The 2016 RPP Practitioners’ Forum, Summary Report


Overview

On November 10, 2016, representatives from the pension and financial industry took part in the 2016 Registered Pension Plan Practitioners' Forum, held at the International Development Research Centre in Ottawa. The goal of the forum was to engage Registered Pension Plan (RPP) practitioners on our cyclical review, E-Services, service standards, and solicit input about the not materially different requirement for annuity purchases. We also wanted to hear about issues and challenges faced by RPP practitioners and explore appropriate resolutions.

Opening remarks

Welcome and opening remarks

Mike Godwin, Director General of the Registered Plans Directorate (RPD), welcomed attendees and thanked them for participating.

Mr. Godwin explained that we listened to the industry's feedback from the previous forum and made this year's forum more interactive. We left more time for discussion after each presentation, we added a dedicated question and answer session to the format, and we sought the attendees' input to help shape our policy for what we consider not materially different when an annuity is purchased outside a RPP.

Mr. Godwin took the opportunity to announce Andrew Donelle's departure from the RPD. Andrew joined the Department of Finance Canada, as of November 28, 2016.

Registered Plans Directorate's cyclical review

Purpose

by Chantal Paquette

The presentation was given by Chantal Paquette, Director, Registration Division, with Pension Managers, Elisabeth Van Vliet, Allan Robusky, and Claire Thivierge. The purpose of the presentation was to provide the attendees with an update on the implementation of our cyclical review, now that over a year has passed since the process was officially launched in April 2015. We also wanted to get feedback from the attendees about what is working well and what we can improve. As well, the presentation provided observations with respect to the use of the T2014 and the benefits of using RPP specimens.

In providing her introductory remarks, Ms. Paquette explained that the Registration Division is the first point of contact for a client into the Directorate. In addition to registering and monitoring 10 types of deferred income and savings plans, the Division also runs a telephone and written enquiries service.

The cyclical review is exclusive to the Registration Division and relates only to RPPs. We receive about 30,000 submissions per year, 80% of which relate to pension plans. A submission when received is screened and enters one of 2 streams. It is either stored (at our third party document storage facility, Recall) or it triggers a comprehensive review and gets assigned to one of our four teams. Regardless of the stream, the content of the submission is entered into our Registered Plans Application Suite (RPAS) system by our administrative unit and it becomes a work item for tracking purposes.

Each team is assigned a specific number of submitters and is responsible for work items relating to those submitters. We have found that this is the most consistent and efficient way to review submissions.

The cyclical review

by Elisabeth Van Vliet

Cyclical review means the terms of the plan are reviewed at least once every six years. Every month, we choose which plans to review based on risk. For example, a plan will be flagged for review based on a change in plan status or the amount of time elapsed since our last review. 

Once the plan is chosen for review, the analyst is responsible for making sure the plan terms as a whole are compliant, as well as any unapproved actuarial valuation reports (AVRs). We also review certain limited aspects of the plan's administration. Our reviews are focused on areas of highest risk. If we have noted that a certain type of plan or transaction is more likely to be non-compliant, we will spend extra time reviewing that aspect of the plan. For example, we have noted that the buy-back of past service in individual pension plans (IPPs) has a high rate of non-compliance due to errors in earnings and service. To address this non-compliance, we spend extra time on the review when past service is purchased in these plans.

We track non-compliance and related trends. When we see improvements or shifts in these trends we will adjust our reviews to focus on these aspects of pension plans. We are also working on automating some of these checks so that we can increase our coverage in an efficient and effective manner.

Cyclical review also means that some AVRs are approved after a very limited review. We know that employers need our approval so we still have a service standard of nine months for AVRs. It's not something that can wait until the plan is due for review. In general, if AVRs are submitted every three years for a plan, every second AVR would be reviewed in conjunction with a comprehensive review of the plan terms.

The focus of our reviews is the status of the plan today. If it was reasonable to expect that an amendment would be accepted and we later don't accept it, we will work with you and the administrators to bring the plan into compliance on a go-forward basis. An example of an amendment that is not reasonable would be a defined contribution rate over 18%. Another example would be a plan that is so off-side that it cannot be brought into compliance, such as a plan that does not meet the primary purpose condition in paragraph 8502(a) of the Regulations.

The objective of the change our review process was to ensure that the RPD meets its mandate by having 100% coverage in plan reviews.

With RPAS, we also maximize our program efficiency by eliminating duplication by reducing data entry for all programs to one integrated system (RPAS is replacing 7 systems). We now have better data that we use to manage compliance intelligently. Most importantly, the change provides administrators with greater certainty. With the change, plan administrators will be able to rely on our acceptance letters as a clear statement that the plan terms were reviewed and were compliant. If the plan is administered in accordance with those terms, it is compliant.

Implementation progress

by Allan Robusky

The cyclical review is now fully implemented and integrated into RPD's business process and system. This change was a major undertaking for RPD and represented a significant work effort, particularly for the Registration Division. Operational procedures had to be completely revamped, new work tools developed and staff retrained. We also introduced a new service to validate earning and service for IPPs. The journey has not been without its challenges and we are still working through some issues, learning and developing our capacity. Over time we expect to see a reduction in the time it takes to complete a review.

