2023-0974211C6 Copycat annuity

Principal Issues: 1. Where indexation is acquired, can CRA confirm that the indexation must be limited to the amount that can be purchased with the OACs the plan member has chosen to allocate for that purpose? 2. Can CRA confirm that in the circumstances the excess of $20,000 cannot be used to acquire additional indexing?

Position: 1. Yes. 2. Yes.

Reasons: 1. Prior position. 2. Prior position.

Author: Schnitzer, Irina
Section: Reg. 8502(d)(ix)

CLHIA CRA Roundtable September 28, 2023

Question 5 – Section 147.4 Copycat Annuity

Background

A member of a flexible pension plan may be entitled to a commuted value from the plan and the plan may permit members to acquire additional benefits with their optional ancillary contributions (“OACs”) and/or to purchase an annuity with the commuted value. Section 147.4 of the Act stipulates that the rights under the annuity contract cannot be materially different from the rights under the plan as registered.

For example, there is a commuted value of $500,000, which includes $50,000 in the OAC account. The plan member wishes to spend the entire $50,000 in the OAC account on indexation. The life insurer prepares a quote and the cost of the annuity is $430,000 (ignoring any ancillary benefits that can be acquired with the amount in the OAC account).

Question 5 a)

Where indexation is acquired, can CRA confirm that the indexation must be limited to the amount that can be purchased with the OACs the plan member has chosen to allocate for that purpose? That is, indexation will be limited to whatever can be acquired with the $50,000.

CRA Response

Yes that is correct. The plan terms as registered establish the manner in which specific optional ancillary benefits are provided in respect of a member. See condition 5 of Newsletter 96-3R1, Flexible Pension Plans.

Question 5 b)

Newsletter 20-1 contemplates that there are situations where the commuted value is greater than the amount that replicates the RPP benefits. In such a situation, the plan member will be entitled to a taxable refund. With respect to flexible pension plans, if the full amount of OACs are used to acquire the optional ancillary benefits, there may be situations in which an annuity for the other rights under the pension plan cost less than the commuted value available for the purchase. In this situation, the plan member would be entitled to a $20,000 refund and the annuity contract would still meet the conditions specified in section 147.4 of the Act. Can CRA confirm that this excess of $20,000 cannot be used to acquire additional indexing?

CRA Response

Yes that is correct. The $20,000 must be paid to the member and must be included in the member’s income. The $20,000 payment is a permissible distribution from the plan under subparagraph 8502(d)(ix) of the Regulations.

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