Minutes of the 2005 Registered Pension Plan Consultation

There were 32 participants from the Canadian pension industry who attended the annual consultation session held at the National Defence Headquarters Warrant Officer and Sergeant's Mess Hall in Ottawa on November 30, 2005.

Once again, we held a “Meet & Greet” prior to the consultation session, permitting Registered Plans Directorate (RPD) employees and the participants to meet and talk informally.

Opening remarks

Introductions

Annelisa Gillespie welcomed everyone to the session. She presented the Management team:

Patricia Spice, Director of the Policy and Communications Division
John O'Meara, Director of the Compliance Division
Janice Laird, Director of the Actuarial Division
Jeff Boxer, Acting Director of the Registration Division
Carl Finniss, Project Manager of the Re-engineering Team

Also from the Canada Revenue Agency were:
Michel Lambert, Income Tax Rulings Directorate
Phil Girvin, Assessment and Collections Branch

Handouts

The following items were handed out to all the participants at the session:

• Agenda
• Copies of the presentation slides
• Questions and Answers
• Feedback form
• RPD Service Delivery Standards Survey

The agenda, Questions and Answers and the RPD Service Delivery Standards Survey were sent to industry participants prior to the session.

Annelisa outlined the items on the agenda. She emphasized the importance of the industry's comments and how it helps us monitor how we are doing. The participants were encouraged to complete the feedback form and survey with their comments on the session or on any of our services. It was mentioned that there would be an open forum at the end of the session if any of the participants had any issues they would like to discuss.

Report on the Directorate

On November 1, 2005, a letter was sent to notify clients of the RPD's changes in pension plan processes. The first phase of the re-engineering implementation plan was launched on November 7, 2005. Under the new pension processes, plan document reviews will be based on risk. During this initial phase, there will be a lot of staff training. Our staff are currently being trained on new procedures with regards to actuarial valuation reports for defined benefit pension plans. In the near future, staff will be trained on some of the compliance work.

In phase 2 of the implementation plan, we will be looking at five items:

• Renewing our legislative and regulatory framework,
• Improving our client services,
• Strengthening our compliance capacity,
• Enhancing capacity to measure our program performance and
• Strengthening our relationships with the provinces and our federal counterparts.

A business case has been made to senior management requesting further funding to allow for additional resources and systems that will assist us. If the additional funding is not received, we will still be going forward with our implementation plan, but it may take longer to complete.

Annelisa mentioned the establishment of the Pension Advisory Committee. It has been a very constructive committee and two meetings have already been held.

Division reports

Registration Division

Jeff Boxer introduced the Registration Division Management team:

Bob Reynolds, Manager, English General Enquiries
Josée Lafontaine, Manager, Bilingual General Enquiries
Elisabeth Van Vliet, Manager
Margaret Gussow, Acting Manager
Liz Scobie, Manager

He discussed how the first phase of the re-engineering initiative was implemented on November 7, 2005, with regards to registered pension plans. Plan administrators were sent letters on November 1, 2005, and the information was posted on our Web site.

The letter indicated that we would, for the most part, discontinue up-front review of new registrations and amendments to existing registered pension plans. However, we would be reviewing certain types of plans and amendments depending on the level of risk.

High-risk pension plans

At the Pension Advisory Committee meeting held in Toronto in October 2005, we sought advice from the Committee on proposed topics of discussion for this year's consultation session. It was evident that the industry was interested in knowing how we define risk and how we will review documents based upon risk.

Under the current process, pension plans defined to be a high risk are:

• Designated plans
• Legislative plans
• University plans
• Flex plans
• Specified multi-employer plans (SMEPs)

Therefore, these plans will be subject to review at registration and upon receipt of amendments. It was emphasized that the identification of a high-risk application or an amendment will vary over time depending upon compliance results and the trend in plan design and funding. It is seen as an evolving process and our risk criteria may be expanded.

In the case of designated plans, and in particular individual pension plans (IPPs), we are interested in ensuring that there is a bona-fide employer/employee relationship, particularly if the IPP is accepting large sum transfers from another defined benefit pension plan to recognize past service accrued under a prior plan. Can the IPP provide retirement benefits with the participating employer? In order to do so, there must be remuneration from the participating employer. We would expect that the remuneration will be commensurate with earnings with the prior employer and that the remuneration will be provided now and in the future. Otherwise, the presence of only a nominal level of remuneration under the IPP would cause us to conclude that perhaps these plans would not qualify for registration; or, if they are presently registered, we would look to see if they would maintain their registered status.

We also want to verify that the Connected Person Information Return (form T1007) has been filed, and whether the benefits and the designated funding rule have been respected. There are currently 8,000 active and inactive IPPs registered under the Income Tax Act (Act). Although most of these plans have only one or two members, we consider a plan to be an IPP when the plan has nine or fewer members.

We consider legislated plans to be high risk due to the complexity of these plans, the size of the membership under the plans and the legislative process required to enact changes to these plans. We are interested in ensuring that the payments of benefits are consistent with the terms of the plan as registered.

