100 OVERVIEW. Chapter Background on Canadian Retirement Savings Tax Reform

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1 Seq: 1 Free lead: 340D Next lead: 390D Comment: Chapter OVERVIEW Page 105 Background on Canadian Retirement Savings Tax Reform... 1 Historical Timelines Advantages of Tax-Sheltered Retirement Plans Alternatives to Tax-Sheltered Retirement Plans Present System for Taxation of Retirement Savings Background on Canadian Retirement Savings Tax Reform It is not surprising that the federal government has devoted so much time and effort to studying the taxation of retirement savings. The tax dollars involved are very significant, as is the impact on the Canadian economy of the pools of Canadian assets held in RRSPs and private pension plans. For example, the amount that was contributed to RRSPs in 2003 was over $27 billion, representing 6 million contributors. In the same year, over $12 billion was contributed to trusteed registered pension plans, with further amounts being contributed to insured pension plans. The first attempts at making significant changes to the existing decades-old system of rules and laws covering contributions to registered pension plans and personal registered retirement savings plans occurred in the May 1985 Federal Budget. Although those initial proposals were heavily criticized and subsequently withdrawn, further proposals occurred over the next four and a half years, resulting in the system that was eventually implemented in In developing the current retirement tax system, the Department of Finance had four major concerns with the previous system. First, the system treated individuals in different circumstances inconsistently and inequitably. There were three main categories of individuals, each treated differently within the previous system: employees who belonged to defined benefit pension plans; 1 105

2 Seq: 2 Free lead: 50D Next lead: 220D Comment: 2 Canadian Pensions and Retirement Income Planning employees who belonged to other types of employer-sponsored registered retirement plans, such as defined contribution pension plans and DPSPs; and employees who fell into neither of the above categories, including those who were self-employed. The total amount of money that could be tax-sheltered on behalf of a person under the previous system could vary dramatically, depending on which of the above three categories the individual belonged to. For example, using 1989 rules, the maximum contribution which could be made to an RRSP by a self-employed individual was $7,500. By comparison, an employee who belonged to a defined contribution pension plan could contribute a combined total of $3,500 to the plan and RRSP, and the employer could contribute up to $3,500 to the pension plan for that individual, resulting in an overall maximum of $7,000. On the other hand, a defined benefit plan providing the maximum benefit of 2% of best average earnings (or $1,715 of annual pension, if less) for a particular year of service could provide benefits of far greater value than $7,000; in addition, the individual could contribute $3,500 to an RRSP if the defined benefit plan did not require employee contributions. Second, some provisions in the previous system could be used by individuals and their employers to increase the amount of tax-sheltered income over and above what the Department of Finance intended. These loopholes (including techniques known as double-dipping and flip-flopping ) do not exist under the current system. Third, there was a concern that the previous system for RRSPs was not flexible enough. For example, if an individual was unable to make an RRSP contribution in a particular year, the ability to make and deduct that contribution was lost forever. The introduction of the RRSP carry-forward alleviated this problem. Finally, the registration requirements for pension plans were set out in an Information Circular (first introduced in 1972). Since this circular did not have the force of law, Revenue Canada (as the CRA was then known) could modify these administrative guidelines to suit a particular set of circumstances. The federal government preferred these rules to be embodied in legislation. Based on these concerns, the Department of Finance developed specific goals for the reform of the retirement savings tax system, as outlined below: 105 To increase the equity in the tax system without introducing excessive compliance costs. The total amount of income that can be tax-sheltered on behalf of any individual will not be considered a

