2008 General Meeting Assemblée générale 2008 Toronto, Ontario

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2008 General Meeting Assemblée générale 2008 Toronto, Ontario

2. IP-16 The Changing Pension Tax Environment: How the IPPs will Impact all Pension Plans

3. The Changing Pension Tax Environment Current Pension Tax System • pension tax system changes initially proposed in the mid-1970s • went through a number of iterations and considerable industry comment • eventual passed as legislation on June 14, 1990 • Regulations released December 23, 1991

4. The Changing Pension Tax Environment Current Pension Tax System (2) • amongst the key items that were the basis of the legislation • setting arrangements that could provide for sufficient retirement income by corporate or individual plans • equivalence of defined benefit and money purchase plans (with overall savings limits) • making portability easier and more uniform

5. The Changing Pension Tax Environment Current Pension Tax System (3) • key formula: on average throughout an individual’s life timeone current dollar per annum of defined benefit pensions costs 9 current dollars • actuaries sought age related factors and refinements – which were rejected as too complex

6. The Changing Pension Tax Environment Selective Enforcement • Law in Canada is supposed to apply to all individuals equally. Some differences allowed for identified groups, but size of the pension plan they are members of is not one. • Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law … C.R.F. s. 15

7. The Changing Pension Tax Environment Selective Enforcement (2) • “The determination as to whether the plan met the conditions in Regulation 8502(a) is essentially a question of fact and it was reasonable for the Minister, on the basis of the evidence before him, to conclude that the conditions were not met as of the date of intended revocation.”Loba Ltd. v. Canada (M.N.R.) • Standard of care for CRA reduced from “correct” to “reasonable” • CRA can decide on the “facts” and there is no place to go for review.

8. The Changing Pension Tax Environment Primary Purpose • Regulation 8502(a)the primary purpose of the plan is to provide periodic payments to individuals after retirement and until death in respect of their service as employees • Registered Plans Division (“RPD”) takes position that any parties motivation can be assigned as “primary purpose”

9. The Changing Pension Tax Environment Primary Purpose (2) • Courts take position that must convince RPD of the “fact” (not motivation), and that they will not review facts • reasons RPD has said are invalid purposes (assumed to be called primary) • plan established by legislation • plan established by collective bargaining • plan meant to attract quality employees • plan to tax shelter retirement savings • more….

10. The Changing Pension Tax Environment Participating Employer • In Regulation 8502(b) definition of a “contribution” to a pension plan • member contribution [ITA 8(1)(m)] • employer MP contribution [ITA 147.2(1)(a)] • employer DP Contribution [ITA 147.2(1)(b) – “eligible contribution] • transfer [ITR 8300(1) – “excluded contribution”] • transfer from non-resident plan acceptable to Minister • Registered Plans Division denies the definition and has decided that transfers are not contributions.

11. The Changing Pension Tax Environment Participating Employer (2) • In ITA 147.1:“participating employer” , in relation to a pension plan, means an employer who has made, or is required to make, contributions to the plan in respect of the employer's employees or former employees, or payments under the plan to the employer's employees or former employees, and includes a prescribed employer; • Before new interpretation of contribution, a transfer was essentially like a reciprocal agreement – service at one employer was the same as service at another. RPD refuses with or without agreement.

12. The Changing Pension Tax Environment The Changing Pension Tax Environment Participating Employer (3) Participating Employer (3) • Impacts: • normal interplan transfers adversely affected • this is particularly the case under the PSPA rules (ITR 8303) as no longer can treat the plans as related • transfers of assets to new pension plan under an sale of an operation as an asset sale • RPD is that if member has no service with new company (e.g. retirees and deferred vested), benefits are nil • RPD says if not same salary for everyone, at best retroactive benefit cut, but may also deregister new plan “retroactively”

13. The Changing Pension Tax Environment The Changing Pension Tax Environment Participating Employer (4) • Impacts: • taking over “dead pension plans” where members had no direct relationship with current employers impossible • this happens with municipal reorganisation, health care reorganisation, various agencies being merged into or out of government • more…..