University plans have existed for many years and were designed primarily as a money purchase plan with a minimum defined benefit guarantee, in other words, a plan that provides the greater of a money purchase provision and a defined benefit provision. With the enactment of pension reform, this plan design became non-compliant because we were not able to determine a pension adjustment for a particular year. We pursued a redesign of these plans to a defined benefit plan with a money purchase offset. This type of arrangement can be compliant and a pension adjustment can be determined. The defined benefit plan with a money purchase offset produces the same result as a “greater of” formula.

Often these plans have a self-insured money purchase provision, which for the most part is grandfathered under the Income Tax Regulations (Regulations). We will not be accepting new self-insured money purchase provisions. The legislation with regard to variable benefits (RRIF-type payments directly from the plan) has now been passed and this option can be chosen instead of a self-funded money purchase provision.

We have also seen an increase in requests for additional funding to provide promised benefits under a money purchase provision, but there are no provisions under the Act to permit such additional contributions.

In the case of flex plans, our interest is in confirming that the provisions comply with Newsletter No. 96-3, Flexible Pension Plans. We want to ensure that the member contributions under the flex provision for ancillary benefits and the normal member contributions under the plan do not exceed the parameters set out in paragraph 8503(4)(a) of the Regulations.

In the case of SMEPs, our interest is in ensuring that all of the conditions of subsection 8510(3) of the Regulations are met or continue to be met in order to ensure that the plan is, in fact, a SMEP. We have noted a trend for amendments to existing SMEPs to link contributions to the plan's financial experience; however, this would contravene paragraph 8510(3)(e) of the Regulations and Ministerial consideration would be necessary to maintain the SMEP status of the plan.

To summarize, for high-risk plans, at registration and upon receipt of amendments, we will be reviewing the lifetime retirement benefit formula, the member contribution limits to the plan, eligible service under paragraph 8503(3)(a) of the Regulations and any pre-reform benefits that must be acceptable to the Minister under paragraph 8503(3)(e), which includes connected person rules for pre-reform, the proportionality conditions and requirements under Information Circular 72-13R8, Employees' Pension Plan.

Plans that have an existing flex provision, or that add one, will be reviewed for compliance with Newsletter No. 96-3. Our review of SMEPs on registration and on amendment will be to ensure that all conditions of subsection 8510(3) of the Regulations are met in order for the plan to qualify as a SMEP.

If, upon review, any high-risk plan is found to be non-compliant, we will not register the plan or approve amendments. We will request amendments to the plan to bring the plan into compliance. The amendments must be submitted within six months; if they are not received within this time, we will begin the process to either deny registration or refuse acceptance of the amendment, as applicable.

Low-risk pension plans

All money purchase plans and defined benefit pension plans that do not fit the preceding categories will be considered low-risk plans. In the case of a low-risk plan, if the application for registration is complete and passes the risk criteria, we will register the plan. We will examine these plans for compliance in the areas of contributions, lifetime retirement benefits formula and eligible service, including pre and post-reform. If upon review, they are found to be non-compliant, the file will be forwarded to our Compliance Division for audit.

While this is a departure from our past practices, we remind you that the legislation still requires that all amendments must be submitted in a time and manner as prescribed by the legislation. It is also important that plan administrators, consultants and actuaries ensure at all times that the plans are fully compliant in wording and in administration. While we do not review plan provisions in their entirety, should there be a particular plan provision, a sample or draft wording you would like us to review, we would be pleased to do so.

Finally, what we examine (the particular plan provisions) as well as the focus of our review (types of plans) will continue to evolve in the future. We will change and broaden the scope of our reviews to focus on other elements within the plan terms such as plans that provide enhanced early retirement windows.

It is our hope that you will find these processes to be of benefit to your clients and we know that you are most anxious to get the plan registered as quickly as possible to facilitate transfer to and from the plan. We would, however, appreciate your timely assistance in providing the information that we may request of your clients, be it plan amendments, information on valuation reports that may be necessary to support contributions being requested, or pension adjustment verifications.

Open forum

Summary of discussions and questions that were raised:

Participant: With regards to university plans, are you saying that they are high risk only based on the types you described or all such plans with a defined benefit provision?

Jeff Boxer: At the present time, all university plans are considered high-risk plans regardless of whether or not the particular plan design is a defined benefit provision offset by a money purchase provision.

Participant: With designated plans, you mentioned you're requiring, in the case of a defined benefit (DB) to DB transfer, that the remuneration be commensurate between the present and the past. What about a case where the person is about to retire? Is that taken into consideration?

Jeff Boxer: Possibly. We would look at whether or not the transfer was an effort to improperly prolong the tax-sheltering. Clearly, if that person was about to retire, then why couldn't they have commuted their lifetime retirement benefit under the initial plan and transferred it to their RRSP? The transfer to an RRSP would be subject to subsection 147.3(4) of the Act, and the limits of section 8517 of the Regulations. If that person is setting up an IPP and is going to be retiring two or three months later, what was the purpose of establishing a new IPP for that individual? Was it to provide retirement benefits or was it to circumvent the transfer rules under subsection 147.3(4) of the Act? Because clearly when you're transferring from one DB plan to another, it's a transfer under subsection 147.3(3) without limit and the full property from plan A goes to plan B. So, yes, that would cause us some concern.

