PRPP contributions will be made under a member’s available RRSP limit
The federal government has released for consultation a package of draft legislative proposals for changes to the Income Tax Act and the Income Tax Regulations to accommodate pooled registered pension plans (PRPPs).
In December 2010, there was unanimous agreement among provinces, territories and the federal government to move forward with the framework for PRPPs. The rules will set the stage for all provinces to introduce legislation to implement PRPPs, said the government.
PRPPs will be a broad-based, low-cost, defined contribution (DC) pension vehicle that will be available to employers, employees and self-employed individuals.
The PRPP tax rules have been designed to be simple and straightforward and to promote low-cost plans. They will encourage take-up by employers and ultimately, greater pension coverage among Canadians, said the government.
The proposed tax rules for PRPPs will apply to both federally and provincially regulated PRPPs and will operate alongside the Pooled Registered Pension Plans Act.
Some key elements of the proposed PRPP tax rules include:
•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 one year made by and on behalf of a PRPP member will be limited to the member’s available registered retirement savings plan (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.
•Pension payment or decumulation options will be limited to those currently available to defined contribution registered pension plan (RPPs).
•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.
Interested parties may submit comments on the package until Feb. 14, 2012. Comments can be sent to [email protected] or to: