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Monday, February 27, 2012

Pooled Registered Pension Plans, Part 1

Pooled Registered Pension Plans, Part 1

On November 17, 2011, the federal government introduced Bill C-25, An Act Relating to Pooled Registered Pension Plans and Making Related Amendments to Other Acts (also referred to as the Pooled Registered Pension Plans Act). Bill C-25 establishes a regulatory framework for a federal pooled registered pension plan (PRPP), a voluntary savings plan aimed at individuals who do not have access to an employer-sponsored pension plan.

A PRPP is administered by a regulated financial institution, and thus reduces the cost and complexity to a small employer of offering its employees a retirement savings plan. A PRPP is intended to be used by self-employed individuals and by employees of small and medium-sized employers that do not currently offer their employees an RPP. The Pooled Registered Pension Plans Act applies to employees of an employer that participates in a PRPP and falls within the legislative authority of the federal government, including an employer carrying on business in interprovincial transportation, banking, or telecommunication. The act also applies to persons who are self-employed or employed in Yukon, the Northwest Territories, or Nunavut. Each province must introduce its own enabling legislation in order to authorize the implementation of provincial PRPPs.

On December 14, 2011, Finance released income tax legislative proposals that are applicable to both federally and provincially regulated PRPPs; public comments were due on February 14, 2012. The proposals come into force at the same time as the Pooled Registered Pension Plans Act. This article provides an overview of the tax rules for PRPPs and discusses the rules for individual and employer PRPP contributions. A future article will discuss investments and investment income of PRPPs, payments from PRPPs, and transfers to and from PRPPs and other registered retirement plans.

Overview. The tax rules for PRPPs are meant to complement the existing RPP and RRSP framework and operate in a manner similar to multi-employer money purchase RPPs. Like an RRSP, a PRPP is available from a financial institution or a public pension fund, which administers the plan: a PRPP is thus intended to allow more people to benefit from the lower investment management costs that result from membership in a larger, pooled pension plan. A single and separate account must be maintained for each PRPP member. The key features of a PRPP are as follows:

  1. an individual member can have a PRPP regardless of employment status;

  2. an employer is not required to but may contribute to an employee's PRPP;

  3. PRPP contributions made by the member and the employer are deductible within limits;

  4. combined PRPP and RRSP contributions by the member and the employer cannot exceed the individual's RRSP deduction limit;

  5. investment income earned within a PRPP and contributions made to it are tax-sheltered until they are paid out of the PRPP;

  6. payments of non-locked-in funds are taxable to the member; and

  7. the transfer rules for a defined contribution RPP generally apply to a PRPP.

Contributions. PRPP contribution rates are set by the administrator, but each employee retains the option to set his or her contribution rate to 0 percent at any time. Any contribution is subject to applicable federal or provincial locking-in rules and can be made by an individual member (employed or self-employed) and by an employer, but no contributions (other than certain transfers) can be made after the year in which the member turns 71. An employee can contribute even if his or her employer is not involved with the PRPP. If the employer is involved with the PRPP, the employee is not required to become a member, but is automatically enrolled in a plan chosen by the employer and has 60 days to opt out. An employer that chooses to offer a PRPP to its employees is responsible for selecting the PRPP and enrolling its employees, and it must deduct the members' contributions from their remuneration. Presumably, self-employed individuals and employees of an employer that does not offer a PRPP are responsible for choosing a PRPP and remitting contributions to the plan.

Contribution limit. The total of the individual's and employer's contributions to a PRPP for a year are linked to the individual's available RRSP contribution limit for that year, including any unused contribution room from previous years. Any contribution that exceeds this limit--except for certain non-discretionary contributions made by the employer--may result in a monthly penalty tax to the individual equal to 1 percent of the individual's month-end excess. All contributions made in a year by the individual and the employer reduce the individual's RRSP contribution room for that year and future years. Employer contributions made in the year also reduce the individual's ability to make deductible PRPP contributions in that year and later years. In contrast to an RPP, employee and employer contributions are not subject to reporting of pension adjustments.

Individual contributions. The contribution deadlines for claiming a deduction in a calendar year parallel the RRSP rules: an individual must make PRPP contributions no later than 60 days after the calendar year-end (March 1--February 29 in a leap year--or the first subsequent weekday if the deadline falls on a weekend). An individual's contributions to a PRPP are treated as RRSP contributions for the purpose of determining the deductibility of total PRPP and RRSP contributions for the year. An individual can claim a deduction for certain transfers to a PRPP, including transfers of retiring allowances, and can designate payments to a PRPP as repayments of amounts withdrawn under the home buyers' plan or the lifelong learning plan, within specified limits.

Employer contributions. An employer can but is not required to contribute to an employee's PRPP. Employer contributions are excluded from salaried compensation and are therefore not taxable to the employee. For example, employer contributions are not subject to CPP/QPP or EI withholdings. Employer contributions must vest immediately and indefeasibly. In order to claim a deduction in a taxation year, an employer must make PRPP contributions with respect to employee service provided in that year no later than 120 days after the end of the year (as is the case with RPPs). To help reduce the possibility of overcontributions, unless the employee directs otherwise, the maximum employer contribution is equal to the employee's RRSP dollar limit for the year (not including unused amounts from previous years).