Participant: I was wondering if you have some kind of threshold, say a person works for one year, two years or three years, where do you draw the line?

Jeff Boxer: With employer/employee relationships there are certain tests where we rely primarily on our Rulings Directorate to give us guidance on the common law tests. So if we did have some concerns about a particular plan given the circumstances you have explained, there would be a strong likelihood that we would look to them to give us some direction on the law; we would then apply the law to that scenario or to any others if we had some concerns, and make a determination.

Participant: I'm curious, why are all university plans considered high risk, even if they're not hybrid university plans? I suspect that half of all university plans have a hybrid formula.

Jeff Boxer: I suspect that that is somewhat understated; we see a lot of the university plans, and the size, design and membership of the plans lead us to conclude that those particular plans are high risk. If we find, in fact, that your statistics are correct, namely that there is only a nominal amount of hybrid plans and that there's a negligible risk, then perhaps we'll scale down our review of certain university plans. For now, all university plans will be considered high risk.

Participant: Last year when you talked about employer/employee relationships, because of the complexities of a situation, I wrote you a long letter. I haven't received a response yet. Does the CRA plan on defining employer and employee relationships? The normal definition that you use violates the Income Tax Act, the Regulations and the rules of the CRA.

Jeff Boxer: I'm not familiar with the letter that you're referring to, but I will certainly investigate to find out where it was and also if, in fact, we received it and why it has not been responded to.

Actuarial Division

Janice Laird began by introducing the actuarial members of her team:

• Terry Krowchuk, Assistant Actuary
• Vincent Cauchon, Assistant Actuary
• Shanour Remtoulah, Assistant Actuary

Janice addressed the following issues:

• Funding non-compliance with respect to both historical concerns and current issues;
• Actuarial valuation report (AVR) risk categories as they relate to the re-engineering processes;
• Training initiatives currently underway in the Directorate; and
• Impact of the proposed changes to the Canadian Institute of Actuaries (CIA) Standards with respect to pension plans and funding

Funding non-compliance

Historically, the Actuarial Division has found examples of AVR funding non-compliance in several areas, including but not limited to the following:

• Interpretation of legislation;
• Contingency reserve;
• Excess surplus determination;
• Transfers - both in terms of the limits in section 8517 of the Act and benefits not calculated in accordance with the plan terms; and
• Designated plan funding with respect to the solvency deficiency component, the retirement age used and some of the grandfathered rules.

Recently, we have been seeing many AVRs for designated plans that have been using an incorrect method for calculating past service pension adjustments (PSPAs). The method used results in reducing the PSPA and therefore the qualifying transfer. It also provides inappropriate elevated funding opportunities as a result of the higher unfunded liability. Specifically, for some plans registered in 2005, we were initially unable to reproduce the amount of qualifying transfer identified in the AVR, where a plan was established and past service was recognized. In each of these cases, we found that the PSPA had been calculated based on the defined benefit (DB) limit in effect at the date the service was rendered, as opposed to the DB limit at the date the service was recognized.

This practice was noticed in early 2005. We contacted our clients to inform them that this was only acceptable if the plan text was submitted with wording that specified the DB limit was $1,722 for years before 2003 and $1,833 for subsequent years. However, if the plan had generic wording regarding the DB limit, for example “or such other limit as provided under the Income Tax Act”, the calculation had to be done in accordance with the plan terms. This would require that the actuary calculate the PSPA using the DB limit in effect on the date the service is actually recognized and valued.

For example, assume a plan is established at January 1, 2005 for a connected member who is 58 years old and has 14 years of past service. The earnings for this individual for 1995 and beyond exceed the amount necessary to provide him with a maximum pension under the Act. The plan uses generic wording to define the DB limit. When we calculated the PSPA, we were able to reproduce the actuary's figures when we used the $1,722 limit for prior years and the $1,833 limit for 2004. However, using the $2,000 limit for all the relevant years would be the only acceptable method in this case since $2,000 was the DB limit in 2005, when the service was being recognized. The resulting PSPA calculated by the Actuarial Division is $24,000 higher, so that creates a significant additional funding amount.

In October, the Actuarial Division staff identified 77 such non-compliant cases, totalling over $2 million in excess funding. This demonstrates the significance of the overall impact of this incorrect PSPA methodology. The non-compliant funding amounts and registration elements that are uncovered are referred to the Compliance Division for further action and follow-up.

AVR risk category

The AVR risk falls into three risk categories, level 1, level 2 and level 3 AVRs. The level of the analytical review given to the AVR depends on the risk category.

Level 1 AVRs are for broad-based plans that do not fall into the category currently defined as high risk, which were outlined in Jeff's presentation. These AVRs will fall into the low-risk category as long as certain additional conditions are met. These conditions encompass many factors including but not limited to the:

• Assumptions used in the report;
• Level of surplus and/or excess surplus;
• Use of reserves; and
• Level of current service contributions per member.

