Module 3 - Leveraging the Tax Regime in Plan Design

Question 1

Governments stated objectives for the current income tax regime governing registered pension and non-pension retirement plans.

Answer 1

a) To establish a tax framework to encourage increased private retirement savings
b) To eliminate inequities that resulted in some taxpayers being unable to benefit from as much tax assistance as others, depending on the type of their pension and retirement savings plans.
c) To enhance the flexibility in the timing of retirement savings.
d) To introduce a system under which dollar limits on contributions and benefits are adjusted for inflation and therefore do not decline in real value.

Question 2

Explain the taxation rules for registered pension plan RPP contributions benefits, investment income and capital gains.

Answer 2

Contributions to an RPP are deductible up to a certain limit.
Eligible employee contributions are deductible inn the year made. (except for pas service defined benefit plan contributions made in respect of years of service prior to 1990)
Benefits are fully taxable to employees when paid directly to them. Individuals age 65 or older may claim a federal tax credit in respect of the first $2,000 of pension income from most types of RPP or savings plans, up to a max of $300. Individuals under age 65 may claim a similar tax credit in respond to income received from similar plans as the result of the death of their spouse or common-law partner.
Income and capital gains earned by investing the assets of an RPP are not taxable.

Question 3

The comprehensive savings limit on tax-assisted retirement savings, the rationale for its existence and the consequences of failure to respect that limit.

Answer 3

Legislation regarding retirement savings limits is based on the principle that the available of tax assistance should be the same for all individuals with the same income, whether they save for retirement through participation in a registered pension plan, RRSP or DPSP or through a combination of those plans.
The comprehensive savings limit is equal to 18% of the member’s compensation, subject to a dollar maximum called the money purchase limit. Note that the use of “money purchase” in references to the CRA “money purchase limit” is correct.
Failure to respect the limit will cause the reregistration of an RPP or DPSP under the ITA and will result in penalty tax under an RRSP

Question 4

The purpose of pension adjustments PAs and outline the steps taken by employers to determine PAs.

Answer 4

PAs are used by CRA to monitor the tax savings limits for registered pension plans and deferred profit sharing plans as well as to calculate the RRSP contribution room for plan member for the following year.
Since a members PA for a year with respect to an employer must not exceed the money purchase limit, the employer must ensure that the PAs are within that upper limit. EX: by limiting the DB pension accrual to 2% of compensation, the result is that the PA equals 9X2% - $600 (18%) In a combination of DPSP and DB the DB pension would be lower than 2% to provide the ability to make some degree of DPSP contribution.

Question 5

Employers are responsible fo reporting PAs to CRA. What are the steps?

Answer 5

a) Determine each plan members benefits accrual in the pension plan or DPSP for the year. ex:25 in DB plan
b) Determine the dollar value of the pension plan or DPSP benefit accrual. in a DB plan it will be 9 times the benefit accrual from step a minus $600. If only DPSP then amount in step a and b will be the same. this amount is known as the pension credit.
c) The pension credit is the Pension Adjustment to be reported by the employer on each plan member’s T4 slip fo the year in question. If DB and DPSP must combine both pension credits.

Question 6

Outline the rationale behind the factor 9 used to determine the PA for a DB pension plan.

Answer 6

This was chosen in the Department of Finance as an appropriate average factor to produce the approximate value of cost of a dollar lifetime pension income under a generous DB pennons plan. This factor applies to all DB pension plans and whether or not the employee is vested.

Question 7

How is PA determined in a DC plan.

Answer 7

The PA is generally calculated as the same of employer and employee contributions int he year, plus reallocated forfeited amounts if any. DPSP does not allow member contributions but he PA is calculate in the same way.

Question 8

What is PSPA Past Service Pension Adjustment and the events that create this.

Answer 8

This is an attempt to maintain equity within the application of the ITA comprehensive retirement savings limit when DB plans sponsors grant retroactive pension improvements. Without this the DB plans would exceed their limit. PSPAs are intended to recognize the difference between the PAs reported in previous years and the PAs th would have been reported higher through the years with the increase applied. It is applied against unused RRSP contribution room and it reduces the amount that the affected member may otherwise contribute to an RRSP
a PSPA is created if the benefit formula in a DB pension plan is increased for year after 1989 or if past service benefits are added for those year.
It is not used in 2 situations.
1- if ancillary benefits are improved, such as early retirement subsidies or increased death benefits.
2- if pensions for service before 1990 are upgraded or improved.

Question 9

Requirements for pension plan administration to report PSPAs to CRA

Answer 9

Must report them for 2 situations
1- Some PSPA must be reported but are exempt from process called “certification” this is not required if benefits are increased for at least 90% of the members and if certain requqiremtns are met around the nature of the member who received this. EX is “specified individuals” by CRA members who own at least 10% of the sponsoring company or whose earnings are at a certain defined high levels.
2- Some must be both reported and then “certified” prior to implementation of the benefit improvement. Certification is normal provided as long as the PSPA does note exceed the members unused RRSP contribution room at the end of the previous year by more than $8,000. if this is not the case, it is possible for the members PSPA will be certified after the Uber withdraws funds form their RRSP such withdrawals are called qualifying withdrawals and they are taxable to the individual.