Ken Griffin
PricewaterhouseCoopers LLP, Toronto

John Hnatiw
PricewaterhouseCoopers LLP, Mississauga

  Canadian Tax Highlights
Volume 20, Number 2, February 2012
©2012, Canadian Tax Foundation


IRS PTIN a Barrier for Canadian Preparers

Canadian professionals who want to prepare US tax returns for clients should keep in mind that paid preparers of most US tax returns must obtain a preparer tax identification number (PTIN) from the IRS. Except in limited cases, only a US attorney, a licensed certified public accountant (CPA), an enrolled agent (EA) who is qualified to practise before the IRS, and a registered tax return preparer (RTRP) can obtain a PTIN. A foreign professional such as a Canadian lawyer, a chartered accountant, a certified general accountant, or a certified management accountant can obtain a PTIN, but he or she may first have to obtain a qualifying US designation such as CPA or become an RTRP by passing certain competency examinations and satisfying continuing education requirements.

Provisional PTIN. Until at least April 18, 2012, the IRS will issue a provisional PTIN to a paid preparer who does not have the qualifying US designation required to otherwise obtain a PTIN. The IRS will announce the last date on which it will issue provisional PTINs in a news release that will be published at least 30 days before that date. A provisional PTIN will be accepted by the IRS until December 31, 2013 so long as it is renewed annually without lapse. If a provisional PTIN expires after April 18, 2012, the holder can obtain another PTIN only if he or she becomes an RTRP or obtains a suitable US designation. A provisional PTIN holder must meet the RTRP continuing education requirements. Each PTIN must be renewed for the next subsequent year by December 31 of the current year.

Regular PTIN. A US attorney, a licensed CPA, an EA, and any other qualified professional who can practise before the IRS are exempt from both the IRS competency examination and continuing education requirements and can thus obtain a PTIN with relative ease. A licensed CPA has no restrictions as to the taxpayers that he or she can represent, the types of tax matters that he or she can handle, and which IRS offices he or she can practise before.

A licensed CPA must pass the CPA examination and satisfy minimum education and experience requirements that vary from state to state. Some states, including Illinois, have two-tier CPA designations: a person can pass the CPA examination and obtain the CPA designation, but to become licensed he or she must meet minimum education and experience requirements. It is not uncommon for a US tax return preparer in Canada to hold an unlicensed Illinois CPA designation, but that is not adequate for the purposes of practising before the IRS or of obtaining more than a provisional PTIN.

A holder of the Canadian CA designation can write the international qualification examination (IQEX), commonly known as the CA-CPA reciprocity exam. This one-day multiple choice exam focuses on differences between US and Canadian rules and assumes a basic knowledge of the areas where the rules coincide. IQEX is offered in all major cities in Canada. A new IQEX format is pending in 2012. Once successful, an IQEX candidate must satisfy other education and experience requirements set by the state in which he or she applies to become a licensed CPA; a CA who passes the IQEX may be able to satisfy the licensing requirements in only a handful of states.

An RTRP, who may also obtain a PTIN, is a return preparer who passes a series of IRS competency examinations and complies with annual continuing education requirements. The first competency examination covering US individual income tax returns was offered late in 2011. An RTRP must complete a minimum of 15 hours of continuing education credits during each calendar year in which he or she is registered; even so, he or she has a more limited ability than other qualified professionals to practise before the IRS.

Supervised PTIN. An exception is made in IRS Notice 2011-6 (2011 3 IRB 315) for a "supervised PTIN." That notice says that certain individuals who are not attorneys, licensed CPAs, EAs, or RTRPs can obtain a PTIN in limited circumstances. As a practical matter, the exception may be difficult to exercise in Canada. The IRS permits an individual to obtain a PTIN if he or she is supervised by an attorney, licensed CPA, EA, enrolled retirement plan agent, or enrolled actuary authorized to practise before the IRS, provided that the supervisor will sign all returns and refund claims that are prepared by the individual. In addition, the individual and the supervisor must be employed at the same law firm, CPA firm, or other recognized firm.

For the purposes of this exception, a law firm or a CPA firm is a partnership, professional corporation, sole proprietorship, or any other association authorized to practise in a state, territory, or possession of the United States or the District of Columbia. A recognized firm--other than a law firm or CPA firm as defined--has one or more employees lawfully engaged in practice before the IRS. However, any law firm, CPA firm, or other recognized firm must be at least 80 percent owned by one or more attorneys, licensed CPAs, EAs, enrolled actuaries, or enrolled retirement plan agents who are authorized to practise before the IRS. Thus, a Canadian law or CA firm does not appear to satisfy the practice and ownership requirements of the supervised PTIN exception. As a result, only a regular or provisional PTIN, but not a supervised PTIN, should be available to a US tax return preparer in Canada.

The IRS further understands that an individual should not be required, as a condition of obtaining a PTIN, to pass a competency examination that covers tax returns and refund claims that are not prepared by the individual. At present, the competency examination covers only individual income tax returns. An individual can obtain a PTIN without taking a competency examination if the individual certifies that he or she does not prepare or assist in the preparation of all or substantially all of any tax return or refund claim that is covered by the competency examinations for an RTRP. The individual is also exempt from the continuing education requirements, although other restrictions apply.

Future PTIN applicants may be required to be fingerprinted as part of a background check. Exemption from fingerprinting will be extended to an attorney, a CPA, an EA, an enrolled retirement plan agent, and an enrolled actuary, and to a PTIN holder who resides and is employed outside the United States. Procedures to facilitate fingerprinting will not be implemented until at least April 18, 2012; the IRS will announce, at least 30 days before the date, the last date on which an individual may receive a PTIN without first being fingerprinted. An individual who obtains a PTIN before the date announced in the news release and who continually maintains the PTIN will not be required to be fingerprinted until December 31, 2013. Thereafter, unless an exemption applies, fingerprinting and background checks will be required in order to renew a PTIN.

Jeffrey Brown
KPMG LLP, Hamilton

Annie Long
KPMG LLP, Vancouver

  Canadian Tax Highlights
Volume 20, Number 2, February 2012
©2012, Canadian Tax Foundation