Conditions Applied to Designated and Individual Pension Plans
In this blog, our chartered accountants in Edmonton outline two conditions that are being applied to designated plans, individual pension plans (IPPs) and registered pension plans (RPPs) under the Income Tax Act’s subsection 147.1(5).
Condition 1: Excess surplus
In Income Tax Act’s paragraph 147.2(2)(d), there’s a surplus limit on the actuarial surplus in an RPP’s established benefit provision, above which an employer wouldn’t be allowed to contribute further. Effectively, this entails the employer to cover its existing service costs by using excess surplus after taking a contribution holiday.
However, certain employers sponsoring designated plans and IPPs with excess surplus try to bypass this restriction. They do this by suspending defined benefit accruals for members by making amendments in the plan while adding a money purchase provision to which the employer would be able to contribute for the members.
However, the CRA (Canada Revenue Agency) does not consider this plan design to be alright because they misuse the Income Tax Act’s RPP provisions. Why? Because it enables unending tax-deductible contributions while building up or preserving the surplus.
Consequently, when an excess surplus is present under a plan’s defined benefit provision, any required contributions to the money purchase provision of a plan are allowed only if they’re created from the surplus. The Income Tax Act’s subsection 147.3(4.1.) and Regulations’ paragraph 8502(k) allows this type of transfer. The amounts allocated to the money purchase accounts of members are subject to the pension adjustment limit in the Income Tax Act’s subsection 147.1(8).
Condition 2: Designated plan funding restrictions
Under subsection 147.1(5) of the Income Tax Act, we impose the following condition:
An RPP will be a designated plan across a calendar year for the conditions in section 8515 of the Regulations and 147.2(2) of the Income Tax Act when the plan:
1.Would be a designated plan across the calendar year if the references in the Regulations’ paragraphs 8515(1)(a) and (b) to the plan’s established benefit provision were read as references to an established money purchase provision or benefit of the plan.
2.Offers past service benefits under an established benefit provision in a previous year or the year for specified individuals (see Regulations’ subsection 8515(4)).
Due to Regulations’ subsection 8515(2), such a plan will remain a designated plan in upcoming calendar years unless the Minister waives it.
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