Compliance Bulletin No. 1

March 3, 2004

This bulletin is the first of a series that will be published annually by the Compliance Division of the Registered Plans Directorate. It will discuss issues and findings with regard to registered plans and the Income Tax Act (the "Act"). In this issue, the aim is to give an annual summary of problematic non-compliance issues and explain the impact on Canadians who are members of non-compliant registered plans.

The Compliance Division monitors tax compliance for all seven types of registered plans. We also have a strong on-going audit presence for registered pension plans (RPPs) and deferred profit sharing plans (DPSPs). A new registered education savings plan (RESP) desk audit program was established this year and a similar program for registered retirement savings plans (RRSP) is expected to be established in the coming year.

Pension Adjustments

The improper calculation and reporting of pension adjustments (PAs) remains one of the most common and recurring issues of non-compliance in RPPs. The importance of reporting a properly calculated PA for plan members cannot be stressed enough, as it ensures all Canadians have equal access to tax assisted retirement savings. Improper reporting of PAs could cause future taxation issues for plan members who have made contributions to their RRSP. When an improper PA is amended, the plan member's RRSP deduction limit is updated accordingly and the member may be reassessed in order to allow only the portion of the RRSP deduction that is consistent with the updated RRSP deduction limit. Furthermore, plan members might have to pay a 1 % tax on their RRSP overcontributions for every month they are left in the plan. See our websitre for more information on calculating PAs.

Direct Transfer from Defined Benefit provision to RRSP

Our audits have uncovered an abundance of excess transfers being made from defined benefit (DB) provisions to RRSPs. The portion of a member's DB provision entitlement that can be directly transferred to an RRSP is the member's commuted value or prescribed amount, whichever is less. The remainder of the benefit is then paid to the member as a taxable benefit. Section 8517 of the Income Tax Regulations (the "Regulations") outlines the method for calculating the member's prescribed amount. This amount is to be calculated on the day the member's benefit entitlement is actually transferred from the plan. When an excess transfer is discovered, the plan member may be assessed to include the excess amount as taxable income in the year the transfer occurred. Furthermore, the plan member may have to pay a 1 % per month tax on the excess amount left in the RRSP.

Terminating Registered Pension Plans

If no funding approval is required on the wind-up of a defined benefit provision, then it is not necessary to submit a wind-up valuation report. However, as allowed by section 8410 of the Regulations, we may request that a plan administrator file a wind-up valuation report prepared by an actuary.

An RPP is to be administered in compliance with the Act as well as the plan text, as registered. If you wish to upgrade benefits on plan termination, it is necessary to amend the RPP to allow for such benefits. Such an amendment would have to be filed, at the latest, 60 days after the funds have been disbursed from the plan, as required by section 8512 of the Regulations.

As plan administrator, you must notify us in writing within 60 days of the date the last of the plan assets are paid or transferred out of the plan. You will need to give us the final distribution date and the settlement methods. You can notify us by letter or by using Form T244 (Registered Pension Plan Annual Information Return).

Educational Assistance Payments (EAP) and RESP Contributions

An EAP is paid out of a RESP to a beneficiary to assist that individual to further their post-secondary education. As required by paragraph 146.1(2)(g.1) of the Act, the beneficiary has to be a full-time student (exceptions provide for students who have a physical or mental impairment) at a post-secondary educational institution and to be enrolled in a qualifying educational program at that institution. Making an EAP in any other situation renders the RESP revocable.

The amount that can be contributed to a RESP is restricted by paragraph 146.1(2)(k) and subsection 204.9(1) of the Act. The amount that can be contributed to a RESP each year is $4000 per beneficiary, up to a lifetime limit of $42,000. These limits apply regardless of the number of plans for the beneficiary.

There are two issues to consider when an overcontribution is made to a RESP. First, the subscriber may have to pay a 1 % tax on the overcontribution for each month the amount is in the plan. Second, it is important to note that making overcontributions to a RESP will adversely affect the beneficiary's lifetime limit of $42,000. That is, when overcontributions are removed from a RESP, the lifetime limit is not restored by the amount of the overcontribution withdrawn.

Where to get help

Registered Plans Directorate

You can find more information at Savings and pension plan administration.

By telephone

Toll-free in Canada and the United States: 1-800-267-3100.
If you are calling from outside of Canada or the United States, call us collect at 613-221-3105. The Registered Plans Directorate accepts collect calls.

By mail and courier

Due to a building refit spanning multiple years, the Registered Plans Directorate’s mailing address has been temporarily changed. Please use the following address for all correspondence until further notice:

Registered Plans Directorate
Canada Revenue Agency
2215 Gladwin Cres
Ottawa ON  K1B 4K9

We welcome feedback on this bulletin. Send comments by email to RPD.LPRA2@cra-arc.gc.ca.