Based on the feedback we collected from the 2014 Practitioners' forum, we now send an acknowledgment letter when we receive a submission that forms part of the six year review cycle. This letter was created and incorporated into RPAS in July 2016.  You may have already received some of these letters which state: We are writing to confirm that we have received your submission dated…. and advise that if it's likely the amendment will be accepted, the plan can be administered as if it was amended. Our original letter caused some concern for terminating plans, so we have revised it to make it clear that terminations are a priority workload for us and do not form part of the six-year review cycle.

So far, we have done comprehensive reviews of just over 4,100 plans; slightly fewer than planned. This is not unexpected though. It was a very steep learning curve for our employees. There was both technical and procedural retraining for all our employees, and not only did our process completely change, all the systems that we use to do our jobs changed as well. At the same time, the Canada Revenue Agency (CRA) changed its records management process. Everything changed, and change can be hard for people. Now that the dust has settled, we are working to find efficiencies to speed up our review rate to meet our projected targets.

With respect to our comprehensive reviews to date, although we have identified some non-compliance, we have not noticed any significant trends in non-compliance. This is something we are actively monitoring.

Most submissions continue to be prioritized according to type and processed within established internal service standards. For example, you and your clients need our approval for new applications and AVRs for funding, so we do those within the same timeframes as before. The one change to our internal service standards is amendments, as they are now processed during the course of a comprehensive review as part of the six-year cycle.

You have said that requests for waivers and administrative relief, enquiries and drafts are also urgent so we continue to give them high priority. Also, a change to the status of a plan triggers a review, so terminations are also a priority for us.

Finally, based on your feedback, we've implemented the new form T2014, Request for a Priority Review of a Registered Pension Plan, and have made improvements to simplify the RPP specimen process.

T2014 observations and specimens

by Claire Thivierge

The purpose of the form T2014 is for you to draw to our attention urgent submissions. When the form T2014 is used, we strongly encourage you to staple it at the very top of the package so that our screening group can identify it easily and take the request to the manager of the submitter group for their immediate attention. It is also flagged in RPAS. If you are attaching the form to a non-high priority submission, such as an amendment, you must explain why you consider it to be a high priority. This will help the manager assign the submission to an analyst quickly.

We also encourage you to use specimens. RPP specimens are an efficient, reliable, and cost-effective way to administer your plans. We've recently updated Newsletter No. 95-6R1, Specimen pension plans – Speeding up the process. One of the changes has further simplified the process for consultants and plan administrators. Now, when a specimen is amended, we no longer require a separate Form T920, Application to Amend a Registered Pension Plan, for each RPP that is based on the specimen. In addition, a specimen can now be used for all types of pension plans, including combination plans.

Summary of the cyclical review questionnaire

We asked the attendees how satisfied they are with our cyclical review process and if things can be improved.

They said that since the cyclical process has been in place for only a short period of time they were unable to provide any constructive feedback. However, many people indicated that they have used the T2014. When it was used properly (firmly attached to the outside of the submission), it was effective and they will continue to use it. Others appreciated being reminded that the form exists and said they would start using it.

System modernization & electronic service delivery

The presentation was given by Maureen Quigg, Systems Manager. Maureen spoke about RPD's latest updates and upcoming changes to RPAS.

Electronic service delivery

Development of RPAS began in 2007. We have made significant changes since it was first released in April 2009. One of those changes was implementing electronic correspondence. Although we don't have full electronic services capability yet, the electronic correspondence functionality that we do have positions us to move towards full electronic services at a future, yet to be determined, date. We no longer keep paper copies, RPAS stores the electronic version of our letters we send out, like the acknowledgment letter previously mentioned, and displays it under the applicable plan for which it was written. As for enabling our clients to submit documents electronically, we are still trying to find a solution. We do have some limitations, since our programs are currently not in the CRA portals. We are also looking at options outside the portals, since, based on feedback from the attendees at the last RPP forum, we know this is something that would be of interest to most of the industry. We have found a solution for submitting forms electronically without having to use the My Business Account (My BA) portal.

In May 2017, it will be possible to submit three forms to us electronically, by web form and Internet File Transfer (IFT). They can be submitted, outside the portals or within the portals. They are:

  • T244, Registered Pension Plan Annual Information Return
  • RC364-CA, Application to Register a Pooled Pension Plan
  • RC365-CA, Pooled Registered Pension Plan Amendment Information

In October 2017, it will also be possible to send us six additional forms by IFT. They include:

  • T510, Application to Register a Pension Plan
  • T920, Application to Amend a Registered Pension Plan
  • RC368-CA, Pooled Registered Pension Plan Annual Information Return
  • RC236, Application for a TFSA (Tax-Free Savings Account) Identification Number
  • T2214, Application for Registration as a Deferred Profit Sharing Plan
  • T2217, Application for Registration as a Registered Investment

We expect that our remaining forms will be available to be submitted by IFT or as a web form in May 2018. This will include the Actuarial Information Summary (AIS) form which you were interested in at the last session.