3 Seq: 3 Free lead: 460D Next lead: 600D Comment: Overview 3 function of his or her employment status, or of the type of registered pension plan or DPSP offered by the employer. To increase flexibility in the timing of individual RRSP contributions through the RRSP carry-forward system. To encourage individual savings for retirement. As baby boomers start to reach retirement age early in this century, the large number of pensioners will put considerable stress on the government-sponsored retirement system (primarily Old Age Security and the Canada/Québec Pension Plans). It will be important for future generations that today s younger generation be relatively financially independent after retirement. To provide increased incentives for profit sharing, through higher deductible contribution limits to DPSPs. To increase the amount of information available to the federal government on levels of retirement savings and the relative utilization of different tax-assisted retirement savings vehicles. To codify many of the pension plan registration requirements previously set out in Information Circular 72-13R8. This codification ensures the consistency of application of these rules with the new system of pension and contribution levels and limits the flexibility which the CRA previously had in administering the Income Tax Act (Canada) and the federal government policy as it relates to registered pension plans. Historical Timelines A number of dates in Canadian history have been significant in the development of private pension plans and individual savings plans. Note: The 3rd edition includes the historical timelines dating from 1919 to For the purposes of this sample chapter we have only included 1999 to 2005, inclusive. January 11, 1995 Passage of amendments to the federal Income Tax Regulations, which include provisions governing pension adjustments (PAs), past service pension adjustments (PSPAs), and registration rules governing pension plans, RRSPs, and DPSPs.

4 Seq: 4 Free lead: 160D Next lead: 600D Comment: 4 Canadian Pensions and Retirement Income Planning March 26, 1995 June 30, 1995 July 19 & 20, 1995 March 6, 1996 November 25, 1996 Royal Assent given to An Act to Amend the Income Tax Act and the Income Tax Application Rules, which implements measures from the 1994 Federal Budget, including the Home Buyers Plan. Royal Assent given to Manitoba s Maintenance Enforcement (Various Acts Amendment) Act, S.M. 1995, c. 3, which allowed the garnishment of pension credits of active and former members when family maintenance payments are in arrears. Release of draft provisions of the Income Tax Act (Canada) and Regulations incorporating changes to retirement savings limits and old age security benefits announced in the 1995 Federal Budget. Provisions modified contribution limits on RRSPs and pension plans and reduced the lifetime penalty-free excess contribution limit for RRSPs from $8,000 to $2,000 for 1996 and subsequent tax years. The budget also eliminated the $2,000 per year of service rollover of retiring allowances to RRSPs for years of service after Federal Budget contains modified limits for money purchase pension plans and profit sharing plans. The RPP limits reduce from $14,500 in 1997 and $15,500 in 1998 to $13,500 for both years, and the RRSP limits for 1998 and 1999 were reduced to $13,500 from $14,500 and $15,500 respectively. All limits are frozen for a further four years. The Budget eliminates the seven-year limit on carry-forward of unused RRSP contribution room and reduces the age limit for maturity of RPPs, RRSPs and DPSPSs from age 71 to age 69. Release of newsletter of flexible pension plans by Revenue Canada, which sets out the conditions that plans that provide for optional ancillary contributions and benefits must meet in order to be registered.

5 Seq: 5 Free lead: 440D Next lead: 710D Comment: Overview 5 January 1, 1997 February, 1997 April 8, 1997 June 26, 1998 Effective date of Newfoundland s Pension Benefits Act With its passage, Prince Edward Island becomes (and remains) the only province without pension legislation in force. Federal Budget introduces a pension adjustment reversal (PAR) for individuals who leave registered pension plans or deferred profit sharing plans before retirement to restore lost RRSP contribution room. Draft PAR regulations subsequently introduced on June 26, Introduction of Québec Bill 102, An Act to Facilitate Phased Retirement and Early Retirement, introduces significant changes to how retirement is traditionally viewed and permits payment of part of an individual s pension in a lump sum and partial receipt of retirement pension while in employment. Royal Assent received on June 5, Regulations effective January 1, Release of draft regulations by the federal government relating to PARs and other pension-related measures from the 1995 and 1996 Federal Budgets. April 30, 1999 Effective date of Manitoba Regulation 81/99, which amends the Pension Benefits Act Regulation to incorporate more comprehensive solvency rules and to bring Manitoba s pension legislation in line with that of other jurisdictions. July 15, 1999 Effective date of British Columbia Bill 58, The Pension Benefits Standards Amendment Act, which contains provisions relating to flexible pension plans, surplus and vesting, provides a new definition of spouse that recognizes same sex partners and provides enhanced responsibilities for plan administrators and fund holders.