As a result of the re-engineering initiative, the Actuarial Division has expanded the low risk AVR screening criteria for Registration Division staff to ensure that the plan demographics are also considered in conjunction with the level of current service contributions in determining whether the submission is an actual high compliance risk. For instance, if the plan has current service contributions that exceed the acceptable threshold per member, but the plan has a high average age or post-retirement indexing, that might justify the higher current service contributions. No further analysis into the funding recommendation would be required in that case.

Under the re-engineering initiative, level 1 AVRs will continue to be reviewed by our Registration Division staff. However, those that fail the low-risk screening will no longer be referred to the Actuarial Division for review.

Level 2 AVRs currently consist of AVRs for:

• Designated plans,
• Flex plans,
• University plans,
• Legislated plans and
• Plans that fail any of the level 1 screening criteria.

These reports were previously referred to the Actuarial Division for further analysis and approval. These AVRs will now be reviewed for funding compliance by the Registration Division staff using calculation systems and spreadsheets developed in the Actuarial Division. This will require extensive training for the Registration Division staff on both the actuarial calculations side and the legislative funding side. Neither of these have previously been a part of the Registration Division's direct accountability.

Level 3 AVRs are those with complex issues and are more appropriately dealt with by the technical specialists in the Actuarial Division. At this stage, it remains to be seen what percentage of AVRs will fall into this category.

Training

The Actuarial Division staff will be involved in the training and support of Registration Division staff relating to AVR analysis and general pension plan funding.

Training on the expanded level 1 screening criteria was completed in November 2005 and the Registration Division staff will start applying the expanded criteria when reviewing AVRs.

The formal training on the level 2 AVRs is scheduled to begin late in November 2005 and will be rolled out during the months of December and January. It will be offered by Actuarial Division staff and be given to 12 senior staff, mostly from the Registration Division. This training is unlike the level 1 training and will be given in stages, since it will be much more technical and comprehensive in nature. It will start with the funding of designated plans and will later be expanded to include flex plans and other specific types of situations. Once the initial group of 12 has been trained, additional training will be provided to other groups of the Directorate staff as required. It is expected that these newly trained staff members will be able to participate in the delivery of subsequent training periods.

CIA standards

The current CIA standards of practice governing the funding of pension plans have remained virtually unchanged since 1981, other than changes in 1999 brought in primarily to accommodate the new solvency rules.

In March 2005, a statement of principles and revised actuarial standards of practice for pension plan funding was released and the CIA sought input from various stakeholder groups. The proposed principles represent a significant change in actuarial reporting on pension plan funding. Although the new standard has not yet been adopted, if it is adopted as proposed, there will be a significant increase on our workload as our current work procedures and risk assessment tools will have to be completely redesigned.

Compliance Division

John O'Meara introduced the three managers of the Division:

• André Martin
• Curtis Bell
• Gilles Lalonde

John addressed the following topics:

• What's new in the Division;
• Descriptions of non-compliance findings and trends; and
• The upcoming Compliance Bulletin.

In the fall of 2005, we initiated a compliance-sampling project in order to more broadly assess compliance levels in the registered pension plans industry. Our current audit program is more targeted and therefore does not provide a true reflection of the overall compliance level in the industry.

In order to select the files for this project, we teamed up with some Agency statisticians to devise a method of selecting files in order to draw some representative assertions for any conclusions we found in these audits. Basically, the process is going to be a modified random sampling within a certain established group of like plans. According to our statisticians, this selection method should present the Agency with an indication of the extent of non-compliance within the industry, while helping to identify potential areas of increased risk for non-compliance.

We have initiated over 100 files on a desk audit basis. We expect that by early next year, the statisticians should have enough initial results to draw some conclusions of a representative nature.

In terms of the expected outcomes of this project, we are hoping to be able use some of the information to support our re-engineering efforts as we move forward. It will also assist us in either supporting our current target audit profiles or modifying them to better reflect industry compliance realities. In addition, this will increase our capacity to report to Parliament on broader compliance issues in the industry.

Non-compliance findings

The most common non-compliance findings for the fiscal year ending March 31, 2005 were:

• Incorrect calculation of pension adjustments (PAs) and a few past service pension adjustments (PSPAs);
• Excess transfers, mostly at termination of the plan;
• Reporting issues, such as non-filing of information returns and failure to report taxable income;
• Ineligible contributions for both employer and employee; and
• Self-directed registered retirement savings plans (RRSP) strip issue.

The Agency placed a taxpayer alert on the CRA "Protect Yourself" Web site on November 10, 2005, to alert the public about the RRSP strip issue. The issue may not seem directly related to this audience, but it should be noted that these plans consist of former RPP pension funds that are being targeted by promoters of the scheme. Also, there is an increase in RPPs being used to strip RRSP locked-in funds. The plans are typically money purchase plans, with individual trustees. Individual trustees may not be as aware of their due diligence standards as third party trust companies would, and thus this structure may be easier for unscrupulous promoters to abuse.

