Compliance Bulletin No. 2
The Registered Plans Directorate (RPD) presents its second annual bulletin highlighting areas of non-compliance with the Income Tax Act (the "Act") and Income Tax Regulations (the "Regulations") related to registered plans and explaining their potential tax impact.
Due to the technical nature of this publication, it is intended primarily for use by plan consultants, plan administrators, financial institutions, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, visit canada.ca/taxes or call 1-800-959-8281.
RPD would like to warn the deferred income plan industry of the increase in the number of questionable arrangements with regards to both registered pension plans (RPPs) and registered retirement savings plans (RRSPs). Promoters of such arrangements may be implicated and subject to third party penalties. For more information on third party civil penalties please refer to Information Circular 01-01 , Third-Party Civil Penalties. Ultimately, these schemes put the individual's retirement savings in jeopardy, and we encourage you to contact us if you are concerned about a particular arrangement.
One prevalent arrangement involves establishing RPPs when there exists no valid employee-employer relationship. Such an RPP would be subject to retroactive revocation and consequent loss of tax sheltering for the RPP funds. For further guidance on this issue please refer to Question 11 of the RPP Frequently Asked Questions.
Another identified arrangement includes the use of RRSP funds to purchase property that is worthless, non-existent, or not a qualified investment for RRSP purposes. In these cases, the funds are stripped from the retirement plan, may not be recoverable, and can result in an income inclusion to the annuitant equal to the purchase price for the year of purchase.
In addition, the Actuarial Division of RPD has recently been involved with determining the reasonableness of deductions claimed by sponsors of offshore Health & Welfare Trusts. Even though these trusts are not registered with Canada Revenue Agency, some of the plans have been promoted as "Super RRSPs."
Funding Designated RPPs
We regularly receive actuarial valuation reports recommending solvency deficiency payments for designated plans (as defined in subsection 8515(1) of the Regulations). While the Act makes provision for the acceptance of contributions that are required by pension benefits legislation, such acceptance is not extended to designated plans.
A contribution recommendation is acceptable provided the overall amount falls within the maximum eligible contributions under subsection 147.2(2) of the Act. This amount is limited to the lesser of the funding required under the maximum funding basis (as defined by section 8515 of the Regulations) and the going concern basis.
In order for a reserve to be included as a component of the liabilities of an RPP, the actuary must provide justification for such a reserve in the actuarial valuation report. We will not accept reserves for vague or unsubstantiated reasons, such as a "10 % reserve for adverse economic performance" or another type of general reserve that has the effect of reducing an existing excess surplus or eliminating a surplus.
Compensation for RPP purposes
Our audits have uncovered that when calculating pension adjustments and retirement benefits many RPPs are including types of income that are not contained in both the definition of "compensation" in subsection 147.1(1) of the Act and the plan text, as registered. This is a particularly troubling area for individual pension plans where income from business or property and investment income is often recognized as compensation by the RPP.
Examples of possible negative consequences for both plan members and plan sponsors include:
- Contributions made under subsections 147.2(1) and 147.2(4) of the Act may be affected and deductions denied under paragraphs 20(1)(q) and 8(1)(m) of the Act.
- Direct transfers made to an RRSP in excess of what is permitted by section 147.3 of the Act may be included in the plan member's income for 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.
- Retirement benefits in pay may have to be recalculated resulting in decreased periodic payments. Many retirees are on fixed incomes where even minor adjustments can have a harsh impact.
Qualifying transfers to or within an RPP have to occur within the time frames specified in the Act. In accordance with paragraph 8303(7)(b) of the Regulations, qualifying transfers have to occur within 90 days of plan registration or past service pension adjustment certification. However, we have found that many qualifying transfers actually take place years after certification or registration.
In the case of individual pension plans, the recognition of past service and any resulting qualifying transfers should be accurately calculated and outlined in the applicable actuarial valuation report. Please refer to the Past Service Pension Adjustment (PSPA) section of our Web site for information on properly calculating a PSPA.
How to Contact Us
If you have any questions regarding Health & Welfare Trusts, please contact the Tax Avoidance Section, Verification & Enforcement Division, Ottawa Tax Services Office.
If you have questions about administering a registered plan in compliance with the Act, the Registered Plans Directorate is there to help. Listed below are ways to reach us:
- A telephone enquiries service is available Monday to Friday from 8 a.m. to 5 p.m., Eastern Time, at 1-800-267-3100 (bilingual service at 1-800-267-5565) to help interpret the rules related to the administration of registered plans. For local area clients, we can be reached at (613) 954-0419 (English) or (613) 954-0930 (French). Clients calling the Directorate after 5 p.m. can leave a message on our voice mailbox system.
- Plan administrators who need guidance on issues related to a specific plan can write to: Registered Plans Directorate, Ottawa, ON K1A 0L5.
- We welcome feedback on this bulletin from employers, plan sponsors, plan administrators, and others, as well as any comments specifically related to auditing registered plans. Please send your comments by email to: RPD.LPRA2@cra-arc.gc.ca
Report a problem or mistake on this page
- Date modified: