CRA releases draft newsletter for registered pension plan annuity contracts

By Lea Koiv and Alexandra Macqueen | December 6, 2018 | Last updated on September 15, 2023
3 min read

CRA has released long-awaited guidelines on annuities that are acquired in satisfaction of rights under a pension plan, including copycat annuities that are acquired with commuted values.

A member of an RPP who is able to commute their pension may be able to acquire a life annuity with the commuted value. This would allow them to avoid the tax liability typically associated with transferring the assets to a (locked-in) retirement savings arrangement, and at the same time avoid longevity and market and/or investment risk.

In our recent article on copycat annuities, we indicated that rights under the copycat annuity contract  cannot be “materially different” from the rights under the pension plan. Where this requirement is not met, the plan member has to include the full amount of the commuted value in income. We had been waiting for CRA to release related guidelines with more details since June 2016.

Those guidelines were released on Dec. 4. The registered plans directorate published a draft newsletter, “Registered Pension Plan Annuity Contracts,” and is accepting comments until March 1.

The draft newsletter confirms that:

  • in determining if the rights under the annuity contract are not “materially different” from the rights under the RPP, and thus allowing the annuity to qualify as a “copycat” annuity, CRA will consider the terms of the RPP based on the plan as CRA registered it; and
  • annuity purchases must not allow the amount or the form of benefits to be reconfigured.

One of the issues that has perplexed annuity insurers when contemplating copycat annuities is how CPI indexing is addressed. While many RPPs have indexing, the Canadian market for annuities indexed to CPI has vanished, making it challenging to find a true copycat.

Fortunately, CRA has proposed two proxies in lieu of a full CPI indexing adjustment. In brief, one is related to the Bank of Canada’s inflation-control target, and the other looks at the spread between Government of Canada long-term bonds and real return bonds. CRA has stated that when looking at the annuity purchase, using the proxies is acceptable, “provided that the annuity contract matches all other benefits provided under the RPP.”

The draft newsletter also confirms that if the commuted value cannot provide benefits equal to what the RPP would have provided, lifetime and ancillary benefits can be reduced, as long as the benefits that would have been provided by the RPP are not further reconfigured. In this situation, the commuted value must fully satisfy the member’s entitlements under the RPP.

The newsletter confirms that the annuity cannot provide for higher benefits than the RPP would have provided. Instead, the member will receive a cash payment for the excess—the amount cannot be left in the plan or transferred directly to another registered vehicle.

Finally, the draft newsletter makes certain comments relating to annuities purchased from IPPs. A number of scenarios are contemplated. If, however, the annuity provides lesser benefits than the IPP, the purchase can still be protected where the guidelines described in the newsletter are adhered to.

(For IPPs registered in Ontario, section 48 of the regulations to the Pension Benefits Act can provide relief for underfunded plans. Where the member is a “significant shareholder,” he or he and the employer may jointly consent, in writing, to the reduction of the significant shareholder’s pension or pension benefit or ancillary benefits.)

Conversely, if the plan has a surplus, and lifetime and ancillary benefits are not at the maximum, the plan could be amended, and an annuity then acquired for the enhanced benefits.

As stated above, copycat annuities are attractive to many plan members. With the release of the guidance in the draft newsletter, annuity issuers may broaden their offerings, which would allow more plan members will be able to make use of this strategy.

Read the CRA guidelines here.

Lea Koiv, CPA, CMA, CA, CFP, TEP, is a tax, pension and retirement expert with Lea Koiv & Associates ( Alexandra Macqueen, CFP, provides financial planning advice through a strategic partnership with Koiv, focusing on retirement income planning for registered pension plan members.

Lea Koiv and Alexandra Macqueen