On December 14, 2011 the federal government released for consultation their proposed amendments to the Income Tax Act that would accommodate Pooled Registered Pension Plans (PRPPs). The proposed amendments are welcome as they serve to clarify the taxation of these arrangements which are governed in most other aspects by the proposed provisions of the recently published Pooled Registered Pension Plans Act (not yet adopted). They are all the more welcome as the government has chosen not to apply the cumbersome pension adjustment rules to these arrangements.
At a very high level, the proposed tax rules governing PRPPs are very similar to the rules for RRSPs except employers can contribute directly to a PRPP without requiring employees’ income to be "grossed up" and, upon retirement, the individual can draw annual income from the PRPP rather than having to roll the money into a LIF or RRIF. Both of these distinctions are welcome. Highlights of the announcement are as follows:
- Contributions to PRPPs will be allowed for a given year up to the individual’s RRSP room for that year. It is assumed that the Administrator will need to provide contribution receipts, similar to an RRSP plan as pension adjustments will not be calculated for PRPPs.
- Employer contributions to an employee’s PRPP account are not included in employment income. Therefore, they do not generate payroll taxes as do employer contributions to group RRSPs. For this reason alone, employers who currently make indirect contributions to a group RRSP on behalf of participants may now find PRPPs to be a more attractive vehicle.
- Annual employer contributions to an employee’s PRPP account will be limited to the maximum RRSP dollar limit for that year, unless the employee directs otherwise.
- General rules will apply to ensure that investments are reasonably diversified.
- Transfers between plans (e.g. RRSP to PRPP, defined contribution to PRPP, and vice versa) will be permitted.
- Decumulation options (i.e. ways to cash money out of a PRPP) are provided for under the draft legislation and include the possibility of receiving RRIF-type payments from within the PRPP. This is currently not possible with RRSPs, as an account holder must transfer to a RRIF from age 71.
- The tax rules contemplate the creation of special PRPPs (designated pooled pension plan) that have fewer than 10 participating employers or where more than half the participants work for a single employer. Given the special features of a PRPP, it is possible that some very large employers will wish to establish a designated pooled pension plan for their own employees in lieu of a defined contribution pension plan or a group RRSP. It remains to be seen whether provincial PRPP legislation also allows for the establishment of such plans.
PRPPs are registered plans and, as such, each jurisdiction must enact legislation that would provide the framework (beyond the tax laws) for these vehicles to be established. Some of the provisions prescribed above (e.g. RRIF-like decumulation, designated pooled pension plans) may ultimately not be adopted by the provinces. Currently only the federal government has released proposed PRPP legislation, although Quebec should not be far behind. Employers in these jurisdictions who currently operate group RRSPs should take note given the potential payroll tax savings.