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147.4 – RPP Annuity Contract
Section 147.4 of the Act provides a new set of rules that deal primarily with individuals acquiring ownership of an annuity contract under a registered pension plan on a tax-deferred basis. These rules ensure that annuities are not used as a means of providing tax-assisted pension benefits in excess of the registered pension plan limits. Section 147.4 of the Act applies to contract acquisition, contract amendment and contract replacement occurring on or after July 31, 1997. Section 254 of the Act applied to the purchase of annuities under a superannuation or pension plan or fund. Retirement compensation arrangements and other unregistered pension plans could benefit from the tax deferment advantages of paragraph 254(a) of the Act. New section 147.4 will apply only to the purchase of annuities from RPP funds. 5.1 147.4(1) – RPP Annuity Contract
Subsection 147.4(1) of the Act replaces the mechanism provided under paragraph 254(a) for individuals to acquire annuities under superannuation or pension funds. Subsection 147.4(1) is more restrictive then paragraph 254(a). Subsection 147.4(1) applies where an individual acquires ownership of an annuity contract in satisfaction of the individual’s entitlement to benefits under an RPP. Any amount received from the annuity contract is deemed to have been an amount paid from the RPP. Therefore there is no immediate taxation on acquisition of the annuity and any payments under the contract are included in the recipient’s income. Before July 31, 1997, under the provisions set out in section 254, an RPP member could consider, in full or partial satisfaction of his entitlements to benefits under the DB provision, to commute the present value of their benefits under paragraph 8503(2)(m) of the Regulations and then use the single amount to shop the market and purchase an annuity providing benefits not permissible under the RPP. Those benefits could have been off-side, within the limits of the Act but not provided for by the terms of the RPP, or equivalent to those available through a transfer to an RRSP pursuant to subsection 147.3(4) and within the limits of the prescribed amount of section 8517 of the Regulations. In any of those cases, the application of paragraph 254(b) would result in the immediate income inclusion, under paragraph 56(1)(a), of the total commuted value. Since July 31, 1997, the plan member can choose in full or partial satisfaction of his entitlement to benefits under the plan:
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Acquire an interest in a tax-deferred annuity from a “licensed annuities provider” (as defined in subsection 147(1)) pursuant to subsection 147.4(1), or Cash-out the commuted value under paragraph 8503(2)(m), or Transfer that amount pursuant to section 147.3 (subject to the prescribed amount of section 8517).
Entitlements to benefits are being satisfied by the application of either provision but not all three. It therefore becomes impossible, as of July 31, 1997, to purchase an annuity providing benefits materially different from those available under the plan without first cashing-out or transferring the present value of those benefits. Under section 254 of the Act, it was not always clear what rights of the RPP had to be mirrored to the annuity to qualify under paragraph 254(a) of the Act. No difference could exist or the annuity would be taxed under paragraph 254(b) of the Act. The rights provided for under the annuity contract must not be materially different from those provided for under the plan. The ultimate determination of what exact rights are provided for under the RPP has been tied to the concept of plan as registered as defined in subsection 147.1(15) of the Act. The contract must not allow for any further premiums to be paid after the individual acquires it. Paragraph 147.4(d) of the Act requires that, at the time of acquisition of an annuity contract, the registration of the plan is not revocable. Under section 147.4(1) the Minister has the authority to ignore the fact that the registration of the plan is revocable. This section will not apply unless the Minister waives this condition. The waiver could be granted when the annuity contract is not affected by the event making the plan revocable. When an individual does not acquires an interest in an annuity contract as a consequence of a transfer to an RRSP or RRIF, as per subsection 147.4(1)(e) of the Act, the individual is deemed not to have received the amount out of or under the RPP due to acquiring the interest. Except for the purposes of sections 147.1 and 147.3 of the Act, the individual is deemed to have received the payment under the RPP. 5.2 147.4(2) – Amended Contract
Subsection 147.4(2) of the Act provides rules that apply where an annuity contract is amended. The rules apply if the rights provided for under the contract are materially altered as a consequence of the amendment. In such a case, an individual with an interest in the contract immediately before the amendment is deemed to have received an amount from a pension plan equal to the fair market value of that interest. By virtue of paragraph 56(1)(a) of the Act, the individual is required to include this amount in income. Subsection 147.4(2) of the Act also deems the amended contract to be a separate annuity contract not issued pursuant to or under a superannuation or a pension fund or plan.
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An individual with an interest in the amended contract is deemed to have acquired the interest at the time of the amendment at a cost equal to the fair market of that interest immediately after the amendment. This establishes the date of acquisition and the adjusted cost basis for purposes of the accrual rule. 5.3 147.4(3) – New Contract
Subsection 147.4(3) of the Act contains rules relating to annuity contracts that replace contracts to which subsection 147.4(1) or paragraph 254(a) of the Act applies. As long as the rights provided for under the new contract are not materially different from those provided for under the original contract, the new contract is considered to be the same contract as the original contract. However, where the rights are materially different, an individual with an interest in the original contract is deemed to have received an amount from a pension plan equal to the fair market value of that interest. By virtue of paragraph 56(1)(a) of the Act, the individual is required to include this amount in income. Plan Text: The terms of an RPP must provide for the acquisition of ownership of an annuity contract with pension plan funds. The terms must provide that the acquisition of ownership of an annuity contract will comply with the conditions set out in the Act. The terms of the RPP must not treat the purchase of an annuity contract as a commutation and subsequent transfer of benefits. Cross References: Amounts to be Included in Income – 56(1)(a)(i) Deemed Registration – 147.1(3)(a) Contract Under a Pension Plan – 254 Prescribed Annuity Contracts – 304(1)(a)
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