Canadian Tax Adviser
February 7, 2012
Everybody into the Pool — New Retirement Savings
Option for Small Business Employees
Calgary, National Enterprise Tax Leader
Employees of small businesses and self-employed individuals will soon have a new option for tax-effective
retirement savings if they don’t already have a company pension plan.
The new Pooled Registered Pension Plans
(PRPP) are intended to be a broad-based, low-cost, defined pension
contribution vehicle that will be available to all employees, employers and
self-employed individuals. The PRPP will offer
these individuals the benefits
of participating in a large pension plan like the defined contribution plans
many large companies offer, and will also allow
employers to offer retirement savings
without the cost of setting up a pension plan and administering it.
The draft tax legislation to enact the PRPP will not be
tabled until sometime after February 14, 2012, the end of Finance's
consultation period. However, small
business employees and owners may want to start considering
this new retirement savings option to take advantage of any tax savings
Finance introduced draft tax legislation for the PRPP framework on December 14, 2011. These tax rules were promised
when the PRPP framework was introduced in Bill C-25 on November 17, 2011.
Finance is accepting comments on the draft legislation, which applies to
both federally and provincially regulated PRPPs, until February 14, 2012.
lan benefits — Employees and
Along with lower investment management costs, PRPPs offer the same tax benefits as
Registered Retirement Savings Plans (RRSP). Like RRSP contributions, PRPP
contributions will be tax-deductible. Individuals’ combined PRPP
contributions and RRSP contributions will be subject to the current annual
RRSP limit of 18% of the previous year’s earned income, up to a maximum of
$22,970 for 2012. Individuals will also be able to transfer their savings between PRPPs, so they’re
not wedded to one plan.
lan benefits — Employers
Employers are not required to contribute to employees’ PRPPs but they can choose to match their
contributions either fully or partially. Companies will be able to deduct
PRPP contributions, but contributions will vest
immediately, unlike some pension plans in which employer contributions do
not vest until the employee has been with the company for a set time.
Any employer contributions are included as part of the employee’s
Companies will not be required to report pension adjustments
for employee and employer contributions as for an
employer-sponsored registered pension plan. As a result, the PRPP option
should be easier to administer.
Investment restrictions of PRPP
General rules will apply to ensure that investments are reasonably
diversified and do not present risks of self-dealing. A PRPP will generally
need to take reasonable precautions to avoid concentrating more than 10% of
its assets in a particular business (or non-arm’s-length group of
businesses). In addition, the PRPP will be required to avoid intentionally
acquiring "restricted investments", which are investments in which a member
has a "significant interest" (i.e., not less than a 10% ownership interest),
as defined in proposed subsection 147.5(1).
Receiving a pension
To receive a pension from a PRPP, employees will have the same options
available to defined contribution pension plan members — the purchase of a
life annuity, transfer to an RRSP or Registered Retirement Income Fund
payment of benefits similar to RRIF benefits from the employee’s PRPP
account. Employees will pay tax on these payments, just like other
For more information, contact your KPMG adviser.