Module 3
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Questions and Answers

What is the primary objective of the current income tax regime governing registered pension and non-pension retirement plans in Canada?

  • Increase government revenue
  • Promote equity in tax assistance for different pension plans (correct)
  • Limit the flexibility in timing of retirement savings
  • Encourage excessive spending

    • Which aspect is NOT a focus of the Income Tax Act (ITA) rules as they apply to registered pension and non-pension registered retirement plans?

  • Enhancing flexibility in timing of retirement savings
  • Introducing inflation-adjusted dollar limits on contributions and benefits
  • Encouraging private retirement savings
  • Promoting excessive spending habits (correct)

    • What is the tax treatment for registered pension plan (RPP) contributions in Canada?

  • Contributions are non-deductible
  • Contributions are taxed at a flat rate
  • Contributions are deductible up to certain limits (correct)
  • Contributions are tax-exempt

    • What is the purpose of introducing inflation-adjusted dollar limits on contributions and benefits in the income tax regime for retirement plans?

    <p>To ensure that contributions and benefits keep pace with inflation</p> Signup and view all the answers

    Why are inequities in tax assistance for different pension plans sought to be eliminated under the current regime?

    <p>To ensure fairness in tax treatment across different plans</p> Signup and view all the answers

    What is the consequence of disregarding the retirement savings limit under the ITA?

    <p>Deregistration of RPP or DPSP</p> Signup and view all the answers

    What is the primary purpose of Pension Adjustments (PAs) as outlined in the text?

    <p>To monitor tax limits for pension plans and calculate RRSP room</p> Signup and view all the answers

    What leads to a reduction in an individual's RRSP contribution room based on Pension Adjustments (PAs)?

    <p>The value of pension benefits earned through employer-sponsored plans</p> Signup and view all the answers

    Why is the 'factor of nine' used to determine Pension Adjustments (PAs) in a DB plan?

    <p>To estimate lifetime pension income</p> Signup and view all the answers

    In a DC pension plan, what components contribute to determining the Pension Adjustment (PA) reported by the employer?

    <p>Employee and employer contributions, as well as reallocated forfeited amounts</p> Signup and view all the answers

    What situation might lead to a Past Service Pension Adjustment (PSPA) being created?

    <p>Changes to pension benefits in a DB plan</p> Signup and view all the answers

    What is the primary purpose of a Registered Pension Plan (RPP) according to the ITA?

    <p>To provide employees with payments post-retirement until their death for their service</p> Signup and view all the answers

    What triggers the creation of a Pension Adjustment Reversal (PAR)?

    <p>When a member's pension adjustment exceeds the value of pension benefits actually received upon termination/retirement</p> Signup and view all the answers

    How are Pension Adjustment Reversals (PARs) beneficial to plan members?

    <p>They restore RRSP contribution room previously reduced due to overstated Pension Adjustments</p> Signup and view all the answers

    What happens if an RPP member simply collects a pension from the plan?

    <p>No Pension Adjustment Reversal is processed</p> Signup and view all the answers

    What are the consequences of noncompliance with the pension plan registration rules set under the ITA?

    <p>Revocation of the plan's registration status</p> Signup and view all the answers

    What is one of the main purposes of a Pension Adjustment Reversal (PAR)?

    <p>To restore RRSP contribution room previously reduced due to overstated Pension Adjustments</p> Signup and view all the answers

    How does the ITA protect members' benefits from most creditors in Registered Pension Plans (RPPs)?

    <p>By forbidding members from transferring or pledging their rights</p> Signup and view all the answers

    What triggers the creation of a Pension Splitting and Prior Service Pension Adjustment (PSPA)?

    <p>'Certification' not required if benefit increases for at least 90% of members and certain conditions are met</p> Signup and view all the answers

    Which statement accurately describes the creation of a PSPA?

    <p>PSPA is created when benefit formula in a Defined Benefit (DB) plan increases after 1989 for past service benefits added.</p> Signup and view all the answers

    What are the general requirements for pension plan administrators to report PSPAs to the CRA?

    <p>'Certification' is required if PSPA exceeds member's unused RRSP contribution room by more than $8,000.</p> Signup and view all the answers

    What is prohibited by ITA rules regarding RPP assets?

    <p>Investing in members' shares or debt</p> Signup and view all the answers

    Which statement regarding employer contributions to RPPs is accurate?

    <p>Employer contributions must be made except for PRPPs</p> Signup and view all the answers

    What is a requirement for borrowing under RPPs for real estate investment?

    <p>Using RPP assets as security</p> Signup and view all the answers

    What happens to forfeited employer contributions from members who leave before vesting since 1989?

    <p>Used to fulfill the employer's contribution duties</p> Signup and view all the answers

    Under a DB pension plan, what is the maximum benefit accrual rate?

    <p>2% of pensionable earnings</p> Signup and view all the answers

    What happens if employer contributions are unallocated under DC pension plans?

    <p>Unallocated contributions are not allowed</p> Signup and view all the answers

    In what situation can employees borrow under RPPs without using assets as security?

    <p>Only for short-term loans under 90 days</p> Signup and view all the answers

    What is the requirement for employers to keep their DC pension plans registered?

    <p>Contribute at least 1% of members' earnings collectively</p> Signup and view all the answers

    What reduction applies to the maximum bridge benefits if a member is under 60?

    <p>0.25% for each month until 60</p> Signup and view all the answers

    What is the limit on the maximum annual lifetime retirement benefit for a disabled DB plan member?

    <p>Accrued pension at disability retirement</p> Signup and view all the answers

    Which type of transfer of commuted value lump sum is NOT recognized under ITA upon termination of employment?

    <p>From DC plan to DB plan within the same retirement plan</p> Signup and view all the answers

    What is one primary reason that IPPs are seen as attractive retirement plans for business owners?

    <p>Can help with estate planning and are tax-deductible</p> Signup and view all the answers

    What specific ITA rules target IPPs to restrict benefits that may be paid to connected participants?

    <p>Rules on benefit restrictions</p> Signup and view all the answers

    What is one common option for disabled employees in a DB pension plan in terms of their pension credits?

    <p>'Choose an immediate, unreduced pension' and continue pension credits</p> Signup and view all the answers

    'Deferred pension' is one of the options for members of a DB pension plan upon termination before retirement. What does this option entail?

    <p>Postponing receipt of pension benefits until a later date</p> Signup and view all the answers

    What happens to the maximum bridge benefits if a member has less than ten years of pensionable service?

    <p>The benefit is prorated based on their years of service compared to ten years.</p> Signup and view all the answers

    An employee who is under 60 will have the maximum bridge benefits reduced by 0.25% for each month until they reach 60.

    <p>True</p> Signup and view all the answers

    If an individual has less than ten years of pensionable service, the maximum pension benefit is prorated based on their years of service compared to twenty years.

    <p>False</p> Signup and view all the answers

    The maximum annual lifetime retirement benefit for a disabled DB plan member is equal to the greater of accrued pension at disability retirement or projected pension if the member worked until age 70 with no pay increase.

    <p>False</p> Signup and view all the answers

    The maximum lifetime pension in a DB pension plan cannot exceed the lesser of defined benefit limit multiplied by years of service or 2% of highest average indexed compensation multiplied by years of pensionable service.

    <p>True</p> Signup and view all the answers

    Individuals leaving a job can transfer the commuted value lump sum from a DB plan to a DC plan within the same retirement plan.

    <p>True</p> Signup and view all the answers

    IPP stands for Individual Pension Plan and is mainly targeted by tax rules that restrict contributions that may be made to the plan.

    <p>False</p> Signup and view all the answers

    IPP is usually considered a designated plan if it is an RPP with a DC provision where certain individuals have more than 50% of all DC pension credits.

    <p>False</p> Signup and view all the answers

    Contributions to IPPs are tax-deductible and there are no restrictions on the amount that can be contributed.

    <p>False</p> Signup and view all the answers

    IPP can be more attractive for business owners as they allow for funding requirements to decrease as the participant ages.

    <p>False</p> Signup and view all the answers

    Lump-sum settlements after retirement from a DB-RPP are typically allowed to commute pensions already in pay according to ITA rules.

    <p>False</p> Signup and view all the answers

    Study Notes

    Stated Objectives for the Current Income Tax Regime

    • The government's objectives for creating the Income Tax Act (ITA) include:
    • Encouraging private retirement savings
    • Eliminating inequities in tax assistance for different pension plans
    • Enhancing flexibility in timing of retirement savings
    • Introducing inflation-adjusted dollar limits on contributions and benefits

    Taxation Rules for Registered Pension Plans

    • Contributions:

    • RPP contributions are deductible to certain limits

    • Example: If an individual earns $50,000 annually and contributes $5,000 to their RPP, their taxable income for the year is $45,000

    • DB-specific employer contribution rules:

      • Must be supported by actuarial valuation
      • Tax deductible within a tax year or 120 days past it

    • DC-specific employer contribution rules:

      • Tax deductible if made according to RP rules

    • Employee contributions are tax deductible in the year made

    • Benefits:

