Compliance Bulletin No. 8
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 outline the related tax implications. This year’s bulletin focuses on non-compliance with the Income Tax Act and the Income Tax Regulations related to:
- over-contributions to registered pension plans (RPPs) and the related potential tax implications;
- transfers from an RPP when the plan is underfunded at termination;
- prescribed information to register an education savings plan; and
- the requirement to provide documents or information under section 231.2 of the Act.
Over-contributions to an RPP
An over-contribution made to an RPP (regardless of the cause) is not listed as a permissible contribution under paragraph 8502(b) of the Regulations. Failure to comply with paragraph 8502(b) makes an RPP revocable under paragraph 8501(2)(a) of the Regulations and the Canada Revenue Agency (CRA) may issue a notice of intent to revoke the plan’s registration under paragraphs 147.1(11)(c) and (l) of the Act. At the same time, given that contributions have not been made based upon the terms of the plan as registered, the CRA may also issue a notice of intent under paragraphs 147.1(11)(b) and (k) of the Act.
However, subparagraph 8502(d)(iii) of the Regulations allows a return of contributions where the payment is made to avoid the revocation of the plan’s registration.
Over-contributions must be refunded to the contributor, and that amount must be included in the recipient’s income for the tax year in which it is received under paragraph 56(1)(a) of the Act. Normally, the prescribed form for reporting such a payment is Slip T4A, Statement of Pension, Retirement, Annuity and Other Income.
Employer contributions to an RPP are tax deductible only if they are made according to subsection 147.2(1) of the Act. Because over-contributions are not allowed under the Act, they are not deductible. Accordingly, the employer’s tax return will be reassessed to reflect the correct amounts.
When the plan is underfunded at the time the over-contribution is identified, the CRA will allow the employer's over contributed amount to stay in the plan and may choose not to deny the deductions taken for the over-contributions in previous years. In addition, if the plan is fully funded at the time the over-contribution is identified, and it is the plan administrator or consultant who informs the CRA of the over-contribution, the CRA will allow the deduction previously claimed in respect of the over-contribution, however, the amount must be withdrawn from the plan and brought into income.
The administrative relief, referenced above in relation to deductions taken for an over-contribution, will not be granted for cases where the RPD uncovered the over-contribution.
In addition, the Act will be amended with effect from the later of January 1, 2014, and the date the measure receives Royal Assent, so that an RPP administrator can refund, to the contributor, any amount that was contributed to the plan as a result of a reasonable error. The refund is not required to be included in the contributor’s taxable income provided that i) the refund is paid to the contributor no later than December 31st of the year following the year the contribution was made; and ii) the amount was not deducted as an RPP contribution for the year or any preceding year. Similarly, a return of contributions made from an RPP in accordance with subparagraph 8502(d)(iii) of the Regulations is not required to be included in the contributor’s taxable income as long as no tax deduction was claimed in respect of the contribution so returned.
Transfers from an RPP when the plan is underfunded at termination
When an underfunded RPP terminates and a member leaves the plan, the member would receive a reduced commuted value based on the solvency ratio of the plan.
A transfer of an individual’s commuted value from a defined benefit provision to a registered retirement savings plan must be made according to subsection 147.3(4) of the Act up to a prescribed amount set out in section 8517 of the Regulations. Generally, in determining the commuted value, ancillary benefits are not treated on a stand-alone basis and so the commuted value would include the value of the lifetime retirement benefits and the ancillary benefits. A reduced commuted value, when an RPP is underfunded, would therefore result in a pro-rata reduction to both the lifetime retirement benefits and the ancillary benefits provided under the terms of the plan as registered. The prescribed amount would also be pro-rated to reflect the proportion of the original lifetime retirement benefits.
