Newsletter no. 16-3, Transfers from Underfunded Individual Pension Plans
May 4, 2016
This newsletter is for individuals pension plan (IPP) administrators and consultants.
In certain cases, an IPP might not be able to give a plan member his or her entire pension benefit because it is underfunded. If a member opts to transfer his or her pension entitlement from the plan, in a lump-sum, the IPP member might not receive a full commuted value.
For transfers from an underfunded IPP, where subsection 8517(3.001) of the Income Tax Regulations applies, an IPP administrator can now calculate the prescribed amount using subsection 8517(3.01) without seeking our approval. Ministerial approval is granted if the conditions of subsection 8517(3.001) are met.
This change is effective from the date of this newsletter.
Transfers to other retirement savings plans
Subsection 147.3(4) of the Income Tax Act allows a member of a defined benefit (DB) registered pension plan (RPP) to transfer a single amount from the pension plan, tax-free, to his or her registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or money purchase (defined contribution) RPP. The single amount is a payment in place of retirement benefits that the member was entitled to receive from the RPP, based on the terms of the plan as registered.
The single amount cannot be more than a prescribed amount, as set out under paragraph 147.3(4)(c) of the Act. The prescribed amount is often known as a maximum transfer limit, meaning that amounts paid from a DB RPP that are above the member’s prescribed amount are not eligible for a direct tax-free transfer, and must be included in the member’s income for tax purposes.
The rules for calculating a prescribed amount are set out in section 8517 of the Regulations. Generally, the prescribed amount is calculated by multiplying the lifetime retirement benefit the member would have received from the RPP by an age factor in the Regulations.
Modified prescribed amount
Subsection 8517(3.01) of the Regulations has a special rule for calculating the prescribed amount when an IPP member receives a reduced single amount from a DB provision of an IPP that is underfunded. This rule allows the IPP administrator to calculate the prescribed amount as if the member had not received a reduction to his or her lifetime retirement benefit. This generally allows a larger part of the single amount to be transferred tax-free to an RRSP, RRIF, or money purchase RPP.
The Regulations require IPP administrators to get our approval to apply this special rule to calculate the prescribed amount.
When do the modified prescribed amount rules apply?
With our approval, subsection 8517(3.001) of the Regulations allows an IPP administrator to calculate the prescribed amount, as described in subsection 8517(3.01), for a member if:
- the member is an employee or former employee of a participating employer or a predecessor employer to the participating employer;
- lifetime retirement benefits payable to the member under the DB provision have been reduced because of insufficient assets; and
- the amount transferred from the IPP is the last payment from the plan to the member and all the property within the plan is paid from the plan on behalf of plan members within 90 days following the transfer.
If the conditions applicable to IPPs in subsection 8517(3.001) of the Regulations are met, you may calculate a member’s prescribed amount using subsection 8517(3.01). You are no longer required to write in for our approval to calculate the prescribed amount using subsection 8517(3.01), and our approval is granted on the understanding that all of the conditions in subsection 8517(3.001) are satisfied at the time of the transfer.
As a reminder, when a registered pension plan is being terminated, you must notify us in writing of the date and method of the settlement of plan assets within 60 days of the final distribution of assets, as required by subsection 8409(3) of the Regulations.
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
For service in English: 613-954-0419
For service in French: 613-954-0930
Elsewhere in Canada
For service in English: 1-800-267-3100
For service in French: 1-800-267-5565
Write to us
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. Our fax number is 613-952-0199.
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