Chapter 5 - 147.4 – RPP Annuity Contract
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5 147.4 – RPP Annuity Contract
Section 147.4 of the Act provides a set of rules that deal primarily with individuals acquiring ownership of an annuity contract on a tax-deferred basis but within their entitlement to benefits under an RPP. These rules ensure that annuities are not used as a means of providing tax-assisted pension benefits in excess of the RPP limits.
Section 147.4 of the Act applies to contract acquisitions, contract amendments and contract replacements occurring after July 30, 1997.
Section 254 of the Act applied to the purchase of annuities under a superannuation or pension plan or fund. Retirement compensation arrangements and other unregistered pension plans could benefit from the tax deferment advantages of paragraph 254(a) of the Act.
5.1 147.4(1) – RPP Annuity Contract
Subsection 147.4(1) of the Act replaces the mechanism provided under paragraph 254(a) for individuals to acquire annuities under superannuation or pension funds. Subsection 147.4(1) is more restrictive then paragraph 254(a).
Subsection 147.4(1) of the Act applies where an individual acquires ownership of an annuity contract in satisfaction of the individual’s entitlement to benefits under an RPP. Any amount received from the annuity contract is deemed to have been an amount paid from the RPP. Therefore there is no immediate taxation on acquisition of the annuity and any payments under the contract are included in the recipient’s income in the year in which they are received.
Rather than receiving retirement benefits directly from a particular RPP, a plan member can choose to receive in full or partial satisfaction of his entitlement to benefits under the plan by:
- Acquiring an interest in a tax-deferred annuity from a “licensed annuities provider” (as defined in subsection 147(1) of the Act ) pursuant to subsection 147.4(1), or by
- Receiving a lump-sum commuted value under paragraph 8503(2)(m) of the Regulations, for the purpose of a transfer to another registered product (such as an RRSP under subsection 147.3(4) of the Act up to a prescribed amount in section 8517 of the Regulations).
Entitlements to benefits outside of the particular RPP are thus satisfied by the application of either provision.
Subsection 147.4(1) of the Act will apply with respect to the acquisition of an RPP annuity contract only if the following conditions are met:
- The rights provided for under the contract are not materially different from those provided for under the RPP;
- The contract does not provide for any further premiums to be paid after it is acquired by the individual; and
- At the time of acquisition, the registration of the plan is not revocable. However, under subsection 147.4(1) of the Act, the Minister of National Revenue has the authority to ignore the fact that the registration of the plan is revocable. It is generally expected that the Minister would do so where there is no connection between the cause of the plan being revocable and the benefits being provided by way of the annuity.
Also, subsection 147.4(1) of the Act provides that the deeming rules do not apply where an individual acquires an interest in an annuity contract by way of a transfer to an RRSP or RRIF. In such cases, the rules governing inter-plan transfers in section 147.3 apply.
Subsection 147.4(1) of the Act is intended to protect annuity acquisitions only where the rights provided for under the annuity contract are not materially different from those provided for under the RPP. The ultimate determination of what exact rights are provided for under the RPP has been tied to the concept of plan as registered as defined in subsection 147.1(15).
It is not intended to allow a plan member to reconfigure the amount or modify the form of the benefits provided under the RPP. Plan members who want such flexibility can achieve this by transferring the value of their pension entitlements to an RRSP or RRIF (within the constraints of section 147.3 of the Act).
Where an individual acquires ownership of an annuity contract under an RPP otherwise than in accordance with subsection 147.4(1) of the Act, the individual is considered to have received a payment in kind from the RPP and is required to include the value of the contract in income under paragraph 56(1)(a).
Under certain pension benefits standards legislation, a member is entitled to receive his or her commuted value even though the individual does not transfer to an RRSP, but rather chooses to buy an annuity outside of the particular plan. Where the commuted value of the promised benefit under the RPP exceeds the premium required to provide an annuity from an outside annuity provider, the pension benefits standards legislation may require the "excess amount" (commuted value less the price of the annuity) to be provided to the member.
