2011 Budget - Questions and answers
Measure for Members of Registered Pension Plans Sponsored by Employers who have Commenced Bankruptcy and Insolvency Proceedings
The Government of Canada has increased the transfer limit under the Income Tax Regulations, retroactive to March 2009, for defined benefit registered pension plan (RPP) members of companies that are subject to the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act.
The following questions and answers are provided to help plan members and plan administrators understand this change.
2. Why change the transfer limit?
3. What is the current status of this change?
4. What will be the result of this change?
5. What are the conditions that must be met at the time of transfer?
7. Will these members be able to make contributions to their LIRA?
1. What is the change?
The Regulations prescribe a limit on amounts that may be transferred tax-free from a defined benefit provision of an RPP to a registered retirement savings plan (RRSP). The transfer limit calculation has been amended so that the amount will be based on a member's unreduced pension entitlement, if certain conditions are met at the time of the transfer.
2. Why change the transfer limit?
When an employer sponsoring a defined benefit RPP commences bankruptcy and insolvency proceedings, the promised pension benefit entitlements under the RPP are often reduced due to plan underfunding. When affected plan members choose to commute the value of their reduced pension entitlements and transfer the amount received to an RRSP, the transfer limit is generally prorated based upon the reduced amount received. The effect of the prorated transfer limit is that plan members who opt for transfers may lose some of the tax-sheltering ability that would otherwise have been available to them but for the insolvency of their employer and the underfunded status of their RPP.
3. What is the current status of this change?
A comfort letter was issued by the Department of Finance in November 2010 that is applicable to defined benefit pension plans sponsored by employers who have commenced bankruptcy and insolvency proceedings. The new measure proposed in this comfort letter was included in the House of Commons Bill C-13, which received Royal Assent on December 15, 2011.
4. What will be the result of this change?
- Where the commuted value of a member's reduced pension amount is less than or equal to the transfer limit that would have applied to the unreduced pension amount, the member will be entitled to a tax-free transfer of that commuted value. And;
- Where the commuted value of the reduced annual pension exceeds the transfer limit that would have applied to the unreduced pension, the excess portion of the commuted value above that limit will be required to be paid to the member and included in his or her income.
5. What are the conditions that must be met at the time of transfer?
- The employer-sponsor of the defined benefit RPP has commenced proceedings under the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act;
- Promised benefits under the RPP have been reduced due to plan underfunding;
- The RPP is not a designated plan under the Income Tax Regulations;
- If a member receives an additional benefit entitlement after a transfer has been completed, a tax-deferred transfer of the additional amount will be permitted only to the extent that the sum of all transfers made on behalf of a member does not exceed the transfer limit calculated in respect of the unreduced pension; and
- The use of this special rule for any particular RPP is approved in writing by the Minister of National Revenue in respect of that RPP.
6.a) Will relief be provided to plan members who transferred a reduced commuted value from the RPP to an RRSP, prior to the announcement of this measure, and a portion of the amount received was brought into taxable income?
If the transfer occurred after February 2009 and before 2011, from an RPP that qualifies in number 5 above, the member will be permitted to make an additional RRSP contribution equal to the amount (if any) by which the lesser of the revised transfer limit and the amount paid to the member, exceeds the previously determined transfer limit.
The Canada Revenue Agency (CRA) will work with RPP administrators to assist in providing RRSP contribution room for affected members.
6.b) Will members who previously transferred the reduced commuted value as per 6.a) above be able to make an RRSP contribution and apply it to a previous year?
Yes. The members will have the option to deduct the additional RRSP contribution against the prior 2009 or 2010 income inclusion, if the RRSP contribution is made by December 31, 2012. Alternatively, the members could apply the deduction relating to this additional RRSP contribution in subsequent years.
The CRA will provide further guidance and information in the near future.
7. Will these members be able to make contributions to their LIRA?
Under pension benefits standards legislation, contributions to a LIRA are generally only allowed to be made by way of a transfer from an RPP or from another LIRA or locked-in plan. As such, this legislation might not allow an individual to make a direct contribution to a LIRA. We would suggest that you discuss this directly with the federal or provincial regulator of the particular RPP and LIRA.
8. I only received 87 % of my promised defined benefit and transferred this reduced commuted value from my RPP to my RRSP. Since the RPP sponsor is facing bankruptcy protection, I do not know when (or if) I will get the remaining 13 % from the RPP. Can I get a PAR now?
The pension adjustment reversal (PAR) legislation restores RRSP room and arises, generally, when the sum of the individual's defined benefit pension adjustments and past-service pension adjustments exceed the amount paid to the member from the particular RPP.
A PAR is only determined once an individual terminates from a benefit provision of an RPP and is no longer a member of the particular RPP. Given that the individual still has a contingent entitlement to receive 13% of his or her defined benefits from the RPP, the individual is still a member of the particular RPP and no PAR would arise at the time that the member receives 87% of his or her benefits from the RPP.
In light of this measure contained in Bill C-13, applicable to those qualified RPPs noted in number 5 above, the CRA will not require a member to wait until he or she receives the residual amount (13% in this example) from the RPP. The RPP administrator will be able to calculate a PAR at the time the individual transfers the reduced commuted value from the particular RPP. In this way, PAR reporting will not be delayed and the affected member may be able to immediately benefit from additional RRSP room.
To determine whether you qualify for a PAR, please contact your RPP administrator.
9. My pension plan is currently underfunded. As a result, my pension plan provided me with a reduced commuted value which I transferred to my RRSP. Under provincial pension benefits standards legislation, my pension plan is required to pay me the balance of my commuted value, plus interest, within 5 years after the date of the initial transfer. Do I qualify for the relief measures noted above?
No. The preceding relief measure only applies where the particular pension plan is underfunded and the sponsoring employer has commenced proceedings under either the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act.
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