Pooled Registered Pension Plans (PRPP)
In December 2010, Finance Minister Jim Flaherty released the “Framework for Pooled Registered Pension Plans” which proposed to permit defined contribution Pooled Registered Pension Plans (PRPPs). The main purpose of the PRPPs was to increase pension coverage among the 60 per cent of Canadian employees and self-employed individuals who do not participate in an employer- registered pension plan. Recently, the Pooled Registered Pension Plans Act was introduced into legislation.
The proposed tax rules for PRPPs will apply to both federally and provincially regulated PRPPs.
The key elements of the proposed PRPP tax rules are as follows:
· An eligible PRPP administrator will be defined as a corporation resident in Canada that is licensed to administer a PRPP under the PRPP legislation of Canada or the similar legislation of a province.
· There will be no employer-employee relationship required for participation in a PRPP. This will permit employees whose employer has no involvement with a plan, as well as self-employed individuals, to participate in a PRPP.
· Contributions to a PRPP made by employers, employees and self-employed individuals will generally be deductible for tax purposes. All PRPP contributions for a year made by and on behalf of a PRPP member will be limited to the member’s available RRSP contribution limit for the year.
· To help prevent situations where large employer contributions might create over-contributions for a PRPP member in relation to the member’s RRSP limit, annual employer contributions to a PRPP in respect of an employee will be limited to a maximum of the RRSP dollar limit for the year, unless the employee directs the employer to contribute more than this amount.
· Employers will be permitted to make direct contributions to a PRPP in respect of an employee, which will be excluded from salaried compensation (like employer contributions to an RPP). Immediate vesting of employer PRPP contributions will be required. There will be no requirement for an employer to make a minimum contribution to a PRPP. Since PRPP contributions will be made under a member’s available RRSP limit, there will be no requirement for an employer to report pension adjustments in respect of employer and employee contributions, as is required in respect of employer and employee contributions to an RPP.
· There will be no “qualified investment” rules for PRPPs. Instead, some general rules will apply to ensure that investments are reasonably diversified and do not present risks of self-dealing. For large PRPPs, the administrator will be required to avoid intentionally acquiring investments in which a member has a significant interest. They will also be required to take reasonable precautions to avoid concentrating more than 10 per cent of plan assets in a particular business (or non-arm’s length group of businesses). Since there are no legislated restrictions on the size of a PRPP, small PRPPs (generally those with fewer than 10 unrelated employers participating) will be required to comply with these two rules, and to avoid holding investments in participating employers in connection with the PRPP.
· The existing transfer rules for defined contribution RPPs (governing transfers between RPPs and between an RPP and an RRSP, Registered Retirement Income Fund (RRIF)1and certain other registered plans), with some exceptions, will generally apply to a PRPP.
· Pension payment or decumulation options will be limited to those currently available to defined contribution RPPs, such as, the purchase of a life annuity for the member, or the transfer of the member’s PRPP account funds to an RRSP or RRIF.
· A deceased PRPP member’s spouse or common-law partner will be permitted to become a successor PRPP member, taking over ownership of the deceased member’s PRPP account funds and making ongoing decisions in respect of those funds as a member of the plan. Alternatively, a surviving spouse or common-law partner will be permitted to transfer the funds to his or her own RRSP, RRIF, PRPP account or RPP account, or to use the funds to acquire a qualifying annuity.
· In addition, the Goods and Services Tax/Harmonized Sales Tax (GST/HST) rules under the Excise Tax Act will be amended to ensure that PRPPs are subject to the same GST/HST treatment as RPPs. As a result, PRPPs would be treated as investment plans for GST/HST purposes. Also, PRPPs with members resident in an HST province and in at least one other province would generally determine their liability for the provincial component of the HST under the special attribution method for selected listed financial institutions. It is proposed that amendments to the GST/HST rules under the Excise Tax Act be implemented concurrently with the income tax amendments.
It is proposed that these changes come into force at the same time as the PRPP Act. The Government intends to introduce legislation in respect of these proposals at an early opportunity.
Download the full Pooled Registered Pension Plans (PRPP)
