3- Employer pension plans

Registered Pension Plan

An RPP is a pension plan under which employers and employees (or employers only) make contributions to a retirement fund. There are two types of RPPs: money purchase and defined benefit plans.

Deferred Profit-Sharing Plan

A DPSP is a contract between an employer and its employees or former employees to share in the profits of a business.

Characteristics of RPPs and DPSPs

Each of these plans has its own specific tax characteristics, which are summarized in the following table:

Deductible Contributions

The amount that can be deducted as an annual contribution to a money purchase RPP and a DPSP is subject to a limit. There is no limit for contributions to a defined benefit RPP for which the maximum benefits are limited. These limits, indexed annually based on the average industry salary increases, are:

Transfer of RPP Funds

An employee who leaves his/her office or employment before retirement age may choose to:

• Leave the accumulated funds in the RPP and take a deferred annuity when he/she reaches retirement age;
• Transfer the accumulated funds to another retirement savings vehicle. The choices may differ depending on the pension acts applicable to the annuitant. Possible transfers include transfers to:
  • An RPP of another employer;
  • LIFs or LIRIFs. These vehicles are similar to RRIFs except that they include certain conditions, including a maximum annual withdrawal;
  • A LIRA or a locked-in RRSP. These vehicles are similar to RRSPs except that the money is generally locked-in and, subject to a few exceptions, frozen until an annuity is purchased or the funds are transferred to a LIF. As is the case with RRSPs, these vehicles mature at the end of the year taxpayers reach 71. Funds have to be converted into a life annuity, a LIF or a LIRIF.

LIFs can be “unlocked” gradually by transferring each year a portion of the funds accessible to an RRSP. There are a number of tax, financial and other consequences that have to be taken into consideration before adopting such a strategy.

Purchase of Past Service by RPP

RPPs generally allow participants to buy periods during which they did not participate in the plan. The periods vary according to the plans and a purchase of past service has tax consequences that vary based on the date the services were rendered and the method of payment.¹⁰ Moreover, a taxpayer’s participation in an RPP during calendar years covered by the purchase has an impact on the applicable rules.

Pooled Registered Pension Plans and Voluntary Retirement Savings Plans

The purpose of PRPPs, implemented by the federal government, and VRSPs, implemented by the Quebec government, is to offer defined-contribution pension plans adapted to the needs of self-employed workers and small businesses.

Quebec employers are subject to one of these plans, according to their area of activity. For businesses doing business under federal jurisdiction, the PRPP rules apply, while the VRSP rules will apply to businesses under provincial jurisdiction. An employer subject to one of these laws may not apply the other plan.

In Quebec, employers under Quebec jurisdiction that employ at least five employees aged 18 or over with at least one year of continuous service have to offer a VRSP if they do not already offer a wage-deduction based retirement savings plan to their employees. Targeted employers must set up a VRSP no later than December 31 of a given year if they had at least five eligible employees in their service on December 31 of the previous year.

Conversely, the federal law establishing PRPPs does not oblige employers to offer this plan to their employees. In both cases eligible employers who wish to do so can offer a PRPP or a VRSP to their employees on a voluntary basis.

Participants’ contributions to these plans are deductible from their taxable income and are added to those made to an RRSP for the purposes of the annual deduction limit.

Individual Pension Plan

An IPP is a defined benefit RPP generally designed and structured for one or more individual members, normally the owner of a business or key executives. Employer contributions are deductible and the employee is only taxed when the amount is withdrawn.

One of the benefits of an IPP is that larger annual deductible contributions can be made compared to an ordinary RRSP. Under certain circumstances, the company may make additional deductible contributions in recognition for past years of service.

Participants in an IPP are required to withdraw annual minimum amounts from the plan starting in the year they reach the age of 72, as for RIFFs (see point 3 of this section).

Simplified Pension Plan

A simplified pension plan is a defined-contribution RPP for which the administrative rules applicable to the employer are not as onerous in order to make it easier for SMEs to use.¹¹

Retirement Compensation Arrangement

A retirement compensation arrangement is a mechanism which results in an agreement between an employer and an employee whereby the employer makes contributions to a custodian who receives the funds, generates a return thereon and makes payments to the employee when he/she retires or loses his/her job, or when there is a significant change in the services rendered by the employee.

Contributions paid as well as the plan income are subject to a 50% tax that is refundable when amounts are paid to the employee. Contributions are deductible by the employer when paid. However, they are only taxable in the hands of the employee when attributed to him/her by the trust.

Such plans are subject to prohibited investments rules similar to these applicable to RRSPs (see point 1 of this section).

⁵ Rules applicable to the extent that contributions are required to finance benefits that are not greater than the maximum limit permitted.

⁶ Amount of contribution is based on company’s earnings.

⁷ Per year of service. This limit corresponds to 1/9 of the RPP specified contribution limit.

⁸ Contribution is limited to the lesser of 18% of the compensation for the year or the annual limit.

⁹ Limit equals one-half of the money purchase RPP limit.

¹⁰ Payment by transfer from an RRSP will have different tax consequences than a cash payment to an RPP.

¹¹ For additional information, go to the Retraite Québec site.