RPP Consultation Session - Questions from the Industry November 30, 2005
As part of an effort to update and clean up our website, we are reviewing the consultation sessions questions and answers to make sure that we give you quality information. We have deleted and will continue to delete redundant, outdated and trivial content. The relevant questions and answers will keep their original numbering. Eventually these will also be deleted as we incorporate this information into our other publications, such as our Technical Manual and Newsletters.
Questions and Answers
- Over-contribution to a registered pension plan (RPP)- Tax treatment of return to employee or employer
- Designated plan - Termination funding
- Issues arising out of the Monsanto case
- Subsection 8303(6)of the Income Tax Regulations - Qualifying transfer to pension plan before registration
- Incorrect pension - over and under payments
- Quebec's indexing benefit - Lump-sum payment on tax deferred transfer
- Issues arising out of the Transamerica case
- Paragraph 8515(7)(c) of the Income Tax Regulations - Indexing assumptions
- Under-contributions to money purchase accounts - Foregone earnings
Question 3 - Over-contribution to a registered pension plan (RPP) - Tax treatment of return to employee or employer
Upon detection and correction of an error that resulted in an over-contribution to a registered pension plan (RPP), the employer or employee is subject to double taxation. If the plan administrator detects an error that led to an over-contribution to the plan, should there not be a mechanism to correct the error without incurring double taxation? Should the Canada Revenue Agency (CRA) not be encouraging plan administrators to detect and correct such errors instead of penalizing the employer and/or employee?
CRA's document number 9719235 discusses an administrative position concerning the refund of excess (non-deductible) contributions made to an RPP in error. Is this document still valid?
CRA's position on employee contributions to an RPP is contained in paragraph 11 of Interpretation Bulletin IT-167R6, Registered Pension Funds or Plans - Employee's Contributions. Paragraph 11 of IT-167R6 states that, generally, any amount received out of or under an RPP must be included in income even though an amount contributed to the plan may not have been deductible because it was in excess of the allowable deduction by reason of subsection 147.2(4) of the Income Tax Act (Act).
Document 9719235 discusses the return of non-deductible employee contributions made to an RPP. It confirms that amounts out of an RPP are taxable to the recipient in the year of receipt according to subparagraph 56(1)(a)(i) of the Act even if such amounts were not deductible from the contributor's income. Such amounts are reported on a T4A slip and are subject to source deductions.
This position will be enforced whenever, as part of our review or audit, it is determined that an excess contribution has been made. In these situations, no deduction will be allowed for the excess contribution and the employee will have to report the return of contribution as an income inclusion.
An exception will be made when the excess employee (non deductible) contribution was made as a result of a reasonable error, and the problem is identified by the employer or plan administrator who must then inform the appropriate authorities and take steps to withdraw the excess contribution as quickly as possible. In these cases, we will apply the administrative position developed by the Trust Accounts Division with respect to the refund of non-deductible contributions. The method of handling these situations is described in the above-mentioned document.
In situations when an employer made a non-deductible contribution, the amount of the over-contribution must be returned to the employer and taken into income. No alternate administrative position exists in these cases. The deduction will not be allowed and the return of contributions will result in an income inclusion in the year the refund is made.
The impact of disallowing contributions and forcing the refund of the amount out of the plan, and into income, is not considered double taxation under subsection 248(28) of the Act. Please refer to Income Tax Rulings Directorate Document 9605827 for more information.
We have commenced a dialogue with the Department of Finance to determine if there is a better way to deal with situations when legitimate errors have been made and are simply being corrected.
Budget 2013 proposed amendments to subparagraph 56(1)(a)(i) of the Act that would exclude a return of contribution from being included in a taxpayer’s income to the extent that the contribution is not deducted in computing the taxpayer's income for the year or a preceding year. In situations where the contribution is deducted by the taxpayer, the payment must be included in the taxpayer’s income.
This amendment applies to a return of contributions permissible under paragraph 8502(d) of the Regulations or under subsection 147.1(19) of the Act. Subsection 147.1(19) applies to contributions made in error that do not affect a plan’s registered status.
The amendment to subparagraph 56(1)(a)(i) of the Act applies to contributions made on or after January 1, 2014.
Question 10 - Designated plan - Termination funding
Could the Canada Revenue Agency confirm what funding will be permitted in each of the following situations for a "designated plan":
- a plan being partially wound up in accordance with pension standards legislation;
- a plan being fully wound up in accordance with pension standards legislation; and
- a plan when a member terminates employment (other than a plan wind-up situation) and chooses a commuted value transfer.