The chart is a comparison from year to year of non-compliance rates based on targeted audits. At first glance, it seems that compliance trends might be a bit alarming with regards to ineligible contributions, and getting worse with PAs, excess transfers and reporting. Because the type of graph presented below does not reflect any changes in our scope or types of audits being performed from year to year, it is extremely difficult to do an accurate year-to-year comparison. However, it is very clear that we have a significant challenge ahead of us in terms of trying to increase compliance within targeted areas that we work on. Certainly when you look at compliance in the industry, it is going to be very interesting to see what the compliance sampling project uncovers over the next year or so.

Non-Compliance Trends April 2000 to March 2005

Compliance bulletin

These are the subjects that will be covered in the upcoming Compliance Bulletin [published after this session on February 3, 2006]. It is a joint effort among all the Divisions in the Directorate and will probably be available by the end of January 2006.

We have identified a problem with a number of 2004-2005 AVRs for high-income earners, in that the newer, higher maximum is not being used and the PSPAs are being calculated using the former $1,722 maximum.

The fraudulent RRSP arrangements will also be more fully addressed in our Compliance Bulletin.

There are some discussions on the issue of employer and employee over-contributions and taxation of these amounts.

We also wanted to remind industry professionals of the subsection 147.4(1) requirements of the Act with regards to annuities. When a member elects to purchase an annuity in satisfaction of benefits under a registered pension plan, in some cases members are being provided with a lump sum from the plan. Then they are permitted to purchase an annuity with the lump sum payment. The practice might contravene the requirement of the Act that such an annuity not be materially different from the benefits that would be otherwise provided to the individual under the registered pension plan. In other words, the annual payments and the form paid under the annuity should mirror the lifetime retirement benefits and form of the plan. The tax consequences could be severe — potentially the whole value of the contract could be included in income.

Policy & Communications Division

Patricia Spice introduced the members of the Policy and Communications Division:

• Mike Godwin, Manager of the Technical Services Section
• Mark Legault, Manager of the Policy and Systems Section
• Maureen Quigg, Meeting Coordinator and Senior Policy Officer

Intermediate penalties - Enforcement tools for RPD

The Directorate is engaged in a dialogue on intermediate penalties with both the Pension Advisory Committee and with the Department of Finance. Under re-engineering processes, if a registered pension plan is considered high-risk, the plan will end up in the audit-selection process. In most situations, compliance will be satisfactory. In the past where non-compliance has been an issue, we have relied on letters of education, reassessments and revocation. Since we are re-engineering our processes, it is the right time to review the intermediate penalties that are available to the Directorate.

At the moment, we are imposing two penalties. First, we have the penalty under paragraph 162(7)(a) of the Act, which is automatically applied by our Sudbury Tax Services Offices when a client fails to file on time or at all. In this instance, there is an automatic assessment of a penalty of $25 per day, to a maximum of $2,500. Second, we have revocation, which we very rarely use and which is subject to the administrative fairness process and appeal to the Federal Court of Appeal.

Auditor General and internal audit

To provide some background to the topic, the following explains how we have evolved to date. Starting in 1994, soon after pension reform and after some experience with the new rules and regulations applying to registered pension funds, the Auditor General completed a study of our processes. The Auditor General commented that there were some penalties in the Income Tax Act that we were not applying and that our inventory backlog was unacceptably high. The backlog resulted from the debate on the Directorate's interpretations, and the industry's resistance to some of our requests for amendments to plans. When we did not agree, there was not very much RPD could do except to revoke the plan's registration, which was generally not an option. It was at this point that we started to discuss alternatives for intermediate penalties with the Department of Finance.

In 2001, the internal auditors looked at our program and also noticed that we had a large backlog of applications for registration and amendments. They mentioned that we should be looking at intermediate penalties to support our negotiations with the industry. In our discussions with the Department of Finance, that department commented that, although both the Auditor General and CRA internal audit had indicated we should be looking at intermediate penalties, Finance needed to be convinced that we were lacking an appropriate penalty regime. What we had was not sufficient. Because we were very heavily involved in the registration or up-front review regime and not on audit, we were not getting the compliance results that would prove the need for intermediate penalties.

Smart report - Recommendation 31

Meanwhile, in 2003, the Federal Government launched a task force to look at its regulatory regime and, in 2004, came out with a fairly lengthy report that identified regulatory sectors and areas that required reform. One of their recommendations related to administrative innovation for enforcement. In fact, the task force recommended that, whenever a Department or Agency was launching a regulatory program or was reviewing its regulatory program, it should be looking at innovative enforcement alternatives, such as monetary, voluntary or mandatory coercive actions and dispute resolution.

As part of the report, the Committee quoted from The Regulatory Craft: Controlling Risks, Solving Problems, and Managing Compliance by Malcolm Sparrow (Brookings Institution Press 2000) and since this is quite descriptive of our relationship with our clients, the quote is reproduced here with the publisher's permission:

The Regulators' Challenge — “Regulators, under unprecedented pressure, face a range of demands, often contradictory in nature: be less intrusive — but more effective; be kinder and gentler — but don't let [them] ... get away with anything; focus your efforts — but be consistent; process things quicker — and be more careful next time; deal with important issues — but do not stray outside your statutory authority; be more responsive to the regulated community — but do not get captured by industry.” www.brookings.edu/press/books/regulatory_craft.htm.

