2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

2009 Annual Meeting ● Assemblée annuelle 2009Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse)

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

Individual Pension Plans (IPP) Presentation Summary

• What is an IPP• Special Rules• Background and Context (Chart) • Potential non-compliance under the

ITA• Possible Impacts of Revocation• Federal Court of Appeal Cases• Future of IPPs• Communication objectives

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What is an IPP

• Defined benefit plan with less than 10 members and typically subject to designated plan funding rules (Section 8515 of Income Tax Regulations ITR)

• Designated funding rules apply where plan is primarily for benefit of “specified individuals” (connected persons or individuals earning more than 2 ½ times the YMPE) (Subsection 8515(4) of ITR)

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What is an IPP• IPPs are generally not subject to

provincial benefit standards legislation such as in British Columbia.

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Special Rules for Connected Persons

• Service restrictions on bridging benefits (8503(2)(b)).

• Restrictions on benefits due to total and permanent disability (8503)(3)(d)) and pre-retirement death benefits (8503)(2)(e)).

• Early retirement restrictions (8503(3)(c)).

• Career Average Earnings formula (subparagraph 8504(1)(a)(i)).

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Special Rules for Connected Persons (Continued)

• No defined benefit accruals during periods of disability (8503)(3)(a)(iv) and no accruals during an “eligible period of temporary absence” (8500(1)).

• Cannot “prescribe compensation” under either a DB or MP plan for “eligible periods of reduced pay” as defined in subsection 8500(1).

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Special Rules for Connected Persons (Continued)

• PA and PSPA treatment.

• Funding (8515) and investment restrictions (8514).

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Background and Context

• Prior to 1991, no defined benefit plans could be registered if primarily for “connected persons. A pension plan is considered to be primarily for the benefit of connected persons and/or related persons if the present value of benefits purchased for or accrued to connected persons exceeds 50 per cent of the present value of the total benefits purchased for or accrued to active members under all registered pension plans of the employer. (Information Circular 72-13R8).

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Background and Context

• With Pension Reform, such plans can now be registered, resulting in the growth of IPPs for connected persons in the post-reform years.

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Active IPPs 2000 - 200920

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IPP Growth 2000 - 2009 (DB / MP)

1558 1722 1727

27353125

4470

5719

6988

7808

8366

234

1050 10181300 1294 1318 1311 1301 1299 1340

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Jan-09

Inventory date

Nu

mb

er

of I

PP

s

DB

MP

Potential Non-Compliance Under the ITA

• Primary Purpose (8502(a))

• The primary purpose of the plan must be to provide periodic payments to individuals after retirement and until death in respect of their service as employees.

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Potential Non-Compliance Under the ITA

• Employee/Employer Relationship. The absence of this relationship would result in failure to comply with paragraph 8502(a).

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Potential Non-Compliance Under the ITA

• In many cases, IPPs are established to effect a transfers from other defined benefit plans.

• Transfer DB to DB (subsection 147.3(3)). Transfer DB to MP/RRSP (subsection 147.3(4) up to a prescribed amount section 8517 ITR).

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Potential Non-Compliance Under the ITA

• In some cases, participation within the IPP ends shortly after the funds are transferred from the original defined benefit plan.

• With little or no earnings received by the “member” of the IPP, the assets received from the original plan become surplus within the IPP.

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Potential Non-Compliance Under the ITA

• Only earnings with a participating employer can be used for benefit purposes with a particular registered pension plan.

• A transfer of funds from a defined benefit pension plan of a former employer to an IPP under 147.3(3) does not make the former employer a “participating employer” within the IPP as defined in subsection 147.1(1).

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Potential Non-Compliance Under the ITA

• Permissible contribution rules distinguish between amounts paid by the employer for its employees (8502(b)(iii)) from amounts transferred into the particular plan (8502)(b)(iv)).

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Pension Plan Notice of Intent to Revoke

• If a plan fails to meet the primary purpose test, the plan’s registration would be revoked retroactively to its date of inception.

• The Income Tax Act does not contain any intermediate penalties

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Possible impacts of revocation

• Loss of tax-sheltered status• Contribution deductions may be

denied• Amounts transferred in may be

brought into income• Amount transferred from a

revoked plan to an RRSP are also subject to Part X.1 tax.

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Appeals Heard by the Federal Court of Appeal

• Loba Ltd. (2004 FCA 342)

• Boudreau (2007 FCA 32)

• 1346687 Ontario (2007 FCA 262)

• Jordan Financial (2007 FCA 263)

• Loba (2008 FCA 403)2009

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Future of IPPs

• Expect that number of IPPs will continue to grow

• IPP as a Supplement to other RPP

• Continued Audit Coverage

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Communication Objectives

• RPD give a fulsome front-end review of individual pension plans• validate that the plan meets the primary

purpose test at the time of registration

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Communication Objectives

• CRA web site• Provide clients the opportunity to

subscribe to RPD’s electronic mailing list that will advise when new information is added to the web site

• Improved client service• Client outreach• Publish Newsletters and Bulletins that are

available on RPD’s web site

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RPD – Contact Information

Our Web sitehttp://www.cra-arc.gc.ca/tax/registered/

RPD General Enquiries Phone Lines(613) 954-0419 (English) (613) 954-0930 (French)

1-800-267-3100 (E) 1-800-267-5565 (F)

Jeff Boxer (613)954-0980Jeff.Boxer@cra-arc.gc.ca

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