Archived - Backgrounder: Key Measures Included in Income Tax Legislative Proposals in Respect of Pooled Registered Pension Plans
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The income tax rules are being amended to accommodate Pooled Registered Pension Plans (PRPPs) in a manner consistent with the objective that such plans fit within the basic system of rules and limits for Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs). The proposals released today reflect the key objective that the rules for PRPPs be simple and straightforward to promote low-cost plans, take-up by employers and pension coverage among Canadians.
The proposed tax rules for PRPPs will apply to both federally and provincially regulated PRPPs and will operate alongside the Pooled Registered Pension Plans Act, which will govern federally regulated PRPPs. The PRPP Act was introduced in Parliament on November 17, 2011.
The key elements of the proposed PRPP tax rules are summarized below:
- An eligible PRPP administrator will be defined as a corporation resident in Canada that is licensed to administer a PRPP under the PRPP legislation of Canada or the similar legislation of a province.
- There will be no employer-employee relationship required for participation in a PRPP. This will permit employees whose employer has no involvement with a plan, as well as self-employed individuals, to participate in a PRPP.
- Contributions to a PRPP made by employers, employees and self-employed individuals will generally be deductible for tax purposes. All PRPP contributions for a year made by and on behalf of a PRPP member will be limited to the member’s available RRSP contribution limit for the year.
- To help prevent situations where large employer contributions might create over-contributions for a PRPP member in relation to the member’s RRSP limit, annual employer contributions to a PRPP in respect of an employee will be limited to a maximum of the RRSP dollar limit for the year, unless the employee directs the employer to contribute more than this amount.
- Employers will be permitted to make direct contributions to a PRPP in respect of an employee, which will be excluded from salaried compensation (like employer contributions to an RPP). Immediate vesting of employer PRPP contributions will be required. There will be no requirement for an employer to make a minimum contribution to a PRPP. Since PRPP contributions will be made under a member’s available RRSP limit, there will be no requirement for an employer to report pension adjustments in respect of employer and employee contributions, as is required in respect of employer and employee contributions to an RPP.
- There will be no “qualified investment” rules for PRPPs. Instead, some general rules will apply to ensure that investments are reasonably diversified and do not present risks of self-dealing. For large PRPPs, the administrator will be required to avoid intentionally acquiring investments in which a member has a significant interest. They will also be required to take reasonable precautions to avoid concentrating more than 10 per cent of plan assets in a particular business (or non-arm’s length group of businesses). Since there are no legislated restrictions on the size of a PRPP, small PRPPs (generally those with fewer than 10 unrelated employers participating) will be required to comply with those two rules, and to avoid holding investments in participating employers in connection with the PRPP.
- The existing transfer rules for defined contribution RPPs (governing transfers between RPPs and between an RPP and an RRSP, Registered Retirement Income Fund (RRIF)1 and certain other registered plans), with some exceptions, will generally apply to a PRPP.
- Pension payment or decumulation options will be limited to those currently available to defined contribution RPPs (that is, the purchase of a life annuity for the member, the transfer of the member’s PRPP account funds to an RRSP or RRIF, or the payment of variable benefits (RRIF-type payments) from the member’s PRPP account).
- A deceased PRPP member’s spouse or common-law partner will be permitted to become a successor PRPP member, taking over ownership of the deceased member’s PRPP account funds and making ongoing decisions in respect of those funds as a member of the plan. Alternatively, a surviving spouse or common-law partner will be permitted to transfer the funds to his or her own RRSP, RRIF, PRPP account or RPP account, or to use the funds to acquire a qualifying annuity. These latter options (plus the option of transferring the funds to a Registered Disability Savings Plan (RDSP) to the extent RDSP contribution room is available) will also be permitted for an infirm financially dependent child or grandchild of the deceased member.
In addition, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules under the Excise Tax Act will be amended to ensure that PRPPs are subject to the same GST/HST treatment as RPPs. As a result, PRPPs would be treated as investment plans for GST/HST purposes. Also, PRPPs with members resident in an HST province and in at least one other province would generally determine their liability for the provincial component of the HST under the special attribution method for selected listed financial institutions. It is proposed that amendments to the GST/HST rules under the Excise Tax Act be implemented concurrently with the income tax amendments.
The accompanying explanatory notes provide additional details regarding the proposed legislative amendments to the Income Tax Act.
It is proposed that these changes come into force at the same time as the PRPP Act. The Government intends to introduce legislation in respect of these proposals at an early opportunity.
1Depending on the specific locking-in requirements for PRPPs under the federal PRPP Act and similar provincial legislation, locking-in requirements may apply to an RRSP or RRIF that receives a transfer of PRPP funds.