To submit forms by IFT, commercial or in-house developed software is required to submit an extensible markup language  (XML) file of up to 150 MB over the Internet. The XML layout will be specified on the CRA website. The layout will outline the information and required details on what the XML file should contain. Multiple forms can be submitted within one XML file. Once the XML file has been generated, the user can then login using a web access code (WAC) or by logging into My BA.

A web form is a form that can be completed directly on our website and submitted to us electronically. To access our forms, a user can login using a WAC or login in My BA.

Web access code (WAC)

To set up a WAC the user must have an account number, which could be a Business Number (BN) or a T3 account number, and the effective date of the account number. In the case of a BN, the effective date of the account number would be the date of registration. For T3s it would be the date of the creation of the trust. Once you have a WAC number you can use it for any of the CRA forms or XML files that you can submit this way. If you currently use one to submit payroll information, you can use the same WAC to submit any of RPD's available forms once the functionality has been implemented.

Canada.ca

Lastly, RPD's webpage, as part of the migration of CRA website to Canada.ca format, is currently planned for May 2017. This timeline for this migration has changed several times already so there is no guarantee that this date will not change again. In order to ensure that the information under the new structure will be easy to find, we will be conducting user testing of our new web pages to ensure they can be easily accessed. We are currently working with our public affairs colleagues to identify an external provider to conduct the testing. We may be asked to assist in identifying testers so if we are asked to participate, would some of the attendees today be willing to do so? We will need about 35 English and 15 French testers.

CRA website links

Filing Information Electronically - IFT and Web form Information: canada.ca/taxes-iref

XML Specifications - Find XML specifications to file electronically

Web Access Code - apps.cra-arc.gc.ca/ebci/leb0/wacretrieve/pub/entry-e.do

Summary of the system modernization & electronic service delivery

The testing of the new Canada.ca website has started. The third party vendor conducting the testing contacted some practitioners for their participation.

Annuity purchase, section 147.4 of the ITA

Jeff Boxer, Technical Services Manager, facilitated a discussion about developing a policy on annuity purchases under section 147.4 of the Act.

Discussion

The RPD has received a number of enquiries about the concept of not materially different and so RPD sought opinion from the attendees on what is, and what is not, materially different. In the case of an outside annuity purchase, if the annuity provided is materially different from what could be provided directly from the registered pension plan, then the cost to acquire the annuity is considered to have been paid directly to the member and that amount must be brought into taxable income.

The RPD is looking to develop a fulsome policy and provide the industry with guidance on the matter and thus sought suggestions from attendees. Jeff mentioned that the RPD does have some information on its website, in relation to section 147.4 of the Act, and that information can be found in the Technical manual online. At present, the technical manual provides guidance in situations where commuted values exceed the acquisition cost of annuities (the difference can be paid to the member as a taxable lump-sum). In addition, where an RPP is underfunded, and an outside annuity is less than what can be provided by the RPP, even though the annuity is materially different, the RPD takes an administrative position that the acquisition should not lose the protection afforded under subsection 147.4(1) of the Act.

Attendees were given time to discuss in groups and a further discussion was held in plenary. Attendees provided a variety of examples and opinions on materiality – which the RPD collected and will consider in developing its policy. The RPD may go back to attendees to seek clarification on the points raised, and hopes to publish information in 2017.

Service standards and performance reporting

The presentation was given by Janice Laird, Director, Policy, Actuarial and Communications Division. Janice spoke about the proposed changes to our external service standards reporting and asked for feedback on the affects the proposed changes could have on attendees or their clients.

Current external service standard reporting

Service standards are an essential tool for the management of effective, citizen-focused service delivery and serve many purposes. The CRA's service standards regime is an integral part of its planning, reporting, and performance management processes and contributes to the achievement of its strategic outcomes. The Annual Report to Parliament is tabled by the Minister of National Revenue and includes a rating of the CRA's achievements against the key targets and indicators set out in our Corporate Business Plan.

CRA is currently reviewing all of the service standards it uses to report externally on its major activities and key business lines. RPD's service standards are included as part of this exercise.

Currently, RPD reports on seven service standards in CRA's Annual Report to Parliament. In recent fiscal years, we have met or exceeded most of our published service standards; with the exception of our response time to general enquiries relating to RPPs.

Our current service standards remain relevant for us to ensure effective service delivery, to measure our performance, and to identify internal operational adjustments. Although we will continue to track them internally, we may not need to report on all of them in the Annual Report to Parliament. When we compare our service standards to those of CRA's key business lines (T1 filing for example), we feel RPD is over represented in the Annual Report to Parliament.