6 Seq: 6 Free lead: 110D Next lead: 1260D Comment: 6 Canadian Pensions and Retirement Income Planning November 30, 1999 February 7, 2000 February 28, 2000 March 1, 2000 March 3, 2000 March 16, 2000 Release of a package of draft technical amendments to the Income Tax Act (Canada), which includes amendments relating to the amount of an employee s pension contributions and registered pension plan transfers. Release of Foreign Service Newsletter Update No by the Registered Plans Division increases the number of years of foreign service that may be recognized in a Canadian registered pension plan to five years from three years. Federal Budget includes an increase in the permissible foreign content limit for investments in RPPs and RRSPs to 25% for 2000 and 30% for 2001 and subsequent years. The foreign property rule was eliminated altogether in the February 2005 Federal Budget. Effective date of Alberta Bill 30, the Employment Pension Plans Amendment Act, and the related Regulation, which contains substantial amendments to the EPPA. Effective date of Ontario Bill 27, the Pension Benefits Statute Law Amendment Act, which contains measures to permit access to locked-in retirement accounts in situations of hardship and shortened life expectancy and to harmonize and streamline pension administration and regulation. Associated Regulations released March 3, 2000 and April 25, Introduction of Québec Bill 102, Act to Amend the Supplemental Pension Plans Act, which adds 60 sections to the Supplemental Pension Plans Act and amends, repeals, or replaces 195 existing sections. It is the biggest revision since the Supplemental Pension Plans Act came into force in Effective date for new legislation is January 1, 2001.

7 Seq: 7 Free lead: 220D Next lead: 820D Comment: Overview 7 April 18, 2000 June 29, 2000 July 1, 2000 September 1, 2000 October 18, 2000 October 20, 2000 Release of a package of draft technical amendments by the federal government, primarily relating to the RPP provisions of the Income Tax Regulations. The more important amendments include a change to the timing of when past service pension adjustments for certain individuals reduce RRSP contribution room and modified bridging amendments to accommodate provisions in Québec s SPPA. The Regulations were finalized and took effect January 30, 2001 Royal Assent given to Federal Bill C-23 and B.C. Bill 21, extending pension benefits and obligations to same-sex partners. All couples who have been cohabiting in a conjugal relationship for at least one year are eligible for benefits. Introduction of proposed changes to locked-in retirement funds in Newfoundland. Claimants will be entitled to temporary pension income or the withdrawal of small balances from locked-in retirement funds. The Registered Plans Division, the government department within Canada Customs and Revenue Agency responsible for enforcing the RPP rules set out under the Income Tax Act (Canada), is reorganized and renamed the Registered Plans Directorate. Federal mini-budget offers CPP and QPP deductions for self-employed individuals. Self-employed individuals will be entitled to deduct the portion of CPP or QPP deductions that represent the employer s share. Federal Bill C-24 receives Royal Assent. The bill improves the application of the goods and services tax and harmonized sales tax (GST/HST) to multi-employer pension plans (MEPPs). Under C-24, MEPPs will receive a rebate equal to 33 per cent of the GST/HST incurred on expenses related to the administration of the plan.

8 Seq: 8 Free lead: 380D Next lead: 930D Comment: 8 Canadian Pensions and Retirement Income Planning November 29, 2000 March 27, 2001 April 23, 2001 June 14, 2001 October 2, 2001 Québec Bill 102 passes through the Québec Legislative Assembly. Most new provisions come into effect January 1, Draft Regulations are not introduced until September 26, Final Regulations introduced on March 7, 2002 and most provisions effective on March 21, Amendments to Nova Scotia s Pension Benefits Act issued. Bill 9 extends pension plan eligibility, revises issues with respect to Life Income Funds and introduces new requirements for registration of pension plans. Canada Customs and Revenue Agency releases new Form T920E(1), Application to Amend a Registered Pension Plan. The new form requires additional information when requesting acceptance of an amendment, including the Business Number of the plan sponsor, contact information for the plan administrator, and information about the plan s consultant. Release of regulations amending the Regulations to the federal Pension Benefits Standards Act, Amendments include changes to surplus withdrawal regulations and a new average formula for the collection of fees by the Office of Superintendent of Financial Services. In response to internationally binding measures in United Nations Security Council Resolution 1373 and the events of September 11, 2001, the federal government introduces regulations amending the Regulations to the federal Pension Benefits Standards Act, 1985 on reporting requirements for Canadian financial institutions and pension plan administrators. The intent of the regulations is to prevent the collection of funds for use in terrorist activities.

