Compliance Bulletin No. 6r1
This Bulletin cancels and replaces Compliance Bulletin No. 6, dated May 2009.
For the past several years, the Registered Plans Directorate (RPD) has used its Compliance Bulletins to inform industry professionals about non-compliance issues relating to registered plans and to outline the tax implications for members and employers. In Compliance Bulletin No. 5, we informed the deferred income plans industry of the results of two Federal Court of Appeal decisions as they related to registered pension plans that had issues with “primary purpose” requirements. The resulting message to the industry was that extreme care must be taken when setting up an individual pension plan when the primary purpose requirement of the Income Tax Regulations may not be met.
This year’s Bulletin focuses on several areas of non-compliance with the Income Tax Act and the Regulations related to registered plans and outlines the associated potential tax implications. The Bulletin also discusses RPD’s compliance requirements for the tax-free savings account (TFSA) and the registered disability savings plan (RDSP).
In addition to several wording changes throughout the document, in the section entitled “Excess qualifying transfers for PSPAs”, you will find the RPD’s revised position for dealing with this issue. Also, the section entitled “RRSP project” has been updated to provide information following the legislative changes introduced as part of the 2011 Federal Budget and provides notification that an electronic filing option for Form T550, Application for Registration of RSP's, ESP's, and RIF's under 146, 146.1 and 146.3 of the Income Tax Act, is coming soon. The bulletin also refers to the updated TFSA contribution limit for 2013.
Excess qualifying transfers for PSPAs
An “excess qualifying transfer” refers to any excess funds that were transferred from the member’s registered retirement savings plan (RRSP) to the defined benefit (DB) pension plan. They are referred to as excess funds because they are more than the amount that was needed to be transferred for the past service pension adjustment (PSPA) to be certified to purchase the period of past service under the DB plan. This excess is usually created because the member’s PSPA was not correctly calculated in the first actuarial valuation report, either because the wrong earnings were used, or the periods of service are not eligible.
In these cases, the member is not allowed to transfer the excess funds back to an RRSP, since there is no provision in the Act to provide for such an action. When the RPD uncovers the excess qualifying transfer, the excess funds may be left in the plan; however, only within the particular DB provision. Alternatively, the excess funds may be removed from the plan and paid out to the member. The funds would then be included as income in the year in which the payment occurs, under paragraph 56(1)(a) of the Act.
On a case by case basis, if the plan administrator has voluntarily reported the excess qualifying transfer, the RPD will consider giving administrative relief to allow the excess funds to be deposited into an additional voluntary contribution account in a money purchase provision of the plan. Please note that this administrative relief will not be granted for cases where the RPD uncovered the excess qualifying transfers.
Any employer over-contributions that may have resulted because the ineligible earnings or service were denied will be dealt with separately.
In Compliance Bulletin No. 3, we informed the deferred income plans industry that penalties may be applied when a person fails to comply with a duty or obligation imposed by the legislation.
A penalty under subsection 162(5) will be applied for:
- an unreported or misreported pension adjustment filed on a Form T4, Statement of Remuneration Paid (slip), or the related summary;
- a misreported past service pension adjustment filed on a prescribed Form T215, Past Service Pension Adjustment (PSPA) Exempt from Certification, or the related summary; and,
- a misreported pension adjustment reversal filed on a prescribed Form T10, Pension Adjustment Reversal (PAR), or the related summary.
A penalty under subsection 162(7) of the Act will be applied for:
- a failure to file the past service pension adjustment on a prescribed Form T215 or Form T1004, Applying for the Certification of a Provisional PSPA;
- a failure to file the pension adjustment reversal on a prescribed Form T10;
- a failure to file the annual information return on a prescribed Form T244, Registered Pension Plan Annual Information Return;
- a failure to file the connected person information return on a Form T1007, Connected Person Information Return.
A penalty may also apply when other related information returns like the Form T3GR, Group Income Tax and Information Return for RRSP, RRIF, RESP, or RDSP Trusts, the Form T4RSPSUM, Summary, or the Form T4RSP, Statement of RRSP Income, needed to be filed, but were not.
The Canada Revenue Agency (CRA) has identified an increasing number of questionable investments held by RRSPs and registered retirement income funds (RRIFs). These compliance issues were identified and discussed in Compliance Bulletin No. 4.
The following is an update of our compliance activities concerning these issues. We will not reiterate our fundamental concerns; however, you should note that the CRA has recently identified that shares of public corporations traded on prescribed stock exchanges are being used to perpetrate RRSP schemes. This is noteworthy because it means that the compliance issues are no longer limited to securities that are not traded on prescribed stock exchanges.
Please note that the following discussion applies equally to RRIFs, with appropriate changes to legislative references.
Part XI.1 tax
For transactions occurring before March 23, 2011, when an RRSP trust acquires a non-qualified investment, the fair market value of the investment at the time it was acquired is included, under subsection 146(10) of the Act, in computing the income of the taxpayer who was the annuitant under the plan. If for any reason subsection 146(10) is not applied, then a tax under Part XI.1 of the Act could be assessed on the RRSP. Part XI.1 tax could also be applied in situations where an RRSP acquired a qualified investment and after that investment became a non-qualified investment.