Proposed changes

We are proposing to refine and consolidate some of our current service standards for external reporting purposes. RPD is proposing to report externally on two or three service standards as opposed to seven. Specifically, we are proposing to:

  • combine the service standards relating to the application to register pension plans and deferred profit sharing plans (DPSPs)
  • expand the service standard for written enquiries to include general enquiries, plan-specific enquiries, waivers, administrative relief, and requests to validate earnings and service

With respect to the proposed service standard for written enquiries, we are proposing to increase the timeline from the current 60 days to 90 days to account for the expanded workload as described above. Also, for purposes of consistency, we have set the targets for all service standards to 85%. Previously, some were at 85% while others were at 80%. This means that we are expected to meet the service standard 85% of the time.

We expect these changes will have minimal impact on our clients. We will continue to monitor response times for processing all types of submissions to ensure we meet our set targets and will make adjustments as required.

Summary of the service standards and performance reporting questionnaire

We asked the attendees if they agreed with the proposed changes to our external service standards.

We had some mixed responses to the proposed changes to our external service standards. Some attendees were indifferent to what information we report to parliament while others were concerned about a lack of transparency to the public. Others wondered if the reduced service standards reporting would affect RPD's credibility as a whole.

A few people were concerned with extending the response time for written enquires from 60 to 90 days. They felt that written enquires should be a priority and waiting three months could be quite long for some clients. However, Janice clarified that priority will be given to general enquiries requiring our urgent attention.

The attendees were more interested in RPD's ability to improve on the current internal service standards and reduce unnecessary delays in processing submissions.

Question and answer session

The session was led by Andrew Donelle, Director, Audit Division.

Question 1 – Dependent pension on pre-retirement death with residual lump sum to beneficiary

Subsection 48(6) of the Ontario Pension Benefits Act (PBA) allows a member to designate a beneficiary to receive the lump-sum commuted value of the member's pension in the event of the member's pre-retirement death (beneficiary lump sum). Subsection 48(8) of the PBA allows a pension plan to provide a dependent child or dependent children with pension benefits following the pre-retirement death of a member (child pension), and to deduct the commuted value of the child pension(s) against the beneficiary lump sum.

Paragraph 8503(2)(e) of the Income Tax Regulations allows for the payment of a child pension (for such dependent child's eligible survivor benefit period), but does not appear to provide an exception to permit that a beneficiary lump sum may also be paid for the balance of the deceased member's entitlement. Paragraph 8503(2)(i) would appear to permit the payment of all such entitlements (child pension(s) and beneficiary lump sum) as lump sums provided that the total of the lump sums does not exceed the total value of the deceased member's benefit.

We note that there are good policy reasons to prefer paying a child pension as a pension as opposed to the lump sum value of the child pension.

Provided that the total of the child pension(s) and beneficiary lump sum do not exceed 100% of the deceased member's benefit, would CRA permit the payment of child pension(s) and a beneficiary lump sum on the pre-retirement death of a member?

Answer 1:

No, the Income Tax Regulations do not permit the payment of a pre-retirement survivor benefit under paragraph 8503(2)(e) and the payment of the commuted value of benefits on death before retirement under paragraph 8503(2)(i) at the same time.

Subparagraph 8503(2)(i)(i) of the Regulations stipulates that the lump-sum payment of an amount to a beneficiary can only happen if no retirement benefits are payable as a consequence of the member's death. Retirement benefits are defined in subsection 8500(1) as benefits provided to the individual that are payable on a periodic basis, such as the survivor retirement benefits payable under paragraph 8503(2)(e).

Question 2 – Electronic PSPA applications

Would CRA consider accepting excel data files (one line per member) submitted electronically for items such as PSPA applications? For larger plans, the requirement to complete individual member paper application forms is quite onerous.

Answer 2:

The Registered Plans Directorate is not responsible for past service pension adjustment (PSPA) applications. However, we contacted our colleagues at the Individual Returns Directorate (IRD) for their comment. They advised us that they would consider accepting excel data files for large plans. It was suggested you contact them directly to discuss electronic applications in more detail. IRD can be contacted at Pension.demandes@cra-arc.gc.ca.

Question 3 – Deemed receipt of PSPA applications

Section 248(7) of the Income Tax Act deems something to be received on the day it is mailed. Would CRA permit an application for certification of past service benefits under subsection 147.1(10) to be made on the same day (but after) the plan administrator receives the contribution from the member necessary to purchase such past service?

Answer 3:

As described in the explanatory notes, subsection 147.1(10) of the Income Tax Act permits past service benefits to be funded while an application for the Minister's certification is pending.

As you have noted, subsection 248(7) of the Act deems things sent by first class mail, or equivalent, to have been received by the person to whom it was sent on the day that it was mailed.

In the case of  a past service pension adjustment (PSPA) certification, form T1004 - Applying for the Certification of a Provisional PSPA, should be completed and sent to the CRA prior to making a contribution related to a past-service event. However, on an administrative basis, we will allow a contribution to be made prior to mailing the form, as long as the contribution is made the same day form T1004 is mailed to the CRA. This is on the understanding that all of the other conditions of subsection 147.1(10) are met. If the Minister refuses to issue the certification, all funding related to the past-service event would have to cease and the particular contribution removed from the plan.

