Newsletter no. 14-1, Reviewing Earnings and Service for IPPs

June 23, 2014

On April 25, 2014, we held a teleconference to inform you of a new approach that we have put in place when we review earnings and service for individual pension plans (IPPs). IPP is defined under subsection 8300(1) of the Income Tax Regulations.

This newsletter gives you more information on this approach. It is intended for pension plan administrators and their representatives.

1. Registration requirements

For a pension plan to be registered under the Income Tax Act, and keep its registration, it must comply with certain prescribed conditions. Two of these conditions are that the maximum retirement benefits provided must be based on compensation as defined under subsection 147.1(1) of the Act, and, in the case of a defined benefit (DB) provision, the service must be eligible under paragraph 8503(3)(a) of the Regulations.

In 2008, we commenced a more fulsome review of earnings and service used to calculate a member’s benefits in all IPPs. Our reviews during this time have uncovered a significant degree of non-compliance in relation to both.

Registration of IPPs is often delayed while we work with plan administrators, or their representatives, to resolve the non-compliance. To speed up the process, and to provide greater certainty to plan administrators and members, we introduced a new approach to our earnings and service reviews.

2. Validating earnings and pensionable service

When you ask us in writing, we will validate the amount and type of earnings (compensation) that the actuary is proposing to use for each plan member against the information previously reported to the Canada Revenue Agency (CRA) by the member and his or her employer.

We will also confirm if service with a particular employer qualifies as pensionable service under the IPP, including advice on whether a previous employer qualifies as a predecessor employer, as defined under subsection 8500(1) of the Regulations. We will give this information at any time after a complete application for registration is sent in and anytime new past service is being recognized.

We will be bound by the validation unless the auditor discovers while auditing the IPP that the information that was previously reported to the CRA was incorrect. For example, if the amount reported on a T4 slip for the member was incorrect, we will not be bound by a validation based on that information.

For new plans, we encourage you to ask for this validation with the application for registration so that we can give you the information you need before an actuarial valuation report (AVR) is prepared or any amount is transferred to the plan. To help with this process, we will continue to accept new applications for registration without an AVR.

By having the earnings and service validated before sending us the AVR, you will have greater certainty in the approval of the AVR. This new approach will speed up the process of resolving problems and will increase efficiency.

To ask us for this validation, you need to send us:

  • a written statement of the earnings you would like validated for each plan member along with written details of those earnings;
  • the business number for each employer to which the earnings and service relate (if available);
  • each member’s written authorization for the CRA to share his or her tax information (see section 3 of this newsletter); and
  • any other relevant information and documents that will help us with the confirmation.

To speed up the process, and reduce the likelihood that we will ask for more information, we encourage you to give us as many details or relevant documents as possible. For example, tell us that there is service with a predecessor employer, and provide supporting documents such as a purchase and sale agreement. Also, tell us if the earnings include amounts allocated from an employee profit-sharing plan, and include copies of the T4PS, Statement of Employee Profit Sharing Allocations and Payments.                                                                                                        

Note

We will only validate the earnings you propose to use in the AVR. To get historical T4 earnings for a member, you will need to contact a tax centre of the CRA.

3. Plan member’s written authorization

Before we can give you details of the information that was reported to the CRA, we will need written authorization from each plan member to share his or her personal tax information as it relates to the IPP.

The plan member can provide this authorization by sending us a signed statement with the following information:

  • The plan member’s full name, social insurance number, and telephone number;
  • The pension plan name and registration number (if available);
  • A statement that the CRA is authorized to disclose the member’s income tax information for the purpose of administering the pension plan;
  • The full name of each individual or business authorized to receive the member’s income tax information. If the name of a business is given, the authorization will apply to any authorized representative of that business;
  • Whether the consent applies to all years or, if not, the years for which we are authorized to disclose information; and
  • The expiry date (if any) of the consent.

As the consent given is limited to the information necessary to administer the pension plan, you do not need to use Form T1013, Authorizing or Cancelling a Representative.

4. Turnaround time

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.

Our client service standard to reply to an application for registration of a new pension plan is 180 days. The validation service will not affect this client service standard. However, as we will start reviewing the application for registration at the same time we review the validation request, we expect a quicker turnaround time for an IPP when you request that we validate earnings and service.

When you send us an application to register an IPP in a prescribed manner, the plan will be deemed registered for all purposes of the Act and Regulations, except paragraphs 60(j) and 60(j.2), and sections 147.3 and 147.4 of the Act. However, we strongly recommend that you do not make any transfers to the plan until it has been registered and the earnings and service have been validated. The member has 90 days after the plan is registered, or if later, the past service pension adjustment (PSPA) is certified, to make the qualifying transfer. In some cases, transferring funds before the plan is registered could have adverse tax consequences for the plan member, particularly if the plan ultimately fails to qualify for registration, or if the compensation and past service are determined to be ineligible.

5. Clear communication and better sharing of information

When an AVR is based on ineligible earnings or service, our communication to you will be clear and we will work with you to make the plan compliant with the Act and Regulations.

We will reject the AVR if the actuary’s funding recommendation is based on earnings that do not match the information previously reported to the CRA, or on service that we conclude is ineligible. We will inform you that any contributions made that were based on this AVR are not eligible contributions, and are not deductible.

With the plan member’s written authorization, we will give written details of the discrepancy between the AVR and the information previously sent to the CRA. This information will help you address the areas that are non-compliant.

6. Administrative relief

On a case by case basis, when we uncover a discrepancy as part of our AVR review where new past service is being credited and the member has transferred property from a registered retirement savings plan to a DB provision within the IPP, that is more than the qualifying transfer needed to certify the PSPA, we will consider allowing the excess amount to be transferred to an additional voluntary contribution account under a money purchase provision of the IPP.

We will consider granting the relief if you confirm in writing that the member transferred the excess amount because the calculation was based on ineligible service or earnings. You must also send us an acceptable revised AVR and any necessary amendments to the plan terms within 90 days of the date of our letter informing you that the AVR was rejected. We will not consider giving this administrative relief after this time.

After the 90 day period has expired, administrative relief will only be available in cases of voluntary disclosure as outlined in Compliance Bulletin No. 6R1.

7. How to contact us

If you have questions about administering a registered pension plan in line with the Act and Regulations, 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 (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 newsletter. Send comments by email to rpd/dre@cra-arc.gc.ca

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