    • Pension benefits are fully taxable when paid directly to employees

    • Individuals aged 65+ are eligible for a federal tax credit on pension income, up to $300

    • Individuals under 65 are eligible for a similar tax credit on income from plans due to spouse or partner's death

    • Investment Income and Capital Gains:

    • Not taxable

    Comprehensive Limit for Retirement Savings

    • The comprehensive savings limit is based on the principle that the availability of tax assistance should be the same for all individuals with the same income
    • Savings limit is equal to 18% of the member's compensation, up to a dollar maximum called the "money purchase limit"
    • Disregarding the limit leads to deregistration of RPP/DPSP under ITA and a penalty tax for RRSP

    Pension Adjustments (PAs)

    • Used by the CRA to monitor tax limits for pension plans/DPSPs and calculate RRSP room for the next year
    • Impact an individual's RRSP contribution room by reducing it based on the value of pension benefits earned through participation in employer-sponsored plans like RPPs or DPSPs
    • Employer steps when reporting PAs to the CRA:
    • Determine each employee's benefit accrual in the pension plan
    • Calculate the dollar value of the benefit accrual
    • Report pension credits as a Pension Adjustment on the T4 slip
    • Total pension credits from all plans if the employee participates in multiple plans

    Factor of Nine

    • The factor of nine is used to estimate the approximate value of lifetime pension income in a DB plan
    • Standardized factor chosen by the Department of Finance
    • Used universally for determining the PA under all DB plans
    • PA formula is based on benefit accrual, considering only current year earnings
    • Calculation treats all plans similarly, potentially overestimating the value of tax assistance

    Determining Pension Adjustments

    • DC Plan: employer's contributions + employee contributions + reallocated forfeited amounts
    • DPSP: similar to DC plan (except no employee contributions)
    • DB Plan: 9 x benefit accrual for the year - $600

    Past Service Pension Adjustment (PSPA)

    • Used to adjust retirement savings limits when a DB plan increases benefits for past years of service
    • Without PSPA, members may exceed the ITA limit
    • PSPA is created if:
    • Benefit formula in DB plan increases after 1989
    • Past service benefits are added
    • PSPA is not created if:
    • Ancillary benefits improve pensions for service before 1990
    • Pensions are upgraded for service before 1990

    Pension Adjustment Reversals (PARs)

    • Used when the Pension Adjustment previously reported exceeds the value of pension benefits actually received by the member upon termination/retirement
    • Helps restore RRSP contribution room that was previously reduced due to an overstated PA
    • Addresses the overstatement of PAs in two cases:
    • DB Plan: "factor of nine" overstates pension credits
    • Terminated members are not fully vested, but historical PAs assumed full vesting

    RRSP Contribution Room

    • Calculated by considering:
    • Annual contribution limit (18% of earned income, subject to a maximum amount)
    • Unused contribution room for previous years (can be carried forward)
    • Pension adjustments (can reduce RRSP contribution room)

    ITA Registration Rules and Contribution Limits

    • Registration rules:
    • CRA requires registration under ITA and under provincial/federal PSL
    • Each province (except PEI) has its own laws for non-federal industries
    • Retroactive registration allowed with the same calendar year effective date
    • Consequences of noncompliance:
    • Plan's registration status being revoked
    • If registration is revoked, the arrangement is considered an RCA (Retirement Compensation Arrangement) from the date of revocation

    Primary Purpose of an RPP

    • The primary purpose of an RPP is to provide employees with payments post-retirement until death for their service
    • Pensions must be lifelong, equal payments, unless adjusted for inflation or reduced after member/spouse death

    Protection of Members' Benefits

    • RPPs must forbid members from transferring or pledging rights
    • Members cannot surrender or forfeit rights voluntarily
    • Creditors cannot seize rights for a member's debt
    • Exceptions for court orders, settlement agreements in relationship breakdown
    • Government has the right to recover debts owed by attaching owed pension### Retirement Savings and Pension Plans
    • An individual's taxable income can be reduced by contributing to a Registered Pension Plan (RPP), with a tax deductible contribution of $5,000 in a given year.
    • Pension benefits are fully taxable when paid directly to employees, but individuals aged 65+ are eligible for a federal tax credit of up to $300.

    Comprehensive Limit for Retirement Savings

    • The comprehensive savings limit is based on the principle that tax assistance should be the same for all individuals with the same income.
    • The savings limit is equal to 18% of the member's compensation, up to a maximum dollar limit (known as the "money purchase limit").
    • Failure to respect the limit can lead to deregistration of the RPP or penalty tax for RRSPs.

