(vi)
Administrative Policy
26 June 2019 Internal T.I. 2019-0791761I7 - Participating employer in RPP
Does the apportionment condition in s. 147.2(2)(a)(vi) apply where one of the employers ceases to have any involvement with the plan, e.g., because of bankruptcy, winding-up, dissolution, sale of business, or voluntary exit from the plan?
After referencing the requirement in s. 147.2(2)(a)(vi), which “ensures that any unfunded liability associated with a participating employer, and thus the employer’s contributions in respect of that liability, are not excessive,” and the s. 147.2(2)(d) requirement that “there is a reasonable determination of each participating employer’s actuarial surplus,” CRA stated that in such situation:
[T]he particular employer would nonetheless continue to be considered a participating employer … . Consequently, in applying the apportionment condition described above, assets and liabilities should continue to be apportioned to that employer. In this regard, we understand that your Directorate considers reasonable an apportionment method that preserves the funding ratio applicable to the employer as at the time the employer ceased to be actively involved in the plan. This helps avoid problems that could arise from experience gains or losses. …
This position applies regardless of whether the particular employer ceases to exist, except where specific rules provide otherwise. Paragraph 147.2(8) provides that a former employee of a predecessor employer of a participating employer in relation to a pension plan is deemed to be a former employee of the participating employer in relation to the plan if certain conditions are met.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 147.1 - Subsection 147.1(1) - Participating Employer | dissolved corporation can be a “participating employer” in an RPP | 141 |
| Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 33(3) | expansive phrase was as defined in short phrase definition | 29 |
Subsection 147.1(5)
Administrative Policy
Newsletter 21-1, Additional Conditions Applicable to Individual Pension Plans and Designated Plans, 16 March 2021
Blanket prohibition against contributions to a money purchase provision if actuarial surplus is over the surplus limit
- Some employers who sponsor individual pension plan (IPPs) (as defined in Reg. 8300(1)) and x designated plans (defined in Reg. 8515(1)) with excess surplus try to avoid the requirement under s. 147.2(2)(d) for a contribution holiday by amending the plan to suspend defined benefit accruals for members and add a money purchase provision under which the employer would then continue contributions.
- This results in an abusive continuance of tax-deductible contributions while preserving or building up the surplus.
- CRA, on a case-by-case basis, has been prohibiting, pursuant to a s. 147.1(5) condition, employers and members from contributing to a money purchase provision of an IPP or to a designated plan if actuarial surplus under the defined benefit provision of the plan is more than the surplus limit – so that any required contributions to the plan’s money purchase provision are permitted only if they are made from the surplus (as permitted by Reg. 8502(k) and s. 147.3(4.1).)
- “We are now imposing this condition on all designated plans and IPPs with effect from the date of this newsletter.”
Condition deeming plan to be designated plans where current but not past service benefits are provided on a money purchase basis and the member has to option to convert the latter into defined benefits
- There has been an increase in applications for registration of pension plans covering a small number of members and under which past service benefits are provided on a defined benefit basis while current service benefits are provided strictly on a money purchase basis, and with members having the option to convert their money purchase benefits into defined benefits at regular intervals.
- Since these plans are designed to limit the provision of defined benefits to past service benefits, they fall outside of the designated plan definition, so that the funding restrictions do not apply (and, in fact, typically they generate much higher defined benefit contributions than would otherwise be permitted if the plan was subject to the funding restrictions for a designated plan).
- Furthermore, members typically choose to convert their money purchase benefits into defined benefits so that the plan essentially operates as a defined benefit RPP.
- CRA is imposing the following condition under s. 147.1(5), applicable to “employer contributions made pursuant to an actuary’s recommendation contained in an actuarial valuation report that is filed with us after the date of this newsletter”:
An RPP is deemed to be a designated plan throughout a calendar year for the purposes of the conditions in subsection 147.2(2) of the Act and section 8515 of the Regulations, when the plan:
provides past service benefits under a defined benefit provision in the year or a previous year for members who are specified individuals (within the meaning of subsection 8515(4) of the Regulations)
would be a designated plan throughout the year if the references in paragraphs 8515(1)(a) and (b) of the Regulations to “a defined benefit provision of the plan” were read as references to “a defined benefit or money purchase provision of the plan”
Because of subsection 8515(2) of the Regulations, such a plan will continue to be deemed to be a designated plan in subsequent calendar years unless waived by the Minister.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 147.2 - Subsection 147.2(2) - paragraph 147.2(2)(d) | 151 | |
| Tax Topics - Income Tax Regulations - Regulation 8515 - Subsection 8515(1) | 158 |
Subsection 147.1(11) - Revocation of registration — notice of intention
Administrative Policy
4 June 1991 Memorandum (Tax Window, No. 4, p. 29, ¶1279)
A pension plan could be revoked retroactively.
Subsection 147.1(12) - Notice of revocation
Cases
Hodge v. Canada (National Revenue), 2009 DTC 6048, 2009 FCA 210
On July 17, 2008, the Minister issued a notice of intent to revoke the registration of a pension plan established by the taxpayer, with the proposed revocation to be as of June 1, 2001 (the date of the plan's initial registration) on the basis that there was no evidence that the plan had ever complied with Regulation 8502(8). On July 13, 2008, the administrator of the plan wrote to the Minister requesting that the revocation of the plan be as of August 31, 2008.
Subsection 147.1(12) authorized the Minister to specify June 1, 2001, as the date on which the Plan's revocation would be effective, as there was no basis for the Court to vary the date of revocation from that specified by the Minister. Giving effective priority to the Minister in determining the date of revocation recognized the Minister's responsibility for administering the Act.
See Also
Mammone v. The Queen, 2018 TCC 24, rev'd 2019 FCA 45
The CRA revocation of a registered pension plan (the “New Plan”) was invalid due to inadvertent failure to comply with the 30-day notice requirement in s. 147.1(12). Graham J found that the contemporaneous reassessment of the taxpayer under s. 56(1)(a)(i) for having purportedly transferred the commuted value of his (OMERS) pension plan to the New Plan was valid since the CRA’s subsequent issuance (well beyond the normal reassessment period, but nonetheless in accord with s. 147.1(12) ) of a further retroactive deregistration of the New Plan effectively also retroactively validated such reassessment.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) | RPP revocation beyond the normal reassessment period retroactively validated an unsupportable reassessment under s. 56(1)(a)(i) | 414 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(9) | subsequent retroactive deregistration of RPP also retroactively validated an assessment factually made on basis of plan’s invalidity | 216 |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) | subsequent retroactive deregistration of RPP would not establish carelessness in previous return filing | 197 |
| Tax Topics - General Concepts - Effective Date | subsequent deregistration of RPP retroactively validated reassessment | 239 |
| Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) | valid assessment for transfer to an RPP that was retroactively deregistered | 85 |