Tax case illustrates government’s motivation in IPP change

Individual pension plans (IPP) can be a great way for people who operate small businesses through a Canadian-controlled private corporation (CCPC) to save for retirement. An IPP is essentially a defined benefit (DB) registered pension plan with fewer than four members, at least one of whom is the controlling shareholder of the corporation that sponsors the IPP.

But IPPs have also been used by employees who wish to take funds from a DB pension with them when they leave their employers. Upon leaving a DB plan, the tax rules typically allow an employee to transfer, on a tax-deferred basis, the entire commuted value of their accrued benefits to another DB pension plan of another employer, or a far lesser amount (often only 50%) to the employee’s own RRSP.

To get around this limitation, some employees would incorporate a new CCPC and immediately set up an IPP to receive the full commuted value from their former employer’s pension plan. Last month’s 2019 federal budget announced changes that would permanently stop this type of planning.

Before reviewing the budget announcement, let’s take a look at a Federal Court of Appeal case (Mammone v. Canada, 2019 FCA 45) decided in March, which sheds light on exactly the type of planning the government has attempted to stop.

The case

The recent case involved a mechanic employed by Toronto Fire Services from 1981 until his retirement in 2009. During this period he belonged to the Ontario Municipal Employees Retirement System (OMERS) pension plan.

On Jan. 1, 2009, the taxpayer incorporated a numbered company that established an IPP called the Pension Plan for Senior Executives of (the Company). The taxpayer was the only member. It was registered as a pension plan pursuant to the terms in the Income Tax Act and, on June 23, 2009, the commuted value of the taxpayer’s OMERS pension—just over $640,000—was transferred to the IPP.

Under the Income Tax Act, a taxpayer is required to include in income an amount received “on account or in lieu of payment of, or in satisfaction of […] a superannuation or pension benefit.” This includes indirect payments, such as payments that the taxpayer directs to someone else for the taxpayer’s benefit. However, there is no income inclusion when amounts are transferred between DB registered pension plans (RPP). An RPP is a pension plan registered by the Canada Revenue Agency (CRA) whose registration has not been revoked, including IPPs.

In 2013 the CRA moved to revoke the taxpayer’s IPP registration “on the basis that the plan did not satisfy registration requirements,” issuing a notice of revocation retroactive to Jan. 1, 2009. On the same day, the agency reassessed the taxpayer’s 2009 tax year to include the commuted value of the OMERS pension in his income, based on the belief that the IPP’s registration had been retroactively revoked and therefore the commuted value of the pension was transferred to a non-registered plan, making it taxable.

While the taxpayer ended up winning his case on a technicality (the CRA erroneously issued its revocation before the required 30-day notice period had passed), the government sought to put an end to this “inappropriate planning” in its 2019 federal budget.

Budget 2019

To stop this type of planning, the 2019 budget proposed to prohibit IPPs from providing retirement benefits for past years of employment that were pensionable service under a DB pension plan of a prior employer. Any assets so transferred on or after March 19, 2019 will now be considered to be a non-qualifying transfer that is required to be included in the employee’s income.

Jamie Golombek , CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning and Advice in Toronto.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.