July 9, 2019

CRA draft newsletter on annuity purchases from pension plans

A draft newsletter released by The Registered Plans Directorate of the CRA provides guidance on the tax implications of purchasing annuities by both plan administrators and individuals from registered pension plans. Currently, Section 147.4 of the Income Tax Act allows an annuity to be purchased from a pension plan with the condition that the annuinty terms are not “materially different” from the pension plan. If different, then 147.4 doesn’t apply resulting in the individual being seen to receive the full purchase price as a taxable payment. The draft newsletter outlines how their definition of “materially different” will be changing.

Key Takeaways:

  • Prior to the Draft Newsletter, the CRA has taken a conservative view of the term “materially different”, effectively requiring annuity terms to be substantively identical to the pension plan terms.
  • Now, the CRA will accept fixed-rate indexation in lieu of CPI indexation.The fixed rate can either be the mid-range of the Bank of Canada’s inflation control range at the date of purchase
  • The newsletter maintains that where the commuted value of pension plan benefits is more than enough to provide the promised benefits under an annuity, the excess must be paid in cash to the member.

“The main change in the Draft Newsletter is the new guidance respecting the forms of inflation indexing that will not be considered materially different by the CRA from CPI-based indexing. These will be welcome to plan administrators of pension plans who wish to purchase annuities with respect to benefits with CPI-based indexing.”

Read more: https://www.morneaushepell.com/ca-en/insights/cra-draft-newsletter-annuity-purchases-pension-plans

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