Penalties not currently applied

There are three penalties under the Act that we have not applied in the past. Paragraph 162(7)(b) provides a penalty for failure to comply with a duty or obligation imposed by the Act or Regulations. As we start into the re-engineering process and as the Compliance Division obtains further compliance results, we may begin to impose this penalty to reinforce the compliance of clients and plan administrators with the Act.

Section 163.2 of the Act applies to any third party that provides advice, misleading advice or false information to a taxpayer on which they rely and causes the information sent to the CRA to be incorrect or false. This section of the Act is not specific to RPD. The third party is liable to a penalty the greater of $1,000 and the total of the person's gross entitlements at the time the notice of assessment was sent. “Gross entitlement” is in effect the amount of money that the person was able to generate from the false information. This penalty was established a few years ago and no doubt will be subject to court challenges to test its application.

Section 238 of the Act is a summary conviction offence that results in criminal liability. If found guilty, the accused may be fined not less than $1,000 and not more than $25,000, or the fine plus a prison term of up to 12 months. An additional tool available under subsection 238(2) of the Act allows the CRA to ask the court to order the accused to comply with a provision of the Act or Regulations. The two specific areas that are relevant to RPD are 1) the failure to comply under subsection 147.1(7) of the Act, which requires the plan administrator to administer the plan as registered or to notify of a change of address or to file an amendment as required within 30 days. There is also 2), the failure to comply with subsection 147.1(18) of the Act, which incorporates, by reference, all the Regulations that relate to registered pension plans in sections 8300 through 8500.

Potential penalties

Lastly, we have a list of future areas to study with the Department of Finance. None of these have been developed to any great extent and we have not submitted to the Department of Finance a preferred option or options.

The first is a monetary penalty on a sliding scale. One of the Pension Advisory Committee (PAC) subcommittees is studying this very issue and is assisting us in developing the scaled penalties.

The second is the suspension of registration, which in theory would prohibit transfers in or out of a plan. It would cause temporary taxation of earnings in the plan and the suspension of deductions for employer contributions. As you might note, this would not be effective for tax-exempt employers or plans in surplus. This could also be subject to appeal and could go through the same process as revocation.

We are studying the current exchange of information provisions, under section 241 of the Act, to determine whether they currently accommodate our needs or if they should be broadened to permit joint enforcement activities with pension regulators, to make our activities more effective.

We are also looking at whether publicizing non-compliance would act as a deterrent. Criminal sanctions can be publicized. Should consideration be given to publicizing administrative penalties such as penalties under sections 162 and 163 of the Act? Should plan members be made aware that the plan administrator was penalized?

The Charities Directorate has recently published a summary policy on “compliance agreements”. This is the kind of tool that has been used in the audit area in CRA for many years. Their policy explains when they will use “compliance agreements” and we are looking at developing our own policy in RPD. This would be an agreement between the plan administrator and the Directorate, where the administrator acknowledges that there has been non-compliance and that they will not engage in non-compliant behaviour in the future. If it does occur again, they will be subject to a penalty. Basically, it is a contract where both parties acknowledge what has happened in the past and what will happen in the future.

Comments or suggestions on this topic can be provided to me or to Mark Legault.

Pension Advisory Committee

Lyle Teichman, a member of PAC, provided an overview of the newly established Committee. He also provided an update on the activities of the Committee and the current subcommittees.

Last year, RPD sent out a letter of interest inviting people who might be interested in participating in the Committee. RPD selected members from a broad range of industry players, based on their expertise, industry experience and geographical location. There are 25 members on the committee: lawyers, actuaries, consultants, plan sponsors, SMEP representatives, insurance company representatives and union representatives. PAC members serve no more than three years, on a phased-in basis; one third of the members will be replaced every year commencing in 2007. Some members will initially sit on the Committee for longer than three years. Annelisa chairs PAC, and we have had some discussion as to whether there should be an industry co-chair; to date, no decision has been made on that issue.

The information provided to the participants can be obtained directly from RPD's Web site at the following links:

• Mandate at www.cra-arc.gc.ca/tax/registered/rpp/pacmenu-e.html;
• Activities at www.cra-arc.gc.ca/tax/registered/rpp/pacmenu-e.html;
• Members' roles and responsibilities at www.cra-arc.gc.ca/tax/registered/rpp/membership-e.html.

There have been two meetings so far, the first of which was held here in Ottawa on March 9, 2005. During this meeting, members were divided into six subcommittees:

• Proposals for Intermediate Penalties - Chair, Lyle Teichman and the RPD liaison, Mark Legault;
• Excess Surplus and Funding Rules - Chair, Paul Timmins and the RPD liaison, Vincent Cauchon;
• RPD Consultation and Communication Strategies - Chair, Mark Eagles and the RPD liaison, Patricia Spice;
• Supervisory Strategy for IPPs - Chair, Andrew Donelle and the RPD liaison, Curtis Bell;
• Phased Retirement - Chair, Denis Guertin and the RPD liaison, Betty Bertrand; and
• Methods to Obtain Data for RPD Desk Audits - Chair, Mary Bishop and the RPD liaison, Tina Flichel-Fawcett.