14. The Changing Pension Tax Environment Change in PSPA Calculations • Old method DB->DB: • from out-going plan: compute the PAs based on payroll reports • for in-coming plan: computer the PAs that would have been computed if member had been on payoll • mismatch requires qualifying transfer or withdrawal, or decrease in benefits • based on historic (year of accrual) salaries and historic maximums

15. The Changing Pension Tax Environment Change in PSPA Calculations (2) • New method DB->DB: • from out-going plan: compute the PAs based on payroll reports (same as before) • for in-coming plan: computer the PAs that would have been computed based on salary in year of accrual and maximum in year of credit • based on historic (year of accrual) salaries and current maximums • large mismatches that are unrelated to benefits (member usually capped at retirement so $0 benefit)

16. The Changing Pension Tax Environment Moving from a 2% Plan to a 2% Plan at 31.12.2009 (Sal. back proj. @ 3%)

17. The Changing Pension Tax Environment Moving 1.3/2% Plan to 1.35/2% Plan at 31.12.2009 (Sal. back proj. @ 3%)

18. The Changing Pension Tax Environment Change in PSPA Calculations (3) • Old method DC->DB: • from out-going plans: actual contributions made + unused contributions • for in-coming plan computer the PAs that would have been computed if member had been on payoll • mismatch requires qualifying transfer or withdrawal, or decrease in benefits • based on historic (year of accrual) salaries and historic maximums

19. The Changing Pension Tax Environment Change in PSPA Calculations (4) • New method DC->DB: • from out-going plan: actual contributions made + unused contributions (no adjust to maximums) • for in-coming plan: computer the PAs that would have been computed based on salary in year of accrual and maximum in year of credit • large mismatches that are unrelated to benefits (member may be capped at retirement so $0 benefit) • this method tends to hide the tax penalty behind the complexities, but it is still there

20. The Changing Pension Tax Environment Change in PSPA Calculations (5) • For DC->DB the transfer penalties are effectively the same increasing amounts as computed before for the DB plan • Why? The old method was based on fundamental integration of DB and DC benefits. The formula under the old method was used consistently and produced consistent and logical results.

21. The Changing Pension Tax Environment Actuarial Equivalence • Pension tax law allows actuarially equivalent increases in benefits for late retirement (after 65), so • B69 x v69-65 x 69-65p69 x ä69= B65 x ä65 • RPD in Actuarial Bulletin No. 1 rewrites actuarial science • B69 x v69-65 x ä69= B65 x ä65 • mortality adjustment is removed, benefits cut, actuarial science ignored

22. The Changing Pension Tax Environment CIA Is The Maximum • CIA has long argued that CRA does not use their work as the maximum transfer value • Newsletter 94-3 issued almost immediately thereafter implemented the newly passed CIA standard as the maximum commuted value basis • Newsletter 94-3R (Oct. 21, 2008) changes so that ANY future CIA Standard of Practice on transfer values will be the maximum

23. The Changing Pension Tax Environment Retroactive Deregistration • RPD has implement something called “retroactive deregistration” where a plan is deregistered back to the instant before it was created. • attempt to bypass the pension tax legislation • attempt seems to be to turn pension into an inter vivos trust • proscribed period for taxes is 3 years, and cannot collect tax except is special cases

24. The Changing Pension Tax Environment Retroactive Deregistration (2) • RPD now finds easy to do by just deciding to say that the primary purpose is incorrect – with no accountability • creates multiple other risks • plans transferring into, or out of, the impacted plan, including pension, RRSP, etc. • ownership issues of funds (pension plans sponsored by company, not owned by beneficiaries)

25. The Changing Pension Tax Environment RPD’s New Position on Policy • CRA has announced at the annual pension sessions their new strategy for dealing with pension issues • RPD will not communicate or give guidance on their emerging policies • RPD will audit to ensure compliance with those policies • if the plan does not comply RPD will penalise

26. The Changing Pension Tax Environment Fines • prior threat from RPD was usually just deregistration (fines for late T244s) • committees were established to invoke substantial fines for “penalties” • agency set up to administer tax-sheltered programs seems set to impose taxes