Canadian Tax Adviser
February 7, 2012

Everybody into the Pool — New Retirement Savings Option for Small Business Employees

Deb MacPherson
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 available.

Background
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.

PRPP plan benefits — Employees and self-employed individuals
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.

PRPP plan 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 contribution room.

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 (RRIF), or payment of benefits similar to RRIF benefits from the employee’s PRPP account. Employees will pay tax on these payments, just like other pensioners.

For more information, contact your KPMG adviser.

© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.