Subsection 207.1(1) of Part XI.1 of the Act imposes a 1% per month tax on an RRSP that holds a non-qualified investment. Under subsection 207.2(2) the issuer could become personally liable for this tax if the RRSP does not remit the amount due. It is an issuer’s obligation to file a Form T3GR, Group Income Tax and Information Return for RRSP, RRIF, RESP or DPSP Trusts, and remit the tax that applies. Failure to do so will result in the CRA assessing Part XI.1 tax where warranted.
We would like to highlight the risk these provisions present to issuers, particularly in the context of the “RRSP strip issue” detailed in Compliance Bulletin No. 4. By definition, when an RRSP is “stripped”, value is removed from the trust so that it is left with property of little or no value. The result is that when the CRA issues an assessment under Part XI.1, the RRSP cannot pay the tax and the liability falls to the issuer.
For transactions occurring after March 22, 2011, the 2011 Federal Budget included several measures to enhance the existing RRSP and RRIF anti-avoidance rules. Legislation to implement these measures is contained in Bill C‑13, which received Royal Assent on December 15, 2011. The new rules largely adopt the existing TFSA rules for non-qualified investments, prohibited investments and advantages, with some modifications.
Questions and answers were prepared to help RRSP issuers and RRIF carriers to better understand when and how the new rules apply and to inform institutions of their responsibilities under the new rules.
To see the questions and answers go to 2011 Budget - Questions and answers.
The CRA has pursued, and will continue to pursue enhanced compliance activities in this sector to protect retirement assets held by Canadians from questionable promotions and arrangements. These compliance initiatives will include audits of issuers and carriers to verify RRSPs and RRIFs.
You are reminded that when an RRSP issuer opens a contract under a specimen plan, they must apply to the CRA to have these contracts registered within 60 days of the end of the calendar year. Such reporting is done by filing a completed Form T550. This form is needed for each specimen, under which contracts were sold, together with a DVD or CD-ROM listing the contract account numbers, names, addresses, and social insurance numbers pertaining to the contracts. Filing this form accurately ensures that the plans sold in the year under the specimen are properly registered. Please note that we will be moving to an electronic filing option for the Form T550. More information on this project will be available shortly.
Tax-free savings account
Since 2009, Canadian residents who are 18 years of age or older are able to earn tax-free investment income in a tax-free savings account (TFSA) during their lifetime. The maximum amount that could be contributed to a TFSA in 2009 was $5,000. This amount is indexed to inflation and rounded to the nearest $500 in the next years. In 2013, the contribution amount will be increased to $5,500. Unused TFSA contribution room can be carried forward to later years. The total of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year. The CRA is responsible for monitoring the TFSA, as necessary under the Act.
Some of the areas that the CRA will be reviewing to ensure compliance for the operation of TFSAs include:
- qualifying arrangements are entered into by individuals who have attained 18 years of age;
- no contributions were made to a TFSA before January 1, 2009;
- contributions are not deducted;
- the investments made are qualified investments;
- contribution limits are respected; and,
- TFSA elections are filed within the required time frame (by the end of February in the year following the year the arrangement was entered into).
This is not an exhaustive list. The CRA will review all facets of the TFSA to ensure that they are being administered according to the Act and its Regulations. You are reminded that failure to follow the rules on TFSAs may lead to consequences like income inclusions and penalties.
Registered disability savings plans
A registered disability savings plan (RDSP) is a trust arrangement between a holder and an issuer (a trust company in Canada). The purpose of such a plan is to provide for the long-term financial security of a beneficiary who has a prolonged and severe physical or mental impairment and is entitled to the disability tax credit. The RDSP is administered jointly with Employment and Social Development Canada (ESDC).
Some of the areas that will be reviewed to ensure compliance for the operation of RDSPs include:
- approved specimen plans meet the requirements under section 146.4 of the Act;
- the plan is for a qualified beneficiary;
- contributions are not tax deducted;
- contribution limits are respected;
- the RDSPs have been registered; and,
- disability assistance payment maximums are respected.
The CRA and ESDC will review all facets of the RDSP to make sure that they are being administered according to the rules and regulations that apply. You are reminded that failure to follow the rules relating to RDSPs may lead to consequences like income inclusions and penalties.
How to contact us
Contact us at the Registered Plans Directorate if you have questions about administering a registered plan according to the Act:
- Our telephone enquiries service is available Monday to Friday from 8:00 a.m. to 5:00 p.m., Eastern Time (with a voice mailbox system to take messages outside those hours):
In the Ottawa area:
For service in English, call 613-954-0419.
For service in French, call 613-954-0930.
Toll free elsewhere in Canada:
For service in English, call 1-800-267-3100.
For service in French, call 1-800-267-5565.
- Plan administrators who need guidance on issues related to a specific plan can write to us at the Registered Plans Directorate, Canada Revenue Agency, Ottawa, ON K1A 0L5, or fax us at 613-952-0199.
- We welcome feedback on this bulletin, and any comments related to auditing registered plans. Email your comments to RPD.LPRA2@cra-arc.gc.ca.
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