Question 4 – Target benefit plans

Can we discuss the application of the ITA and ITR to non-Specified Multi-Employer Plan (SMEP) target benefit plans for new plans and amended/converted plans?

Answer 4:

Given that a number of provinces are moving ahead with target benefit plans (TBP) frameworks, Department of Finance officials are examining potential modifications to the pension tax rules to appropriately accommodate TBPs within the system of rules and limits for registered pension plans.

However, the RPD has identified that an exception to the equal and periodic rule in paragraph 8503(2)(a) of the Regulations would be needed to accommodate TBPs since it is possible that pensions in pay may be reduced in an underfunded plan. The Department of Finance has committed to reviewing this provision. In the meantime, the RPD has accepted amendments to provide a TBP provision as long as the only area of non-compliance relates to paragraph 8503(2)(a); and all other plan provisions comply with existing tax rules.

Question 5 – Definition of predecessor employer

Can we discuss RPD's interpretation of the highlighted words in the definition below of predecessor employer in subsection 8500(1) of the Income Tax Regulations (ITR)?

Predecessor employer means, in relation to a particular employer, an employer (in this definition referred to as the vendor) who has sold, assigned or otherwise disposed of all or part of the vendor's business or undertaking or all or part of the assets of the vendor's business or undertaking to the particular employer or to another employer who, at any time after the sale, assignment or other disposition, becomes a predecessor employer in relation to the particular employer, if all or a significant number of employees of the vendor have, in conjunction with the sale, assignment or disposition, become employees of the employer acquiring the business, undertaking or assets;

We note that the definition of predecessor employer in ITR subsection 8500(1) was amended by the Technical Tax Amendments Act 2012, S.C. 2013, c. 34, to change the phrase one or more employees of the vendor to all or a significant number of employees of the vendor. Unfortunately, the meaning of the phrase a significant number of employees of the vendor was not discussed in the accompanying explanatory notes.

What does all or a significant number of employees of the vendor mean in this provision? We note that the term significant is defined in the Income Tax Act (ITA) in several (unrelated) provisions to be 10% or more (see, for example ss. 34.2(1), 142.2(1), 207.01(4)) or 25% (80.01) and in several cases is undefined. We understand the RPD is currently interpreting this phrase to mean 90% or more which is similar to the administrative meaning given the all or substantially all. Could the RPD confirm its administrative position and the reasoning therefor?

Answer 5:

Note

The answer to this question has been modified from the version provided to attendees in advance of the forum. The change in the answer is to reflect commentary and/or suggestions made during the forum.

In interpreting the phrase all or a significant number of employees of the vendor in the definition of predecessor employer in subsection 8500(1) of the Regulations, we can confirm that the CRA has not adopted any specific threshold test.

The word significant is not defined in the Act or Regulations, nor does it appear that its meaning has been interpreted in Canadian case law. In these situations, we generally rely on the ordinary meaning of the word from dictionary definitions. The Merriam-Webster Online Dictionary defines significant to mean: of a noticeably or measurably large amount; a significant number of layoffs.

It is our view that what constitutes a significant number of employees for purposes of the predecessor employer definition is a question of fact to be assessed in each case. We accept that the significant test may be measured either in terms of an absolute number of employees or on a percentage basis. In the latter case, where only part of a business is sold, it is generally appropriate to consider the total number of employees of the part of the business rather than the total number of employees of the vendor.

The significant test was added to the predecessor employer definition in 2012. According to the Department of Finance Explanatory Notes, this was to ensure that provisions pertaining to RPPs apply appropriately in the context of certain purchases of businesses. Consistent with this objective and the ordinary meaning of significant, we would generally consider that the significant test would be met where there is a genuine sale of a distinct business segment and in conjunction with the sale of a significant number of the affected employees are transferred to the purchaser. An example of a situation that would not meet the test is where several employees resign to start a new company and arrange for the purchase of their client list from the former employer.

Question 6 – Timely validation of earning for IPPs

In the teleconference held April 25, 2014, a new and quicker approach to validate earnings to be used for an individual pension plan (IPP) actuarial valuation report (AVR) was introduced. Newsletter 14-1 describes this validation process. This new approach is particularly desirable in cases where an IPP is being wound up and a final contribution is required to fund the benefits on wind-up. The process, unfortunately, has not worked as quickly as RPD suggested it would. Can we discuss how this process may be expedited?

Answer 6:

Note

The answer to this question has been modified from the version provided to attendees in advance of the forum. The change in the answer is to reflect commentary and/or suggestions made during the forum.

