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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