Maximum
Transfer Limit
Maximum Transfer
Amount
From A Defined Benefit Provision Of A Registered Pension Plan
Income
Tax Act And Regulations
Any
transfer from a defined benefit provision of a registered
pension plan must be in accordance with subsection 147.3(4)
of the Income Tax Act.
The
necessary conditions are:
a)
the amount does not relate to an actuarial surplus,
b)
the amount is transferred on behalf of a member in full
or partial satisfaction of benefits to which the member
is entitled, either absolutely or contingently, under a
defined benefit provision of the plan as registered,
c)
the amount does not exceed a prescribed amount (as specified
in Income Tax Regulation 8517); and
d)
the amount is transferred directly to
i)
a money purchase provision of a registered pension plan,
ii)
a registered retirement savings plan (RRSP), or
iii)
a registered retirement income fund (RRIF).
Subsection
147.3(4) is applicable to transfers occurring after 1988
except that the direct transfer to a RRIF as outlined in
d) iii) above was not available until August 30, 1990.
Maximum
Transfer Amount
The
maximum transfer amount is prescribed in Income Tax Regulation
8517 by the formula A x B:
where
A is
the amount of the individual’s lifetime retirement benefits
under the defined benefit provision commuted in connection
with the transfer, and
B is
the present value factor that corresponds to the age attained
by the individual at the time of the transfer, determined
pursuant to the following table:
Attained
Age |
Present Value Factor |
Attained
Age |
Present
Value Factor |
Under
50 |
9.0 |
73 |
9.8 |
50 |
9.4 |
74 |
9.4 |
51 |
9.6 |
75 |
9.1 |
52 |
9.8 |
76 |
8.7 |
53 |
10.0 |
77 |
8.4 |
54 |
10.2 |
78 |
8.0 |
55 |
10.4 |
79 |
7.7 |
56 |
10.6 |
80 |
7.3 |
57 |
10.8 |
81 |
7.0 |
58 |
11.0 |
82 |
6.7 |
59 |
11.3 |
83 |
6.4 |
60 |
11.5 |
84 |
6.1 |
61 |
11.7 |
85 |
5.8 |
62 |
12.0 |
86 |
5.5 |
63 |
12.2 |
87 |
5.2 |
64 |
12.4 |
88 |
4.9 |
65 |
12.4 |
89 |
4.7 |
66 |
12.0 |
90 |
4.4 |
67 |
11.7 |
91 |
4.2 |
68 |
11.3 |
92 |
3.9 |
69 |
11.0 |
93 |
3.7 |
70 |
10.6 |
94 |
3.5 |
71 |
10.3 |
95 |
3.2 |
72 |
10.1 |
96
or over |
3.0 |
For
non-integral ages, the present value factor is to be determined by
interpolation. The amount of lifetime retirement benefits is
an annual amount which is determined as a “normalized” pension by
making minor technical adjustments with respect to features such as
form of pension, pension commencement date, early retirement reduction,
etc. as described in Income Tax Regulation 8517.
Example
A
51.5 year old defined benefit pension plan member is entitled
to a lifetime pension of $12,000 per year ($1,000 per month)
at age 65. The maximum amount that the member can transfer
out of the plan is $116,400. This amount is calculated
by multiplying the annual pension amount of $12,000 by the
interpolated present value factor of 9.7 for age 51.5.
Excess
Amount
If
the commuted value of the member’s entitlements exceeds the
maximum transfer amount, the excess amount can be:
-
taken in cash subject to the locking-in provision under
applicable pension legislation.
-
transferred to a registered retirement savings plan (RRSP)
provided the member has room to make an RRSP contribution
for the year either through current year contribution limit
or unused RRSP room carried forward from prior years.
The member will be issued a T4A for the excess amount to
be included as income. The transaction is tax neutral
since the member can claim an equivalent amount of deduction
as an RRSP contribution.
-
for early retirement prior to age 65, left in the plan to
provide a lifetime pension and/or bridge benefits the amounts
of which are determined in accordance with the benefit formula
of the plan, or
-
for early retirement prior to age 65, paid to an insurance
company to purchase a lifetime pension and/or bridge benefits
the amounts of which are determined in accordance with the
benefit formula of the plan.
Summary
And Comments
Under
most circumstances, the commuted value of a defined benefit
pension amount is calculated in accordance with the Canadian
Institute of Actuaries’ (CIA) Recommendations For The Computation
Of Transfer Values From Registered Pension Plans. The
maximum transfer rule is usually not applicable unless the
pension benefits are relatively rich and generous as in shareholder/executive
types of plans such that the commuted value exceeds the maximum
transfer amount.
Since
there is no similar maximum transfer rule applicable to transfers
between two defined benefit provisions, it has been suggested
by some pension practitioners that implementing another defined
benefit plan through a pension plan member’s own incorporated
company will circumvent the maximum transfer rule. The
key considerations would then be:
-
does the benefit of the additional tax deferral achieved
by such a manoeuvre justify the costs of implementing and
maintaining a plan?
-
is the company going to be generating sufficient revenue
for the member to be paid an employment income and for the
company to make ongoing pension contributions? Canada
Customs and Revenue Agency may decline registration of the
new plan if it is perceived to be a “shell” plan.