However, when a particular RPP is underfunded at the time of transfer, an RPP can be amended to reduce or remove the promised ancillary benefits. In this way, it is possible for the actual commuted value received to be formed mostly, if not entirely, of lifetime retirement benefits for determining the prescribed amount. If a particular RPP is based on a specimen plan, we would need an amendment to the specimen plan to give such consideration. Alternatively, the plan could have a provision describing which benefits would be reduced if the plan is not fully funded at termination. If there is no such amendment or provision in the plan terms, a commuted value received is made up of both the lifetime retirement benefits and the ancillary benefits based on the terms of the plan as registered.
An exemption to this method is where the CRA has approved the application of subsection 8517(3.01) of the Regulations; that is, where the particular RPP (other than a designated plan) is underfunded and the participating employer has started proceedings under either the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act and has ceased making contributions to the plan.
For transfers made in 2013 and later years, the CRA may, upon request, permit the transfer limit under section 8517 of the Regulations to be based upon a member’s unreduced lifetime retirement benefit when a particular RPP (other than an individual pension plan (IPP) as defined in subsection 8300(1) of the Regulations) is underfunded and a benefit reduction has been approved by the plan’s regulator under either federal or provincial pension benefits standards legislation. In the case of an underfunded IPP, similar consideration may be provided as long as the lump-sum commuted value transferred from the plan represents the final payment to the member and all plan assets are paid from the IPP within 90 days of the transfer. We recognize that some transfers and payments have been made in 2013 that would have qualified for this measure. Additional information regarding these situations will be made available on our website shortly.
When an amount is transferred that is more than the prescribed amount, the difference between the prescribed amount and the total amount transferred must be included in the individual’s income and may be subject to Part X.1 tax.
Prescribed information to register an education savings plan
During audits, it has become clear that some promoters have been sending in a large number of invalid subscriber social insurance numbers when applying to register education savings plans.
As a condition for registration, education savings plans must be sent in with the prescribed information according to paragraph 146.1(2)(b.1) of the Act. The prescribed information to register a contract is:
- the contract number;
- the date the contract was signed;
- the name, address and social insurance number of the subscriber and, where there is one, of the joint subscriber; and
- the name, address and social insurance number of all beneficiaries under the contract.
We would like to remind you that only contracts sent in with all the prescribed information can be considered registered by the CRA.
Promoters must make a reasonable effort to get the required social insurance numbers according to subsection 237(2) of the Act. Promoters must also be able to show that a reasonable effort was made to get this information. For example, a record of the date and substance of the telephone conversations and copies of the correspondence relating to the attempts to get an individual’s social insurance number should be available for review.
Subsection 162(7) of the Act allows for a penalty of $100 to $2,500 for each failure to follow a duty or obligation imposed by the Act. Contracts sent in with invalid information can also be refused for registration.
Requirements to provide information under section 231.2 of the Act
The RPD would like to remind all persons associated with deferred income and savings plans (DISPs) of their obligation to provide information requested by the CRA.
Subsection 231.1(1) of the Act allows CRA officials to inspect, audit or examine books, records and property that relate to the administration or enforcement of the Act. If a person does not voluntarily allow the CRA officials to obtain the information requested under section 231.1, subsection 231.2(1) allows the CRA to formally require the information.
If a person refuses this requirement, the CRA may ask for a compliance order from the Court under subsection 231.7(1) of the Act. Failure to follow a compliance order could lead to a finding of contempt of court.
Not giving CRA officials the information they asked for relating to the administration or enforcement of the Act may result in a fine of not less than $1,000 and not more than $25,000 or both the fine and imprisonment for a term of not more than 12 months, as stated under subsection 238(1) of the Act.
How to contact us
Contact us at the RPD 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 Standard Time (with a voice mailbox system to take messages outside those hours).
In the Ottawa area:
For service in English: 613-954-0419.
For service in French: 613-954-0930.
Toll free elsewhere in Canada:
For service in English: 1-800-267-3100.
For service in French: 1-800-267-5565.
Plan administrators who need guidance on issues related to a specific plan can write to us at the Canada Revenue Agency, Registered Plans Directorate, 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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