You have concerns with how quickly we are processing our earnings and service validations and would like to discuss how we might be able to expedite our process.  Newsletter 14-1, which describes our earnings and service validation service, states that we will give priority to validation requests. They will be assigned to an analyst as soon as we receive them. The actual turnaround time will depend on the volume and the complexity of the requests. Since we began this service, 78% of the requests we've received have been completed within 60 days, with over half of those completed within 30 days. The average time to complete a validation request is just under 45 days. These response times are in line with our published service standard for written enquiries, to complete 80% of written enquiries within 60 days. You also mention that our service is particularly desirable in cases where an IPP is being wound up and a final contribution is required to fund the benefits on wind-up. However, this service is intended for ongoing plans to facilitate a timely registration process and amendments that add prior service for plan members. It is not intended to verify earnings in connection with termination of membership or plan wind-up. Specifically, the newsletter states that we will validate earnings and service at any time after a complete application for registration is sent in and anytime new past service is being recognized. During the discussion, you also asked if we would consider completing the validation in the absence of a complete application. On this point, we would be happy to discuss our validation service further to ensure it fulfills its intent to reduce delays due to invalid earnings and service being recognized in IPPs, and remains a useful service to the industry.

Question 7 – ITR 8401(6) reporting by administrators of large multi-employer defined benefit (DB) plans

Administrators of large multi-employer plans regularly deal directly with plan members who purchase periods of absence at the end of the leave period. These administrators are not the employers of these employees and therefore issue T4A slips with the necessary information in respect of these purchases. The Pension Adjustment (PA) Guide twice mentions that a plan administrator is able to obtain permission from RPD to report the part of a member's pension credit related to an eligible absence that is purchased by April 30 of the year following the end of the absence. In section 11.5 of the guide, there is the following wording:

However, if the member deals directly with the plan administrator instead of the employer during periods of absence, reduced earnings, or disability, the plan administrator can apply to us for written permission to report a part of the member's pension credit. The administrator should send that request to our Registered Plans Directorate.

If permission is given, the employer calculates and reports the pension credit that applies to benefits for services actually rendered, and the administrator calculates and reports the rest.

In section 12 of the guide, there is the following wording:

The plan administrator of a Multi-Employer Plan (MEP) may choose to report on a T4A Supplementary the PAs related to the above periods of absence. However, the plan administrator must first apply for and receive written permission from the Registered Plans Directorate.

On the T4A, record the PA amount in box 34 and the plan registration number in box 36.

a) Is there a form or procedure for the plan administrator to make this application? Nothing in the guide mentions this.

Answer a):

Yes. The procedure is for the plan administrator of a multi-employer plan (that is not a specified multi-employer plan) to apply in writing to the Registered Plans Directorate requesting written permission from the Minister, under subsection 8401(4) of the Income Tax Regulations, to report the portion of the pension credits of members that is attributable to defined benefits provided to members in respect of a period of reduced services as defined in subsection 8300(1) of the Regulations. There is no CRA form for this purpose.

b) Once the application has been made, how does CRA recognize that the administrator has been given permission to file a T4A with this information instead of the employer filing a T4?

It appears that something may have changed in the last 3 years to alter the procedure for this and some plan administrators have been assessed late filing penalties when reporting these additional PAs even though the timing set out in ITR 8401(6) is met.

Answer b):

Note

The answer to this question has been modified from the version provided to attendees in advance of the forum. The change in the answer is to reflect commentary and/or suggestions made during the forum.

We are aware that some late filing fees have occurred in the situation described, and are currently discussing the matter with our counterparts at the Individual Returns Directorate of the CRA to ensure that late filing penalties are not assessed when the PA reporting timelines have been met.

Question 8 – Annual indexing for active plan members

Can we justify annual indexing of earnings for active members equal to the Consumer Price Index (CPI) (rather than AWI) while active, without creating a PSPA for years when CPI may be higher than the Average Wage Index (AWI)?

In determining the PA for each year of pension accrual in a plan that provides indexing on accrued benefits of active members, any indexing that will be applied to earnings for a year to reflect the increase in average wages and salaries between the year of earnings and the year in which benefits are determined are excluded in the PA calculation – which means AWI indexing doesn't have to be included (projected) in calculating a PA at the end of each year. ITR 8302(3)(h) and section 5.2 of PA Guide (T4084(E)) are specific about AWI in this instance. Also, section 4.2 of the PSPA Guide (T4104(E)) states that any indexation of earnings to reflect the increase in average wages and salaries between the year the earnings were paid and the year in which benefits are determined does not generate a PSPA – see ITR 8303(5)(d). Thus, it appears that only AWI can be ignored for purposes of PSPAs of active members.

However, it appears that currently, indexing during the deferral period (i.e., after pension accrual ceases and before the pension starts) can be based on either the CPI or AWI during the deferral period.  The PSPA issue is addressed in ITR 8303(5) which lists excluded benefits for purposes of determining a PSPA and (f) therein provides an exclusion where a deferred member's benefit is adjusted by CPI or similar adjustment in respect of the [deferral] period and RPD's Q&A #14 in the frequently asked questions list clarifies that a deferred member's accrued pension can be adjusted by either CPI or AWI.

So, we believe the rules to avoid a PSPA when applying indexing are currently as follows:

  1. for pensioners – no more than CPI
  2. for actives, no more than AWI
  3. for deferreds, no more than either AWI or CPI.

