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Sunday, March 25, 2012

Pooled Registered Pension Plans, Part 2

Pooled Registered Pension Plans, Part 2

Pooled registered pension plans (PRPPs) are intended to provide a new retirement savings option that is attractive to smaller employers and the self-employed. 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) was introduced on November 17, 2011 to implement PRPPs. On December 14, 2011, Finance released income tax legislative proposals for PRPPs that apply to both federally and provincially regulated PRPPs. Last month ("Pooled Registered Pension Plans, Part 1," Canadian Tax Highlights, February 2012) we offered an overview of PRPPs and discussed the tax rules that apply to individual and employer PRPP contributions. This article discusses investments and investment income of a PRPP, payments therefrom, and transfers between a PRPP and other registered retirement plans.

Investments. An administrator is responsible for investing a PRPP's assets. Although the assets are combined for investment purposes, each member has a personal account and, upon enrolling in the plan, can make investment choices from those options offered by the administrator. A member bears the investment risk, just as in any other defined contribution arrangement. Investments in PRPPs need not conform to RRSP "qualified investment" rules, but the investments are subject to restrictions that are intended to prevent an administrator from participating in an arrangement that may be used (1) to circumvent PRPP contribution limits, or (2) in the case of an older individual member, to reduce the value of the PRPP account in order to avoid or lower required RPP payments in retirement. A PRPP must take reasonable precautions to avoid (1) the acquisition of investments in which a member has a significant interest (generally more than 10 percent of a class of a corporation's shares or of a partnership's or trust's units, including interests held by all non-arm's-length parties); and (2) the concentration of more than 10 percent of the plan's assets in one business or non-arm's-length group. A small PRPP (generally, one with fewer than 10 unrelated employers participating) must also avoid holding investments in the participating employers.

Investment income. The investment income earned in a PRPP must be allocated to the member's account annually (or more frequently). The earnings in, as well as the contributions made to, the PRPP are tax-exempt until they are paid out of the PRPP, but that exemption does not extend to income from a business that is carried on by the PRPP.

Payments and transfers during a member's life. Funds in a PRPP are generally covered by locking-in rules similar to those applicable to an RPP. Subject to these rules, payments from a PRPP are generally included in the individual's income and are eligible for the pension tax credit and pension income splitting. Payments made to a non-resident are subject to withholding tax. The existing transfer rules for a defined contribution RPP (governing transfers between an RPP and another RPP, an RRSP, a RRIF, and certain other registered plans) generally apply to a PRPP. Employee and employer contributions to a PRPP (other than certain transfers) must cease by the end of the year in which the member turns 71, at which time the payment options to the member mirror those for a defined contribution RPP. The PRPP funds can be (1) paid as a single, non-periodic payment; (2) used to purchase a life annuity for the member; or (3) paid as variable benefits (RRIF-type payments).

Payments and transfers upon the member's death. Generally, the funds in a PRPP are included in income for the deceased member's last taxation year. However, as indicated in the table, if the deceased had directed that the funds be distributed to a "qualifying person"--a spouse or an infirm dependant--the transfer of funds is tax-deferred or included in the transferee's income.

PRPP Funds
  Tax-deferred transfer?
Fund transfer options Surviving spouse
or common-law
Infirm financially
dependent child
or grandchild
Become a successor member,
assume ownership of PRPP
Yes No
Transfer to one's own RRSP,
Yes Yes
Acquire a qualifying annuity Yes Yes
Transfer to registered disability
savings plan (RDSP) to the extent
of available contribution room
No Yes

Ken Griffin
PricewaterhouseCooopers LLP, Toronto

John Hnatiw
PricewaterhouseCoopers LLP, Mississauga

  Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation

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