We also looked at how PAC would operate. The RPD re-engineering process was also discussed.

A second two-day meeting was held in Mississauga in October 2005. We looked at further details of the RPD re-engineering process and the subcommittees presented interims reports. I will give a summary of the interim reports and activities. These do not represent RPD policies and have not been accepted by RPD, nor have they been officially submitted to RPD.

For Subcommittee 1, we have been examining what the penalty structure might look like if RPD were to consider interim penalties that fall short of revoking registration. The Subcommittee came up with eight draft recommendations. The primary recommendation is the penalty structure itself. Under the draft recommendations, penalties for non-compliance would be based on the quantum of the amount of non-compliance. The penalty structure would be 10% of the amount of the error for the first offence with a minimum of $100. A penalty of 25% of the amount of the error would apply for any repeat offences committed within five years, with a minimum of $250. The penalty would be 100% of the amount of the error where the offence is due to wilful misconduct or negligence.

This proposal generated quite a bit of discussion at the PAC meeting in October. It was suggested that the subcommittee consider maximum penalties. The subcommittee subsequently met to consider this suggestion and the subcommittee revised the recommendations to include a maximum penalty of $5,000 for any inadvertent unpaid penalties.

Subcommittee 2 is examining excess surplus and funding rules. They are examining a recommendation to increase the excess surplus buffer, as they felt that the current buffer does not allow sufficient flexibility in plan funding. They are examining the application of the excess surplus test on a group-by-group basis rather than on an aggregate plan member basis, which will provide additional funding, especially for groups that come together in a plan merger. They felt that the funding assumptions for designated plans are dated and need to be revised. They are also looking at funding for “orphaned” employee groups. No interim recommendations were presented.

Subcommittee 3 reported that they reviewed and provided detailed comments on the re-engineering announcement letter that was sent to clients in early November; it included Frequently Asked Questions. They are reviewing new filing forms and provided input to RPD on the form and structure of the RPP technical manual that was recently posted on the Web site.

Subcommittee 4 is looking at the supervisory strategies for IPPs. They reported that they have identified what they believe are CRA concerns with regards to IPPs. Their concerns are:

• What the primary purpose of the plan is;
• How the maximum funding valuation is determined;
• Issues regarding PAs and PSPAs; and
• Qualifying transfers and excess transfers.

The industry concerns are:

• Length of the registration process;
• Long approval process for AVRs;
• Forms that must be sent to more than one location;
• Lack of written material with regards to RPD's expectations of IPPs;
• Determining eligible contributions in a multi-employer IPP; and
• Recent change to paragraph 8303(5)(f.1) of the Regulations, without relief for IPPs.

The subcommittee suggested that RPD publish a manual on how to register IPPs.

Subcommittee 5 was tasked with examining phased retirement. They looked at how phased retirement could work from RPD's perspective. They are examining a couple of phased retirement options; there is no single model that is emerging just yet. It was suggested that RPD contact the Department of Finance to find out what its reasons were for the prohibition in paragraph 8503(3)(b) of the Regulations. Based on the Department of Finance's reasons for that prohibition, the subcommittee will then put together a business case for two or three models. No interim recommendations were made.

Subcommittee 6 was charged with looking at methods to obtain data for RPD desk audits. Since RPD has not yet finalized the desk audit process under re-engineering, this subcommittee was disbanded without a formal report or recommendations.

Another item addressed at the meeting was possible future topics. Suggested topics included:

• Taxation of retirement compensation agreements;
• Over-contribution issues; and
• Recommending procedures for administrators to bring offside plans into compliance.

RPD re-engineering

Carl Finniss reported that there is very little new with the RPD re-engineering process. We are beginning to implement some of the processes described in previous consultation sessions.

All of the plans, ideas and information you have shared with us have helped us to create concrete procedures. We do have some additional tasks that the re-engineering team is working on. The processes for RPPs have pretty much been completed.

Since the 2002 consultation session, we have embarked on the re-engineering project: a change initiative that we saw coming in three phases. We completed the first phase, which was essentially to identify changes we could implement. We identified 10 incremental changes that we could implement immediately. Some of those changes you can see now. One was publishing the technical manual online. We discussed developing an on-going consultation strategy with our clients and making our consultations more interactive and meaningful. The result of that initiative was the creation of PAC. We wanted to develop and refine the risk management framework within the Directorate. Many of our decisions and processes are now in assessing risk. Most of these changes have been positive changes and we hope that is the reaction from you and your staff.

Along with incremental changes, we had discussed some innovative improvements to our processes, which is our second phase. We were looking at how feasible those changes were; in other words, would we be able to implement them and still fulfill our mandate? Would the industry see benefits to the changes and would they want these changes? Could we coordinate these changes with other areas within the Agency and could we get some moral and financial support from our senior management? We are still struggling to get financial support, which was something we expected. We structured the re-engineering initiative so that we could still accomplish a great deal even without the extra financial support.