If the answer changes depending on whether the plan is an individual pension plan or not (or on any other factors), please confirm that also.
With respect to the three situations submitted:
For a plan that is being partially wound up in accordance with pension standards legislation, funding is permitted only to the limits specified in section 8515 of the Income Tax Regulations (Regulations).
For a plan that is being fully wound up in accordance with pension standards legislation, terminal funding of any existing deficit is permitted.
When a member terminates employment and chooses a commuted value transfer, funding is permitted only to the limits specified in section 8515 of Regulations. Please note that if the plan is an individual pension plan, this would be a full wind-up and terminal funding would be permitted.
Question 12 - Issues arising out of the Monsanto case
The following question was asked at the November 23, 2004, RPP Consultation Session. Given the recent decision in the Monsanto case requiring the distribution of surplus upon the partial wind-up of a registered pension plan, and given that during the period between the partial wind-up date and the resolution of the Monsanto case, surplus in an affected plan may have been substantially reduced, what is the Registered Plan Directorate's (RPD) position in the event that an employer needs to contribute to a registered pension plan in order to pay out the required surplus distribution?
RPD's response at the November 23, 2004, RPP Consultation Session: RPD stated that there are funding issues that need to be resolved before the required payments can be made to members of affected plans. RPD and the Legal Services section of the Canada Revenue Agency are currently working with the Province of Ontario to resolve these issues. We anticipate that we will have these issues resolved before the end of the year, and will have more information posted on our website when it is available.
What is the status of these discussions?
Additionally, in a "Monsanto" situation, once it is determined that plan members on a partial wind-up are entitled to surplus, making those funds no longer available to fund pension benefits, can a sponsor segregate those funds and prepare a fresh actuarial valuation report without reference to the segregated funds? Can this segregation of the funds and funding valuation report be updated retroactively if the partial wind-up was in a prior year?
The participating employer's current surplus under the plan as a whole should be fully utilized before any additional contributions are permitted to fund the liability for surplus entitlements on partial wind-up resulting from the Monsanto decision.
The Financial Services Commission of Ontario is dealing with proposed distributions of surplus resulting from the Monsanto decision on a case-by-case basis.
The issues of segregating surplus and retroactive reporting do not arise, because the participating employer's current surplus under the plan as a whole should be utilized to fund the liability for surplus entitlements on partial wind-up resulting from the Monsanto decision.
Question 15 - Subsection 8303(6) of the Income Tax Regulations - Qualifying transfer to pension plan before registration
When a pension plan member reaches December 31 in the year they turn age 69, and the pension plan has not yet been fully registered, how can they make the registered retirement savings plan (RRSP) qualifying transfer to the pension plan, prior to their RRSP assets being transferred to a registered retirement income fund (RRIF)? Would the Canada Revenue Agency (CRA) be prepared to fast track the registration process for such cases, or permit the RRSP qualifying transfer prior to final registration of the pension plan?
Subsection 146(16) of the Income Tax Act (Act) provides for a transfer from an RRSP to a registered pension plan. A deemed registered pension plan is considered to be a registered pension plan (except for purposes of paragraphs 60(j) and 60(j.2) and subsections 147.3 and 147.4 of the Act) in accordance with subsection 147.1(3) of the Act. Therefore, a qualifying transfer of assets from an RRSP made in connection with a past service event can be made to a deemed registered pension plan.
The definition of a "qualifying transfer" in the Past Service Pension Adjustment Guide (T4104) includes a note that explains that no transfer of funds may be made to a plan that has not been accepted for registration. It further recommends that no arrangements be made for a qualifying transfer to an unregistered plan. This information is misleading and will be amended in the next release of the guide. There is, therefore, no need for the CRA to fast track the registration process for a new plan for the purpose of a qualifying transfer since such a transfer is permitted to a deemed registered pension plan.
Another option available to a member for the purpose of having a past service pension adjustment (PSPA) certified in relation to a past service event, is to do a qualifying withdrawal from their RRSP in accordance with subsection 8307(4) of the Income Tax Regulations (Regulations).
When the final determination made with respect to the application for registration is a refusal to register the pension plan, the Act shall apply as if the plan had never been deemed. Therefore, any amounts transferred into the plan in connection with a past service event would no longer be a qualifying transfer as described in subsection 8303(6) of the Regulations. Revised PSPAs may be required.
In addition, the plan would generally revert to a retirement compensation arrangement and all of the property held within the plan would be subject to the corresponding legislation.