    Pension Adjustments (PAs)

    • Pension Adjustments are used to monitor tax limits for pension plans and calculate RRSP room for the next year.
    • PAs reduce an individual's RRSP contribution room based on the value of pension benefits earned through participation in employer-sponsored plans.
    • Employers must report PAs to the CRA and ensure that the PA doesn't exceed the money purchase limit.

    Factor of Nine

    • The factor of nine is used to estimate the approximate value of lifetime pension income in a DB pension plan.
    • The standardized factor is used universally for determining PAs under all DB plans, which can lead to overstated PAs and reduced RRSP contribution room.

    Determining Pension Adjustments

    • For DC plans, the PA is the sum of employer contributions, employee contributions, and reallocated forfeited amounts.
    • For DB plans, the PA is 9 times the benefit accrual for the year, minus $600.
    • For DPSPs, the PA is similar to DC plans, except there are no employee contributions.

    Past Service Pension Adjustments (PSPAs)

    • PSPAs are used to adjust retirement savings limits when a DB plan increases benefits for past years of service.
    • PSPAs are created when the benefit formula in a DB plan increases after 1989, or when past service benefits are added.
    • PSPAs are not created when ancillary benefits are improved for service before 1990 or pensions are upgraded.

    Pension Adjustment Reversals (PARs)

    • PARs are used to restore RRSP contribution room that was previously reduced due to overstated PAs.
    • PARs are used when a member's pension benefit is less than the cumulative PAs and PSPAs reported.

    RRSP Contribution Room

    • The RRSP contribution room is calculated based on the annual contribution limit, unused contribution room from previous years, and pension adjustments.
    • The annual contribution limit is 18% of earned income, subject to a maximum amount.

    ITA Registration Rules and Contribution Limits

    • The CRA requires registration of pension plans under the ITA, with each province having its own laws for non-federal industries.
    • Retroactive registration is allowed with a same calendar year effective date.
    • Noncompliance with registration rules can lead to revocation of the plan's registration status.

    RPPs and ITA

    • The primary purpose of an RPP is to provide employees with payments post-retirement until death for their service.
    • RPPs must forbid members from transferring or pledging rights, and members cannot surrender or forfeit rights voluntarily.

    Assets and Investments

    • RPPs must follow minimum investment standards of applicable PSL jurisdictions.
    • ITA rules prohibit RPP assets from being invested in members' shares or debt, with certain exceptions.
    • RPPs can't borrow, except for short-term loans or borrowing for real estate investment.

    Employer and Employee Contributions

    • Employer contributions must follow the plan text, and failure to do so can lead to revocation of the plan's registration status.
    • Employee contributions can be designed without employee contributions, but specifics must be included in the plan documents.

    Working Outside of Canada

    • Employment outside of Canada requires Minister of Finance approval.
    • Pre-1993 plans credit all service, regardless of location.
    • Foreign service is eligible under specific conditions, and DC contributions can be made with CRA consent.

    DC Pension Plans

    • Employer contributions must be specific to certain employees and allocated accordingly.
    • Contributions can't be made if surplus is not assigned to employees.
    • Forfeited employer contributions and their earnings from members who leave before vesting must be reallocated, used for plan expenses, or refunded to the employer.

    DB Pension Plans

    • The maximum benefit accrual rate is 2% of pensionable earnings.
    • Bridge benefits are payable from a DB pension plan, with a maximum based on estimated CPP/QPP and OAS benefits.

    Disabled Employees

    • Disabled employees can receive their pension from a DB pension plan, with a maximum annual lifetime retirement benefit.
    • The maximum benefit is based on the accrued pension at disability retirement, or the lesser of the projected pension if the member worked until age 65, or the YMPE at disability pension start.

    Lump-Sum Settlements

    • Plan members can commute pension from an RPP before or after commencing, as per ITA.
    • PSL typically prohibits commuting pension already in pay.

    Termination of Employment

    • On termination, plan members can choose from a deferred pension, refund of employee contributions with interest, or a lump sum payment.
    • The maximum amount of pension that can be provided in a DB pension plan is based on the defined benefit limit, or 2% of the highest average indexed compensation multiplied by years of pensionable service.

    Individual Pension Plans (IPPs)

    • IPPs are pension plans for one person with a DB provision.
    • Business owners find IPPs attractive because contributions are tax-deductible, and can be more than RRSP contributions, including past service contributions.
    • The ITA rules restrict benefits and contributions to IPPs, and are used to determine whether an IPP is a designated plan.

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