Question 10

Pension adjustment reversals PARs

Answer 10

Is another attempt to maintain equity with the application of the ITA comprehensive savings plan limits. Their purpose is to remedy the overstatement of PAs that would occur without the PAR mechanism in two circumstanceds.
a) In DB pension plans, the use fo the factor 9 ofter overstates the value of the member pension credits
b) at time of termination not all pension and DPSP member are fully vested yet historically PAs assumed full vesting.
PARs help if a terminated member benefit (lump sum or payment transfer LIF or RIF) is less than the cumulated PAs and PSPAs report for that employeee. The PAR is reported to cRA by the plan admin. equal to the amount of the excess,, restores RRSP contribution room to the extend of that excess, There is no PAS if the member simply collects his or her pension plan for the plan.

Question 11

Registered pension plans under ITA approach

Answer 11

Government requires that pension plans be bona fide retirement vehicles and is concerned that the tax deductible contributions made to pension plans should not exceed that are considered reasonable in the circumstances.
Before it will grant registration under ITA, CRA requires a plan sponsor to also apply for registration under the provincial or federal pension standard legislation. each province except PEI has its own laws and regulations that govern pension plans in industries that are not under federal jurisdiction. The office of superintended of pensions OSFI regulates private pension plans in federally regulated industries like banking, airlines, telecommunications as well as Yukon and Northwest Territories.
A pension plan may apply for registration retroactively, but the effective date must be in theme same calendar year which the application is submitted.

Question 12

Consequences of noncompliance with pension plan rules set under ITA

Answer 12

The plans registration status will become revocable. then the arrangement is then classified as a Retirement Compensation Arrangement RCA from the date it ceases to comply with the rules. and ceases to benefit from the preferential tax treatment afforded to RPPS.

Question 13

What is the primary focus of the RPP in context to ITA

Answer 13

To provide employees with periodic payments after retirement until death.

Question 14

The ITA requires that members benefits from pension plans be protected from most creditors.

Answer 14

All RPPs must include a clause prohibiting plan members from assigning or transferring their rights under a pension plan to another or pledging their rights under a pension plan as security for a debt. Plan members cannot surrender or voluntarily forfeit their pension rights. Creditors cannot charge or apply to seize a member pension in order to satisfy debt owed by the plan member.
However this does not prevent the assignment by court order or settlement upon marriage breakdown.
it does not prohibit the surrender of benefits to avoid revocation of plan registration, nor does it prohibit the distribution of benefits by a deceased lan members legal representative. The government of Canada does have the right to recover taxes owing by attaching the pension owing to member.

Question 15

An RPP may not borrow funds, with two specific exceptions

Answer 15

1- Where the term of the loan does not exceed 90 days and non of the RPPS assets are used as security for the loan. (except if the burrowing is necessary for current payment of benefits or purchase of annuities)
2- Where the burrowed money is uses to acquire real property to earn income from property as Lon as no RPP assets other than real property acquired is used as security for the loan and the loan does not exceed the cost of the property.

Question 16

Identify general ITA requirements regarding employer and employee contributions to RPPs

Answer 16

RPP must be administered to adhere to provisions of the plan text as registered with CRA. Failure to do so with registered plan text places an RPPs registration in a revocable status. Provisions of an RPP must include the designation of a specific administrator that is responsible for the overall operation and admin of the RPP and filling the returns with CRA. The administrator may be a participating employer, a Canadian resident or a group of persons, the majority who resides in Canada. Non-Canadian administrators are permitted with a written permission of the Minister.

Question 17

An RPP must require an employer to contribute with one exception.

Answer 17

Pooled Registered Pension Plan PRPP do not required employer contributions. A plan can be designed that neither required nor permits employee contributions. If employees are required or permitted to contribute, plan documents must contain specific information on the amount and nature of their contributions.

Question 18

How the ITA deals with periods when employees work outside of Canada.

Answer 18

ITA regulations provide tha eligible service includes a period throughout which a member is employed in Canada by, and receives remuneration from a participating employer. Where a member is employed outside of Canada, that period of employment is not eligible unless the Minister of Finance considers it acceptable.

Question 19

If a plan is registered before October 29, 1993, can the pensionable service include those outside of Canada?

Answer 19

Yes, this is a grandfathered rule, that pernsionable service including all se4rvice inside or outside Canada can continue to credit all service outside of Canada.

Question 20

For non grandfathered plans, two circumstances under which periods of foreign service may be eligible se4rvice under a pension plan.

Answer 20

Where the employee services are performed outside Canada under an employment contract with a resident participating employer, providing the member is or has been a resident of Canada,
Or, where the employee renders service outside Canada under an employment contract with a nonresident participation employer a non-participating employer that is connected with a participating employer or a nonparticipating employer that has an arrangement with a participating employer with respect to the emppyees employment outside of Canada.