As an example, assume that a terminating member is entitled to receive an annual pension directly from the RPP in the amount of $40,000. If the member elected to receive a commuted value (in lieu of the $40,000 pension), he or she would have been entitled to receive a lump-sum amount of $700,000. The member chooses to receive the annual pension of $40,000, but from an outside annuity provider under section 147.4 of the Act. The outside annuity provider only requires $600,000 to provide the member with an annual pension of $40,000 that mirrors the benefits that would have been provided directly from the RPP.
In this example, there is an “excess” of $100,000 (Commuted value of $700,000 less the cost of the annuity purchase $600,000) and certain regulators may require the RPP to pay the member this “excess". The excess cannot be used to provide additional annuity benefits that were not available to the member as this would be materially different.
Subparagraph 8502(d)(ix) of the Regulations allows an RPP to pay a single amount that is required due to the Pension Benefits Standards Act, 1985 or similar law of a province, where the single amount is not transferred directly to another RPP, an RRSP, or a RRIF. The CRA will apply subparagraph 8502(d)(ix) so that the member can receive the excess amount, as described above, in situations involving buying an annuity. In applying subparagraph 8502(d)(ix), the member will be entitled to receive the excess amount as a lump-sum payment from the RPP ($100,000 in the example above). The lump-sum payment must be brought into the member's taxable income in the year received under paragraph 56(1)(a) of the Act. As a reminder, the annuity provided from an outside annuity provider can’t be materially different from the benefits provided under the particular RPP.
There may be circumstances where the commuted value is not sufficient to purchase an annuity with the same payout. The fact that the annuity payments are less than the benefits provided under the RPP will not in and of itself cause the annuity acquisition to lose the protection afforded by subsection 147.4(1) of the Act.
Paragraph 147.4(1)(f) of the Act provides that, when an individual acquires an interest in an annuity contract described in paragraphs 147.4(1)(a) to (e), the individual is deemed not to have received the amount out of or under the RPP due to acquiring the interest. In other words, the acquisition cost of the annuity is not a taxable benefit to the member.
Paragraph 147.4(1)(g) of the Act provides that, except for the purposes of sections 147.1 and 147.3, the individual is deemed to have received the payment under the RPP. Consequently, it is the annuity payments to the member that are brought in to taxable income under paragraph 56(1)(a).
5.2 147.4(2) – Amended Contract
Subsection 147.4(2) of the Act provides rules that apply where an annuity contract is amended. The rules apply if the rights provided for under the contract are materially altered as a consequence of the amendment. In such a case, an individual with an interest in the contract immediately before the amendment is deemed to have received an amount from a pension plan equal to the fair market value of that interest. By virtue of paragraph 56(1)(a), the individual is required to include this amount in income.
Subsection 147.4(2) of the Act also deems the amended contract to be a separate annuity contract not issued pursuant to or under a superannuation or a pension fund or plan.
An individual with an interest in the amended contract is deemed to have acquired the interest at the time of the amendment at a cost equal to the fair market value of that interest immediately after the amendment. This establishes the date of acquisition and the adjusted cost basis for purposes of the accrual rule.
5.3 147.4(3) – New Contract
Subsection 147.4(3) of the Act contains rules relating to annuity contracts that replace contracts to which subsection 147.4(1) or paragraph 254(a) applies. As long as the rights provided for under the new contract are not materially different from those provided for under the original contract, the new contract is considered to be the same contract as the original contract.
However, where the rights are materially different, an individual with an interest in the original contract is deemed to have received an amount from a pension plan equal to the fair market value of that interest. Under paragraph 56(1)(a) of the Act, the individual is required to include this amount in income.
The terms of an RPP must provide for the acquisition of ownership of an annuity contract with pension plan funds. The terms must provide that the acquisition of ownership of an annuity contract will comply with the conditions set out in the Act. The terms of the RPP must not treat the purchase of an annuity contract as a commutation and subsequent transfer of benefits.
Amounts to be Included in Income – 56(1)(a)(i)
Deemed Registration – 147.1(3)(a)
Plan as Registered – 147.1(15)
Transfers – 147.3
Prescribed Annuity Contracts – 304(1)(a)
Permissible Distributions – 8502(d)(ix)
Provincial Pension Benefits Standards Legislation - 8513
Prescribed Amount - 8517
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