Registered Pension Plan Annuity Contracts – Draft Newsletter for Industry Consultation

Notice to reader

The Registered Plans Directorate has started a consultation process for its draft newsletter, Registered Pension Plan (RPP) Annuity Contracts under Section 147.4 of the Income Tax Act.

As this newsletter affects registered pension plan administrators, plan members, consultants and licensed annuities providers, it is important to consult with the pension industry to make sure that the newsletter adequately addresses issues related to acquiring outside annuities in satisfaction of a  member’s rights to benefits under a registered pension plan.

Organizations interested in submitting their views are invited to review this draft newsletter. We would appreciate receiving one submission per organization in order to streamline the consultation process.

Written comments should be forwarded by March 1, 2019 to

This newsletter is for registered pension plan (RPP) administrators, consultants, and licenced annuity providers. It was developed as a result of a Canada Revenue Agency/industry consultation that looked at the issue of annuity contract purchases outside of an RPP.

Section 147.4

Section 147.4 of the Act applies when an individual acquires ownership of an annuity contract in satisfaction of their entitlement to benefits under an RPP. Often referred to as a buy-out annuity, it occurs when a plan administrator pays a premium to a licensed annuity provider to purchase an annuity contract on behalf of the member or their survivors. The member (or survivor) is both the annuitant and the owner of the contract.

When certain conditions are met, subsection 147.4(1) deems the individual not to have received an amount from an RPP by acquiring an annuity, and deems amounts received under the contract to be amounts received under the RPP. As a result, there is no immediate taxation on acquiring the annuity contract and any payments under the contract are included in the individual’s income in the year received. The deeming provisions of subsection 147.4(1) apply if the following conditions are satisfied:

  • the rights provided under the contract are not materially different from those provided under the RPP;
  • no further premiums will be paid after the contract is acquired; and
  • unless waived by the Minister; at the time of the acquisition, the registration of the RPP is not revocable.

Section 147.4 does not apply when an individual acquires an annuity contract using RPP funds that were transferred first to a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). The transfer of RPP funds to an RRSP or a RRIF is subject to section 147.3 of the Act.

Materially different

Subsection 147.4(1) applies if the rights provided under the annuity contract are not materially different from the rights provided under the RPP. In determining whether the rights under the annuity contract are not materially different from the RPP, consideration must be given to the terms of the RPP based on the plan as registered. Plan as registered is defined in subsection 147.1(15) of the Act, which means the terms of the plan on the basis of which the Canada Revenue Agency has registered the plan. It also includes amendments that have been accepted by the Canada Revenue Agency as well as those that have been submitted for acceptance but have not been accepted or refused and it is reasonable to expect that the Canada Revenue Agency will accept them.

Annuity purchases, therefore, must not allow for a reconfiguration of the amount or form of benefits that are provided under the particular RPP.

What if the annuity contract is materially different from the RPP?

If an individual acquires ownership of an annuity contract under an RPP that is not in accordance with subsection 147.4(1), the individual is considered to have received a payment from the RPP and is required to include the value of the contract in income under paragraph 56(1)(a) of the Act. Given the potential adverse tax consequences, the following is intended to provide guidance on what adjustments, when compared to the plan as registered, we consider to be immaterial so that subsection 147.4(1) can apply.

Cost of living adjustments

Many RPPs provide cost-of-living adjustments that are based on the Consumer Price Index (CPI). However, market conditions might deter the purchase of an outside annuity based on CPI. Provided that the annuity contract matches all other benefits provided under the RPP, the Canada Revenue Agency will accept one of the following fixed-rate adjustments in lieu of a full CPI indexation adjustment. This will be sufficient for the Canada Revenue Agency to consider the purchase to not be materially different for the purposes of subsection 147.4(1).

  • The midpoint of the Bank of Canada’s inflation-control target range at the date of purchase: bankofcanada/inflation
  • The spread between the yield of Government of Canada long term bonds and real return bonds in the month of or the month preceding the date of purchase: bankofcanada/lookup-bond-yields

For those RPPs that provide indexation that is less than CPI, such as CPI less 1% or 40% of CPI, the methodology allowed above for an outside annuity purchase would have to be adjusted accordingly.