Question 21

Rules that apply to employer contributions under DC PP under ITA

Answer 21

Unlocated contributions cannot be made. In order to remain registered an employer contributions of a a least 1% ov the active members pensionable earning on a collective basis, must be made. This requirement does not apply to plans that provide a DC or DB benefits.
Employer contributions and earning Theron, forfetigin after 1989 by plan members who terminate employment before vesting must be reallocated to plan members used to pay administrative expenses of the plan, used to satisfy the employers contribution obligations or refunded to the employer before the end of the year following the year of forfeiture. Note that refund ordinarily requires advance approval by the pension regulator in the jurisdiction where the plan is registered.

Question 22

Indicate the maximum benefit accrual rate under a DB pension plan.,

Answer 22

Generally the annual benefit accrual cannot exceed 2% of pensionable earnings. A higher rate can apply for public safety occupations that integrate pension with CPP/QPP.

Question 23

The contributions limits for DC pension and non-pension registered plans.
a) DC plans
b) DPSP plans
c) RRSP plans

Answer 23

a) 18% of compensation of current year, subject to certain dollar limits.
b) 18% compensation in the current year, up 50% of the contribution dollar limit for DC pension plans in the same year.
c) 18% compensation of earned income in the previous calendar year, subject to certain dollar limits.

Question 24

Describe the ceiling on the amount of bridge benefits payable from a DB pension plan when the member;s lifetime pension is not affected.

Answer 24

The maximum amount of period bridge benefit payments is the sum or an estimated amount of the sum of CPP/QPP and OAS benefits the member would be receiving if they were age 65.
If the member who qualifies for a bridge benefit is under 60 the maximum must be reduced by 0.25% per month between the date the bridge benefits commences and the date the member attains age 60.
If the member who qualifies for the bridge benefit has completed less than ten years of pensionable se4rvice, the maximum bridge benefit must be prorated. y the ratio- of the members years of pensionable service to then years.

Question 25

How an employee who is considered permentately disabled man receive their pension from DB pension plan and the limit placed on the amount of pension. An employee who is considered totally and permentatly disabled may either:

Answer 25

A) Continue to receive pension credits in the plan
b) Receive an immediate pension, unreduced by reason of early retirement.
The maximum annual lifetime retirement benefit:
a) The accrued pension at the time of the disability retirement, without reduction for early retirement.
b) The lesse of:
- The projected pension that would have been earned by the plan member under the pension plan had they survived and remained employed to age 65, assuming no increase to pay
- YMPE for th year in which the dislibty pension payment start.

Question 26

Explain the ITA rules for Lump sum settlements after retirement form a DB-RPP.

Answer 26

under ITA a plan may commute all or any portion of their pension from an RPP either before or after the pension commenced. However, the right to commute a pension in pay is also governed by pension standards legisgtaltion and is usually prohibited.

Question 27

Explain the ITA rules for Lump sum settlements after retirement form a DB-RPP.

Answer 27

under ITA a plan may commute all or any portion of their pension from an RPP either before or after the pension commenced. However, the right to commute a pension in pay is also governed by pension standards legisgtaltion and is usually prohibited.

Question 28

On termination of employment before retirement a pension plan may provide a deferred pension or one of the following alternative payments.

Answer 28

a) A refund of employee contributions with interest
b) A refund equal to twice employee contributions with interest, if certain conditions are met
c) A lump-sum payment equal to the value of the pension accrued to the employee at the date of termination of employment.

Question 29

The maximum amount of pension that can be provided in a DB PP

Answer 29

The lifetime pension paid to an employee cannot exceed the lesser of:
a) The defined benefit limit multiplied by the employees years of service (the DB limit is equal to 1/9 of the money purchase limit for the year.)
b) 2% of the employees highest average indexed compensation, multiplied by the employees years of pensionable sera ice.

Question 30

Upon termination of employment, ITA recognized these transfers:

Answer 30

a) A transfer from a DC provision of an RPP to a DC provisions of another RPP or an RRSP or RRIF
b) A transfer from a DC provision of an RPP to a DB provision an RPP
c) A transfer between DB provisions of RPPS
d) A transfer from a DB provision of an RPP to a DC provisions in another RPP or to anRRSP or RRIF

Question 31

IPPS are pension plans containing a DB provision that are established for one person. IPPs ares seen as attractive owners because:

Answer 31

a) Tax deductible contributions may be greater than those available through RRSP contributions and may include large deductible past service contributions
b) Funding requirement relating to past service benefits grow with the age of the participant.
c) Participating in a DB pp can offer creditor proofing an estate planning opportunities.

Question 32

A ¨specified¨individual

Answer 32

is one is who connected at any time with a participating employer, o ran individual who has remuneration in the year form participating employers or there employer not at arms length form these employers that I great than 2.5 times th eYMPE.

Question 33

income tax regulators defined the term ¨connected¨to

Answer 33

A person who des not deal at arms length with the employer meets the ITA definition of ¨specifide shareholder¨or holds 10% or more of the issues shared of any case of shares of the employer alone in in a combination with someone they do not eat with at arms length.