It appears that the treatment of deferred vested members is more generous (i.e., they can receive either CPI or AWI adjustment without a PSPA) than that of active members in a plan (which are limited solely by AWI). We currently have plans which index earnings at CPI (rather than AWI) and find it strange that a PSPA could be created in years when CPI may be greater than AWI (note that in the long run, AWI is expected to be higher than CPI), but on a year by year basis, CPI may be higher than AWI, thereby potentially creating a PSPA for active members in those years.

We do not believe that this apparent requirement to determine and report a PSPA for active members in years when CPI may be higher than AWI is productive or desirable.

Answer 8:

We confirm your understanding of the applicable rules in relation to benefit indexation.

Currently, the rules concerning indexing and the calculation of a pension adjustment (PA) and a past service pension adjustment (PSPA) are:

  • for active members, if the benefit formula includes an adjustment to earnings to reflect an increase in the average wage then, under paragraph 8302(3)(h) and 8303(5)(d) of the Income Tax Regulations, the adjustment can be ignored for the purposes of calculating PAs and PSPAs
  • for deferred members, under paragraph 8303(5)(j) of the Regulations, benefits can be adjusted by increases in the average wage or the Consumer Price Index (CPI) without generating a PSPA
  • for retired members, under paragraph 8303(5)(k) of the Regulations, benefits can be indexed by CPI without generating a PSPA

To avoid a potential PSPA calculation, a plan administrator may amend a pension plan so that it limits indexing to reflect CPI up to but not exceeding the increase of average wage.

You state that the regulations appear to be more generous for deferred members than for active members because if active members' earnings are indexed by CPI, and CPI is higher than the increase in the average wage for certain years, then the amount exceeding the average wage increase would have to be included in the calculation of a PA or PSPA in those years. You would like the government to reconsider these rules.

The Canada Revenue Agency administers the tax system and applies the rules of the Income Tax Act and Regulations. The Department of Finance Canada develops federal tax policy and amends legislation. Therefore, we would suggest that your concerns on this matter should be sent to the Minister of Finance for his consideration.

Question 9- Annuity purchases

Could we discuss RPD's interpretation of the highlighted words in ITA paragraph 147.4(1)(b) inserted below with respect to a RPP annuity contract? Does RPD have guidelines as to what would constitute a material difference in such cases?

147.4(1)(b) the rights provided for under the contract are not materially different from those provided for under the plan as registered

Answer 9:

This topic formed part of the discussions during the morning of the practitioner's forum. The RPD will work to develop further communication about this issue.

Question 10 - Post-commencement indexation

Assuming that the maximum benefit rules in section 8504 of the Income Tax Regulations (ITR) are not exceeded, would an amendment to a pension plan that replaced a CPI-based indexation formula that complied with ITR clause 8503(2)(a)(ii)(A) with a flat rate of indexation of less than 4% as permitted under ITR clause 8503(2)(a)(ii)(B) be permitted? Would it be regarded as a combination under ITR clause 8503(2)(a)(ii)(D) which would therefore require satisfaction of the present value test in ITR clause 8503(2)(a)(ii)(E) and (F), or simply a replacement of one compliant formula for another? Would it matter if the retirees affected by the amendment had received, in any year previous to the amendment, indexation under the CPI-based formula at a rate greater than 4%?

Answer 10:

Assuming that the flat-rate indexation adjustment applies only to lifetime retirement benefits payable after the date of the amendment, the amendment would be permitted. The present value test in clauses 8503(2)(a)(ii)(E) and (F) of the Regulations would not apply since the indexation provided under the plan would not be considered a combination of indexation adjustments. At any given time, there is only a single indexation adjustment applicable to the members' benefits.

Question 11 – Permissible contributions

Employer A's employees participate in a registered pension plan. The registered pension plan is in a deficit position. The business is purchased by a separate employer, Employer B. Employer B does not participate in the registered pension plan on a prospective basis. However, Employer B agrees to make payments to the above registered pension plan in respect of past service deficiencies associated with employees and former employees of Employer A. The former employees of Employer A are not employees of Employer B.

Under subsection 147.2(8) of the ITA, the former employees of Employer A are considered to be former employees of Employer B since they are employees of a predecessor employer (as defined in section 8500(1)) provided that Employer B is considered to be a participating employer in relation to the pension plan.

The definition of participating employer under subsection 147.1(1) for the purpose of section 147.2, includes an employer who is required to make contributions to the plan (in respect of employees or former employees) or payments under the plan to the employer's employee or former employees.

Is the requirement to make contributions to the plan or payments under the plan required to be housed in the pension plan document or would an obligation under a standalone agreement or court order outside of the registered pension plan be sufficient to establish Employer B as a participating employer? Are there other considerations that apply to a determination of whether Employer B's contributions/payments would be considered eligible contributions under subsection 147.2(2) of the ITA assuming conditions in subsection 147.2(2)(a) are otherwise satisfied.

