Individual
Pension Plan (IPP) Eligibility
Incorporated
Company / Employment Relationship
Pension is an employment benefit so there must be the employer-employee
relationship between the Company and the IPP member. The pension
plan sponsor should be an incorporated company with employment earnings
paid to the member.
Note that
in addition to the pension plan sponsor, a "predecessor employer"
may also sponsor an IPP. A predecessor employer as defined by Income
Tax Regulation 8500 means, in relation to a particular employer, an
employer (in this definition referred to as the "vendor")
who has sold, assigned or otherwise disposed of all or part of the
vendor's business or undertaking of all or part of the assets of the
vendor's business or undertaking to the particular employer or to
another employer who, at any time after the sale, assignment or other
disposition, becomes a predecessor employer in relation to the particular
employer, where one or more employees of the vendor have, in conjunction
with the sale, assignment or disposition, become employees of the
employer acquiring the business, undertaking or assets.
Past Service
A non-connected person can have past service recognized retroactively
to the date of hire. However, any new pre-1990 past service
recognized is only 2/3 pensionable
(i.e. maximum benefit is capped at 2/3 of the maximum pension limit)
and is subject to the "Proportionality Condition".
Proportionality Condition for pre-1990 past service is outlined in
Registered Plans Directorate's
Newsletter 99-1. The key requirement is that present value
of pre-1990 past service benefits for a pension plan member can not
exceed the present value of benefits accrued after the effective date
of the pension plan. In summary, a defined benefit pension plan
that provides new pre-1990 benefits can no longer provide full benefit
or full funding immediately as a lump sum. The benefits can
only be provided, and their associated funding contributions can only
be made, as a matching contribution to the current service contributions
each year from the effective date of the plan until the pre-1990 past
service liability is fully amortized.
A connected person can only have post-1990 past service benefits after
the incorporation date. A connected person is eligible for pre-1991
past service benefits only if the 50-50
Test can be satisfied.
Please note that there is a maximum of 35 years of pensionable service
under the old pension rules in
Information Circular 72-13R8 that govern pre-reform service.
Therefore, the 35-year service maximum only applies to pre-reform
service. Pre-reform means pre-1991 for new plans and pre-1992
for grandfathered plans.
Post-1989 past service can only be provided if the provisional Past
Service Pension Adjustment (PSPA) is satisfied. It must
be satisfied through one (or a combination) of the following means
before such post-1989 past service benefits can be provided:
-
Approval
by CRA of Form T1004 (Applying
For The Certification Of A Provisional PSPA) filed with them.
CRA will approve the form if the
individual has sufficient unused RRSP room carried forward to
satisfy the PSPA amount. Please note that the individual's
unused RRSP room would be reduced by the PSPA amount upon CRA's
approval; or
-
Transfer
(tax-free) an amount from the pension plan member's RRSP or account
in a Defined Contribution (DC) Pension
Plan to the pension plan that provides the past service benefits.
Such a transfer is commonly referred to as a Qualifying Transfer;
or
-
Withdraw
an amount from the pension plan member's RRSP using CRA
Form T1006 (Designating An RRSP Withdrawal As A Qualifying Withdrawal).
Since
IPPs are tax-driven, most IPP candidates or prospects would more than
likely have made maximum RRSP contributions for prior years.
Provisional PSPA is usually satisfied through a Qualifying Transfer
from RRSP.
Options
if Not Enough RRSP Funds for Qualifying Transfer
Or Not Enough Unused RRSP Room for PSPA Certification
The Past Service Pension Adjustment (PSPA)
requirement must be satisfied in total through one or a combination
of the three options outlined above. If not enough RRSP funds
are available for transfer and/or not enough unused RRSP contribution
room is available to get certification, the options are:
1. Cut back on the post-1989 years recognized for
past service purposes. It is recommended that the more recent
years (e.g. 2002, 2001, etc) be cut, since they generate higher PSPA than earlier years (i.e., 1991, 1992 etc.). Our IPP
On-Line Quoting System©
automatically eliminates the more recent years until the
PSPA can be satisfied. The past service funding amount is also
reduced by the elimination of some past service years.
2. Since the PSPA amount does not change (it is
calculated using actual T4 earnings from prior years), one option
is to leave the RRSP funds in the RRSP to grow until sufficient to satisfy
the PSPA. The liabilities for these years would grow with interest
over time, thus creating higher past service funding in the future.
3. Recognize only a selected number of years (use
up the earlier years first as they are at lower PAs) by meeting the
required qualifying transfer amount from the RRSP. Leave the remaining
RRSP funds to grow until they are sufficient to satisfy the PSPA for
the remaining years. Obviously, the company can do past
service funding for only those years of past service recognized.
Note:
Choosing Option No. 1 above may result in certain years of
past service being "lost" for funding purposes forever
as the PSPA for those years will likely never be satisfied.
Options No. 2 and No. 3 would allow all post-1989 past service
years to be recognized over time. It is up to the individual
to decide whether to use up all the RRSP funds to have immediate
recognition and funding of post-1989 past service or to have
post-1989 past service gradually recognized and funding spread
over time.
Employment Earnings
Section
147.1 of the Income Tax Act defines compensation for pension purposes
as employment earnings that are required to be included in the individual’s
taxable income for the year by Section 5 or 6 of the Income Tax Act.
T4-type earnings such as salaries and wages, bonuses, director's fees,
taxable benefits and allowances, distributions from EPSP (Employee
Profit Sharing Plan) reported on T4, T4PS would be eligible earnings
for pension purposes.
Please note that self-employment earnings (proprietorship) and dividend
income are not pension-eligible. If you are not sure, please
consult an accountant.