Back in November 2002, we had discussed innovation as a three-pronged approach. We wanted to create a client-service model based on client self-assessment, relying on the industry's ability and knowledge and trusting them to self-assess whether they are compliant. We also mentioned relying on a certification of compliance, which we are not yet doing: we will most likely look at this in the future. The third thing was risk-based supervision. We spoke about shifting the compliance focus from the detailed review of documentation, to reviews based on risk and greater reliance on analyzing plans through audits and reviews. We have started the first part of that change initiative; we are altering the way we review documentation at the front end. This does not mean that there is no requirement to make those filings, in order to ensure that they are compliant.

The increase in audit presence has started and will continue. The training of our analysts with regards to the new procedures and processes still has to be completed. This should be fully implemented in the coming months.

In November 2002, I spoke about the expected results for this project. Some of them included a better response to your needs, greater job satisfaction for our staff and increased focus on higher-risk areas of compliance. We are hoping to see increased compliance from our clients. Another expected outcome is a focus on outcomes, not outputs. We also discussed improved and expanded electronic service delivery, which has been a challenge, but we have made improvements to our Web site. We are still looking at our system requirements and the related costs.

Furthermore, we also discussed the concept of a certified plan provider process, an idea that was raised by a consultant we hired. If consultants could demonstrate how diligent they were at administering their plans, we could grant them a certificate. As we investigated this, we found it to be a very resource-intensive program and a very ambitious thing for us to start. Since we did not feel it was a priority, we placed this process on hold.

Back in November 2002, we had expected that this would all be completed by January 2005. We did not meet that goal, but we were not too far off. We have had some challenges along the way.

The pension plan part of the project has been the major focus for the re-engineering team over the last three years. We are still working on some of the remaining issues such as securing the funding, setting up an organizational structure and writing job descriptions that will be sent for classification. We are also moving on to the other phase of our project, which is dealing with other deferred income plans. We will be consulting with clients on some of these other products. The products are deferred profit-sharing plans, registered education savings plans, supplemental unemployment benefit plans, registered retirement savings plans, registered retirement income funds and registered investments. If you are interested in any of those areas or would like to provide some input, please advise me at RPD Re-engineering. At this stage, we are just developing our communication strategy for these products. We are going to try to structure the process models similarly to the models established for registered pension plans.

We want to hear what we are doing well and what we are not doing well. We need to see if we are getting the desired results for our program. We will continue to adjust our priorities and to respond to them as best we can with our resources. As a result, the Directorate that you work with today may be very different next year.

Sign up for the Directorate electronic mailing list, if you have not done so already. That will alert you to when there are any changes made to our Web site. If you are interested in becoming a member of PAC, we suggest that you subscribe to our electronic mailing list so that you will receive our next call letter for members.

We have started to receive enquiries about providing some outreach to clients. If you are aware of anyone in the industry who would benefit from our expertise, please let us know. We are becoming more aware that this is an effective way to access people we do not traditionally reach.

Open forum - Consultation session

With the creation of PAC, John O'Meara asked the participants if the RRP consultation session should remain the way it is or should it be modified.

Participant: I think the sessions have been important to the industry because of the open forum and the ability to discuss questions, as opposed to just reading published Questions and Answers. I would like to see this aspect of the consultation sessions continue. PAC has more specific roles.

John O'Meara: Would you prefer that the Questions and Answers be provided semi-annually, as they come up, or as an annual event?

Participant: Once a year would be fine; there would have to be sufficient questions or things to discuss in order to need more frequent meetings.

Participant: These sessions are important for several reasons. One of them is the self-assessment approach that you are expecting us to adopt. We need to know with what we are complying. Every time I come to one of these meeting I find out about many new rules. If you want compliance, you have to have that constant communication. These are the sessions you are going to use to resolve issues. You should also consider having it in more than one location.

John O'Meara: We do intend to increase our outreach and information-sharing for the purposes of re-engineering.

Participant: It's very important that we all get the information at the same time. Meetings like this are excellent and should continue. In between meetings, there must be a way to communicate on on-going events. One example would be the PSPA issue; I only heard about this issue today, and I am not aware if it is on your Web site. There was no official announcement on it.

Janice Laird: There was something posted on our Web site in April 2005 and Mark confirmed that the Question and Answers on this issue were posted. There has, however, been a delay in updating our guides.

Technical questions and answers

Prior to the consultation session, we requested that industry participants submit any technical questions they wished to discuss at the session. We responded to 24 questions. The Questions and Answers were sent to participants prior to the session.

John O'Meara presented the Questions and Answers and opened the forum for discussion. After further discussion, it was agreed to review the responses to certain questions and make any necessary changes. Once reviewed, they will be posted on our Web site.

Closing comments

Annelisa Gillespie thanked everyone for their participation and encouraged them to complete the feedback form with any of their comments or suggestions. She also encouraged them to complete the RPP Service Delivery Standard Survey since we included questions concerning our letter of November 1, 2005 and Frequently Asked Questions concerning our new processes.