Answer 11:

Whether an employer is required to make contributions to an RPP, as contemplated in the definition of participating employer in subsection 147.1(1) of the Act, is a question of fact. The determination would require a review of both the plan terms and the stand-alone agreement or court order.

We would note that most pension plan documents set out the obligations of participating employers with respect to the funding of the plan. If those plan terms were contrary to or inconsistent with the stand-alone agreement or court order, then it would be necessary to amend the plan to permit these contributions to be made. Otherwise, the plan would not be considered to be administered in accordance with the terms of the plan as registered.

Question 12 – Annuity purchase under section 147.4 of the Income Tax Act

A buy-in annuity policy is issued by an annuity provider to a registered pension plan administrator in order to de-risk certain liabilities under the registered pension plan. Under the annuity policy, the annuity provider deposits the total periodic annuity payment to the pension fund. The liability to pay the pensions to individual retired members rests with the pension plan administrator and no individual certificates of insurance are provided to the retired members whose entitlements are the subject of the buy-in annuity policy. Individual members do not even know that their entitlements are the subject of the buy-in annuity policy and have no preferred claim to the annuity payments made to the pension fund. The pensions due to the retired members are the measure of annuity provider's liability. Our position is that the individual pension plan member does not acquire any interest in the annuity contract as a result of this transaction.

Please comment on the factors that CRA would consider to evaluate whether an individual member is considered to acquire an interest in the annuity policy under paragraph 147.4(1)(a) of the ITA as a result of the buy-in annuity purchase.

Answer 12:

Subsection 147.4(1) of the Act applies where an individual acquires an interest in an annuity contract in full or partial satisfaction of the individual's entitlement to benefits under an RPP and certain other conditions are met. It provides that the individual is deemed not to have received an amount under the RPP as a result of acquiring the interest and any amounts received under the contract are deemed to be received under the RPP.

Generally, the CRA would consider an individual to have acquired an interest in an annuity contract for purposes of subsection 147.4(1) where the individual acquires ownership of the contract in satisfaction of their pension entitlement under the plan. This is a question of fact. In the situation described above, subsection 147.4(1) would have no application as the contract is issued to and owned by the RPP and not any individual plan members. The buy-in annuity contract is simply an investment of the RPP.

Question 13 – Pensionable earnings

Can taxable benefits paid to shareholders, such as an automobile benefit, be included in pensionable earnings?

Answer 13:

The term compensation, as defined in subsection 147.1(1) of the Act, includes amounts in respect of an individual's office or employment that are required by section 5 or 6 of the Act to be included in computing the individual's income, except for certain excluded amounts.

An individual's compensation from an employer is relevant for a number of RPP provisions, including the pension adjustment limits in subsections 147.1(8) and (9) of the Act and the maximum pension rule in section 8504 of the Regulations. It also represents the upper limit on what an RPP may include in pensionable earnings. This latter term is not defined in the Act or Regulations but is commonly used in RPPs to determine the amount of pension benefits provided under a defined benefit formula.

An individual who is both an employee and a shareholder of a corporation may receive a benefit from the corporation. In order to determine the appropriate tax treatment, it is necessary to establish whether the benefit has been conferred on the individual in their capacity as an employee or in their capacity as a shareholder. This is a question of fact that can only be determined on a case-by-case basis.

Where an employee-shareholder receives a benefit in their capacity as an employee, the amount is generally included in the individual's income by virtue of section 6 and as such may be included in the individual's compensation for RPP purposes. However, where the benefit is received in their capacity as a shareholder, the amount is included in the individual's income under subsection 15(1) of the Act and would not form part of the individual's compensation.

For more information, see Income Tax Folio S2-F3-C2, Benefits and Allowances Received from Employment and Interpretation Bulletin IT-432R2, Benefits Conferred on Shareholders.

Appendix – Summary of the feedback on the 2016 RPP Practitioners' forum

Overall experience

  • Received feedback from 18 of the 23 attendees
  • 100% said that the session met or exceeded their expectations
  • They said it was a great meeting and exchange of ideas
  • They really appreciated the opportunity to help develop policies
  • They found the forum helpful, valuable, and informative
  • The Q&A session was great
  • The breakout sessions were excellent
  • Nicely informal
  • Attendees liked sharing a table with the RPD manager in charge of their submissions
  • People appreciated getting the presentations and Q&A's in advance for their review
  • Some participants noted that it was nice to know what RPD thinks about certain topics and to share experiences between practitioners
  • They stated it is useful to know current issues and initiatives at RPD

Suggestions for improvement

  • Include a Department of Finance representative to add to the discussion
  • Include the provincial pension regulators for their input on conflicts between them and the ITA
  • More interaction and brainstorming
  • Hold the forum annually or as often as needed
  • Take shorter breaks to allow more time interacting as a group
  • Don't focus the discussions on IPPs
  • IPPs could have a separate meeting
  • Number the PowerPoint slides, proper use of acronyms, less time spent on stats (this year was better than 2014), and more focus on governance
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