RPP Practitioners' Forum - Questions from the Industry
June 2 ,2009

Questions and Answers - Archive

The following publications are archived and kept for historical purposes. Caution should be used when referring to these documents, as they may not reflect the law or policy currently in force. If you have any interpretative questions about the current law or policy, contact the Registered Plans Directorate by phone at (613) 954-0419. Also, see our list of current questions and answers RPP Practitioners' Forum - Questions from the Industry (June 2, 2009).

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Question 2 - Annuity purchase treated as a transfer under the Income Tax Act

Provincial legislation requires that on termination of employment, the member may require the administrator to pay an amount equal to the commuted value for the purchase of a life annuity, as referenced in the Ontario's Pension Benefits Act (PBA) subsections 42(1) and (2). Section 147.4 of the Income Tax Act (Act) permits the acquisition of an interest in an annuity contract with assets from a registered pension plan (RPP) without any immediate tax consequences to the affected individual. One of the conditions stated in subsection 147.4(1) of the Act is the requirement that the rights provided under the annuity contract must not be "materially different" from those provided under the RPP. The Act also provides for the transfer of commuted values under subsection 147.3(4) of the Act, which is limited by the prescribed amount in section 8517 of the Income Tax Regulations (Regulations).

Can a member proceed as if they had received a transfer of their commuted value, limited by section 8517 of the Regulations, and use this amount to purchase an annuity not regulated by subsection 147.4(1) of the Act?

Should the CRA require the phrase "materially different" of section 147.4 (1) of the Act to be applied to an annuity purchased using the commuted value, as described above, and as these terms require a certain amount of judgment (as indicated in CRA's response in an earlier RPP Consultation Session - 2003 - item 9 ), are each of these annuity purchases to be sent to CRA for approval? Can the CRA provide guidelines to what they consider "materially different"?

Answer 2

First, if a member wishes to purchase an annuity and reconfigure the benefits provided for in the plan, he will have to transfer the benefit under subsection 147.3(4) of the Act to a registered retirement savings plan (RRSP). Then, the individual may purchase an annuity under subsection 146(1) of the Act, without regard to the benefit provided for under the RPP. Subsection 147.3(4) of the Act, in conjunction with section 8517 of the Regulations, is used to determine the maximum tax free transfer of an amount from a defined benefit provision of an RPP to an RRSP or a registered retirement income fund (RRIF). It does not permit the amount to be used to purchase an annuity.

Therefore, a member cannot proceed as if they had received a transfer of their commuted value, limited by section 8517 of the Regulations, and use this amount to purchase an annuity not regulated by subsection 147.4(1) of the Act. If a member chooses to use their benefit entitlement provided for under the RPP to purchase an annuity, the annuity must be limited by the conditions set out under subsection 147.4(1) of the Act.

There is no provision in either the ITA or the PBA to provide for a lump sum payment of the difference between the commuted value and the purchase price of an annuity.

However, the Registered Plans Directorate (RPD) realizes that there may be a conflict with the provincial requirements under Ontario's Pension Benefits Act, to use the plan member's entire commuted value for an annuity purchase. RPD has entered into discussions with the Financial Services Commission of Ontario in order to resolve this issue.

There will be no CRA approval given to situations where a member receives a transfer of their commuted value, limited by section 8517 of the Regulations, and uses this amount to purchase an annuity not regulated by subsection 147.4(1) of the Act. If this occurs, the entire amount may become taxable in the hands of the member under paragraph 56(1)(a) of the Act.

The determination of whether a difference, between what the member is entitled to under the plan and the annuity purchase, is material can only be made after consideration of the specific circumstances of each case. Therefore, CRA cannot provide a list of differences that it has determined not to be "materially different".

The commuted value of the benefit under the defined benefit provision may be less than the premium required to purchase an exact replica in the form of an annuity. In such cases, either the plan sponsor makes up the difference or the annuity provisions are adjusted downward, that is, the plan member suffers a loss.