Understanding the Power of Additional Voluntary Contributions
Sep 13, 2014
The INTEGRIS Personal Pension Plan is a collection of three distinct subaccounts (defined benefit ("DB"), defined contribution ("DC"), and additional voluntary contributions or "AVC").
When a PPP member saves under the defined contribution option, the employer makes a mandatory 1% of T4 income contribution. The employee, however, also has the option of making an employee voluntary contribution, ranging from 0% to 17% of T4 income. These voluntary employee contributions are then deposited inside of the AVC subaccount of the PPP – and treated as if they were DC assets.
This employee contribution has the effect of reducing personal income taxes owed since it is an employee contribution. Someone paying at a marginal tax rate of 45% and contribution to the PPP would receive a tax refund of $45 for every $100 made to the pension plan's AVC account.
The AVC account serves another purpose: to receive RRSP assets held at other financial institutions. Because the RRSP annuitant received tax assistance when he or she contributed to the RRSP, a transfer of RRSP assets into the AVC account does not trigger any new deductions. However, once RRSP assets enter the PPP, they are for all purposes treated as pension monies and subjected to any applicable provincial pension legislation. In a number of provinces, assets held in the AVC account, therefore, trade creditor-protected.
The other consequence is that since voluntary contributions (and RRSP transfers) are not used to purchase past service under the plan's DB component, they are not subject to provincial locking-in rules and can be withdrawn from the pension plan prior to retirement age. A transfer to another RRSP can take place by using a CRA Form T2151.
Finally, since under the terms of a PPP, the investment management fees relating to the assets in the AVC account (or for that matter, all fees payable under the PPP) are the legal responsibility of the plan sponsor of the PPP, they are deductible under section 18 of the Income Tax Act (Canada). On a large RRSP transfer into the AVC account, this can create substantial additional tax relief for the PPP sponsor. By way of illustration, a $1,000,000 RRSP transfer to the AVC account where the client pays 1.5% of assets under management would create a new corporate tax deduction for the PPP sponsor of $15,000 annually (and growing with the size of the assets under management.)
This deduction is in addition to the regular deductions that the corporation would claim either under the DB component or DC component of the PPP.
A registered plan to registered plan transfer can occur using a CRA Form T2033.
In light of the new tax rules that penalize passive investments within CCPCs, advisors must understand how pension legislation can become a powerful tool to deal with wealth succession, business succession, and tax optimization within a corporate environment.Learn more about the ppp101 course
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