Following its introduction of Bill C-25 on November 17, 2011 (see my prior blog post), the federal government released for consultation a package of draft legislative proposals under the Income Tax Act to accommodate the creation of Pooled Registered Pension Plans (PRPPs) within the basic system of rules and limits currently applicable to registered pension plans (RPPs) and RRSPs. It is anticipated that the introduction of these new tax rules will "set the stage" for provincial legislation required to implement PRPPs beyond federal "included employment".
The stated objectives of the tax proposals are to put in place PRPP rules which are "simple and straightforward to promote low-cost plans, take-up by employers and pension coverage among Canadians".
The key elements of the proposed PRPP tax rules are as follows:
- Eligible PRPP administrator - defined as a resident Canadian corporation licensed to administer a PRPP under federal or provincial PRPP legislation.
- No employer-employee relationship required - employees whose employer has no involvement with the PRPP, as well as self-employed individuals, are eligible to participate.
- PRPP contributions - by employers, employees
and self-employed individuals will generally be deductible for tax
purposes, subject to prevailing RRSP contribution limits available
for the year,
- Employers will be permitted to make direct, deductible, contributions to a PRPP in respect of an employee (like RPP contributions) with no required minimum, however, to prevent over-contributions in relation to the member's RRSP limit where an employer participates, annual employer PRPP contributions 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;
- Since PRPP contributions will be made under a member's available RRSP limit, there will be no pension adjustment reporting requirement for an employer in respect of employer and employee contributions
- Immediate vesting - of employer PRPP contributions will be required.
- No "qualified investment" rules for
PRPPs - instead, some general rules will apply to address
diversification and self-dealing risks,
- the administrators of "large" PRPPs will be required to avoid intentionally acquiring investments in which a member has a significant interest and 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);
- "small" PRPPs (generally those with fewer than 10 unrelated employers participating) will be required to comply with these two rules as well, and will be required to avoid holding investments in participating employers.
- Transfer rules – existing rules for defined contribution (DC) RPPs (governing transfers between RPPs, RRSPs, RIFs, etc.) will, with some exceptions, generally apply to a PRPP.
- Pension payment or "decumulation" options (i.e., purchase of a life annuity, transfer of PRPP account funds to an RRSP or RRIF, or payment of variable RRIF benefits) - from the member's PRPP account will be limited to those currently available to DC RPPs.
- On death - 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 PRPP; or
- alternatively, will be permitted to transfer the PRPP 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 others) will also be permitted for an infirm financially dependent child or grandchild of the deceased member.
- 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.
It is proposed that these changes come into force at the same time as Bill C-25. The government has invited interested parties to submit comments on the consultation package by February 14, 2012, following which legislation will be introduced "at an early opportunity".
Ian McSweeney practises exclusively in the field of pensions and employee benefits and advises clients on pension plans, supplemental retirement arrangements, deferred profit sharing plans and other employee and executive compensation programs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.