If you elect to use a method that differs from the ones above, we recommend that you send us a written request with your rationale outlined. We will review these requests on a case by case basis.

Individual annuity purchases using commuted values

In the case of a defined benefit RPP, the terms of the plan as well as applicable pension benefits standards legislation might allow a member to use their commuted value to buy a life annuity from a licensed annuity provider. A commuted value is a lump-sum payout equal to the present value of a member’s earned benefits under the plan. A commuted value cannot be used to purchase an annuity that is materially different from the RPP, based on the plan as registered.    

In some cases, the commuted value is not enough to provide an annuity that equals the benefits that would have been provided under the RPP. In this case, the lifetime retirement benefits or ancillary benefits are reduced, but without further reconfiguring the benefits that would have been provided from the RPP. An annuity that provides less benefits than what would have been provided from the RPP will have the protection afforded under subsection 147.4(1) of the Act, on the understanding that the payment of the commuted value is in full satisfaction of the member’s benefits under the RPP.

If the commuted value is greater than the cost to buy an annuity that replicates the RPP benefits, the excess commuted value cannot be used to provide higher annuity payments under the annuity contract. The member can use the portion of the commuted value to purchase an annuity that replicates the benefits provided under the RPP. Under subparagraph 8502(d)(ix) of the Income Tax Regulations, the portion of the commuted value that is in excess of the annuity acquisition cost can be paid in cash to the individual and must be included income for tax purposes. It cannot be left in the RPP or transferred directly to a pooled registered pension plan, RPP, RRSP, RRIF, or specified pension plan.

Individual annuity purchases using plan assets

Certain RPPs, such as Individual Pension Plans, might wish to purchase an annuity contract from a licensed annuity provider that is based on the assets in the plan. However, as noted above, the annuity purchase must be based on the plan as registered.

If there are not enough RPP assets, the employer can make additional RPP contributions to make sure that the promised benefits under the plan as registered can be provided directly from the RPP. Thereafter, the benefits can be settled by way of an annuity purchase outside of the plan. Alternatively, as previously noted, if the annuity contract provides lesser benefits than what was available under the RPP (in the manner previously described), then the acquisition cost will be given the protection afforded under subsection 147.4(1).

If there are excess assets in the RPP, to the extent that lifetime retirement benefits and ancillary benefits are not at the maximum allowable under the Act, benefits can be enhanced through a plan amendment before being settled by an annuity purchase.

Do these rules apply to money purchase plans?

Section 147.4 of the Act applies for annuity contracts that replace benefits provided under RPPs; both defined benefit and money purchase plans. A money purchase plan is also called a defined contribution plan. Similar to defined benefit plans, when buying an annuity outside of a money purchase RPP, the annuity must be based on the plan as registered in order to satisfy subsection 147.4(1).

Buy-in annuities

A buy-in annuity policy is issued by an annuity provider to an RPP administrator in order to de-risk certain liabilities under the RPP. Under the annuity policy, the annuity provider deposits the total periodic annuity payment to the pension fund. The responsibility 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 retirement benefits are subject to the buy-in annuity policy. In these situations, subsection 147.4(1) of the Act has 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 an investment of the RPP.

Inspections and requirement to provide documents or information

As a reminder, subsections 231.1(1) and 231.2(1) of the Act allows the Canada Revenue Agency to inspect as well as give notice requiring any person to provide information or any document relating to the enforcement or administration of the Act. Therefore, we suggest that you retain information for annuity purchases based on the newsletter, as well as any annuity purchase where section 147.4 of the Act applies.

How to contact us

If you have questions about this newsletter, contact us at the Registered Plans Directorate.

Our telephone enquiries service is available Monday to Friday from 8:00 a.m. to 5:00 p.m. Eastern time. There is a voice mailbox system to take messages outside of these hours. We will return calls on the next business day.

In the Ottawa area, call 613-954-0419

If you are elsewhere in Canada, call toll free: 1-800-267-3100

You can find more information at:

You can also send a letter:

Registered Plans Directorate
Canada Revenue Agency
Ottawa ON  K1A 0L5

Our fax number is 613-952-0199.

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