Question 16 - Incorrect pension payments - over and under payments
Under certain circumstances, it is not possible to commence pension payments at normal retirement age, for instance, when the administrator does not have a current mailing address for the member. In addition, due to the complexities involved with calculating pension benefits, mistakes can occur. In such cases, can an adjustment be made to pensions in pay without violating the equal and periodic requirement? Can lump-sum payments be made for missed payments? Can overpayments go back to the plan?
Note: RPD has made some changes to the approval process of retroactive lump-sum catch-up payments. Our position on retroactive lump-sum catch-up payments can be found in Newsletter 09-1 and in the administrative relief FAQ. We are currently reviewing whether overpayments of pension benefits can be returned to the plan. Further information will be provided.
Question 20 - Quebec's indexing benefit
The Quebec Supplemental Pension Plans Act regulations were recently amended to remove the requirement that the additional benefit on cessation of plan membership be provided via additional lifetime pension benefits, and to permit the payment as a cash lump-sum payment.
Has the Registered Plan Directorate's requirement for specific plan language (i.e., specify how the value of the additional termination benefit is converted to non-past service pension adjustment (PSPA) additional pension) been relaxed or eliminated?
Please confirm that the cash lump-sum payment to which a member is entitled as a result of the Quebec additional benefit rule may be transferred along with the commuted value of the member's basic benefit entitlement on a tax deferred basis, provided the total transfer amount is less than the applicable transfer limit of section 8517 of the Income Tax Regulations (Regulations) (i.e., similar to the method described in Newsletter 98-2, Treating Excess Member Contributions Under a Registered Pension Plan for post-1990 member contributions under the 50% cost sharing rule).
If a registered pension plan is amended to include the additional pension benefit required under Quebec's Supplemental Pension Plans Act, the plan terms must identify the possible upgrades that are permitted under the Income Tax Act (Act). Our position outlined in Question 15 of our Frequently Asked Questions on our website has not changed.
Paragraph 8503(2)(m) of the Regulations allows for the commutation of the member's benefit under a defined benefit provision. The payment cannot exceed the present value of the member's benefits. Paragraph 8503(2)(m) allows for the present value to be determined as if the benefits were indexed. If the present value of the member's benefits, including the additional pension benefits of Quebec, is in excess of the prescribed amount, the excess has to be paid directly to the member in cash. Only the amount up to the prescribed amount can be transferred under the Act.
Question 22 - Issues arising out of the Transamerica case
To avoid requiring a case-by-case review, will the Registered Plans Directorate be establishing a policy that describes the situations when segregated accounts would be permitted along with conditions that would apply in those circumstances?
The requirement for segregated accounts, typically occurring in situations when a purchase and sale or merger occurs, is a relatively new development. Permission for this segregation is granted on an administrative, case-by-case basis only since it is not otherwise permissible under the Income Tax Act. Our present policy requires that, in order for a request to be considered, there must be written evidence of the provincial regulator requirement to segregate accounts in the particular circumstances. We will also consider such requests when there is a specific court order requiring segregation of funds.
We will review our current policy to determine if our processes can be more streamlined.
Question 23 - Paragraph 8515(7)(c) of the Income Tax Regulations - Indexing assumptions
Assume a designated plan where all members are pensioners (not restricted funding members), and the plan has no post-retirement indexing.
When the actuary prepares the normal valuation results without indexing assumptions, can we compare it to a maximum funding valuation that assumes 4% consumer price index (CPI) post-retirement indexing? That is, does paragraph 8515(7)(c) of the Income Tax Regulations (Regulations) accommodate an assumption of 4 % post-retirement indexing for maximum funding valuation, whether or not the registered pension plan terms have any post-retirement indexing provisions?
When a plan as registered provides for no indexation of benefits after retirement, the CPI assumption is 0% for non restricted-funding members (e.g., pensioners) when determining the contributions that may be made to a registered pension plan that is a designated plan under section 8515 of the Regulations.
It should be noted that a plan with only pensioners can apply for a waiver of the designated plan status.
Question 24 - Under-contributions to money purchase accounts - Foregone earnings
Under-contributions also sometimes occur and additional amounts must be contributed to the members' accounts. The Canada Revenue Agency does not currently allow the plan sponsor to add the lost investment earnings to the members' accounts, notwithstanding that such amounts would have been tax-deferred funds if the error had not occurred. Is there any intention to change that policy?
No, there is no intention for a change in policy. If the employer wants to make up for lost investment earnings, plan contributions in subsequent years may be increased subject to the annual limits in subsection 147.1(8) and (9) of the Income Tax Act.
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