9 Seq: 9 Free lead: 820D Next lead: 930D Comment: Overview 9 April 1, 2002 April 16, 2002 February 18, 2003 April 30, 2003 May 14, 2003 Effective date of introduction of amendments to the Pensions Benefits Regulations in Saskatchewan. The new regulations offer greater flexibility to retirement planners by recognizing registered retirement income funds as a pension choice and allowing for the transfer of funds from LIFs and LRIFs into RRIFs. Amendments to the Regulations to New Brunswick s Pensions and Benefits Act introduced. The amendments deal with vesting requirements, changes with respect to the commutation of benefits, and the distribution of surpluses. The amendments received Royal Assent on June 2, Some provisions are retroactive to December 31, 1991 and December 1, 2000 and the remainder come into force December 1, Federal Budget increases RRSP dollar limits, money purchase RPP limits and maximum pension limits. Limits for money purchase RPPs increase to $15,500 for 2003, $16,500 for 2004, and $18,000 for RRSP dollar limits increase to $14,500 for 2003, $15,500 for 2004, $16,500 for 2005 and $18,000 for Maximum pension limits increase to $1, for 2004 and $2, for Thereafter, all limits are to be indexed to increases in the average wage. The Ontario government Throne Speech makes plans for the abolishment of mandatory retirement. The Alberta government issues regulations allowing for the withdrawal of funds from locked in RRSPs, LIRAs, RIFs, and LRIFs in the event of financial hardship.

10 Seq: 10 Free lead: 270D Next lead: 1920D Comment: 10 Canadian Pensions and Retirement Income Planning May 17, 2003 February 27, 2004 July 29, 2004 Release of a package of draft technical amendments to the Income Tax Regulations, which include amendments to increase funding ratios for shared-cost defined benefit pension plans, changes to the rules for tax-free transfers between money purchase plans and to permit member funding of an unfunded liability in a pension fund. The release of draft amendments to the Income Tax Regulations dealing with defined benefit plans, defined contribution plans, and investment rules. Among the changes are amendments dealing with PSPA exclusions for increases in the maximum pension limit and new rules for RRIF-type payouts from money-purchase plans. The Supreme Court of Canada releases its decision in the case of Monsanto Canada Inc. v. Ontario (Superintendent of Financial Services). The Supreme Court holds that subsection 70(6) of Ontario s Pension Benefits Act requires the distribution of surplus on a partial pension plan wind up. December 10, 2004 Ontario extends the application of Section 8 of the Pension Benefits Act, 1990 to December 31, Section 8 is the surplus sharing regulation requiring that no distribution of surplus be made to an employer on full or partial wind-up unless there is a written agreement. Section 8 was intended as a temporary three-year measure when it first came into force on December 18, 1991 but has continually been extended since that time, this being the seventh such extension. February 1, 2005 New Standards of Practice for Determining Pension Commuted Values implemented by the Canadian Institute of Actuaries. Québec adopts the new standard effective April 14, 2005 but is effective for all other jurisdictions from February 1, 2005.

11 Seq: 11 Free lead: 100D Next lead: 0D Comment: Overview 11 February 23, 2005 April 19, 2005 June 1, 2005 December 12, 2005 The Federal Budget eliminates the foreign content restrictions for pension plans and RRSPs and also increases RRSP dollar limits, money purchase RPP limits, and maximum pension limits. Limits for money purchase RPPs increase to $19,000 for 2006, $20,000 for 2007, $21,000 for 2008, and $22,000 for RRSP dollar limits increase to $18,000 for 2006, $19,000 for 2007, $20,000 for 2008, $21,000 for 2009, and $22,000 for Maximum pension limits increase to $2, for 2006, $2, for 2007, $2, for 2008, and $2, for Thereafter, all limits are to be indexed to increases in the average wage. Amendments to the Income Tax Act (Canada) Regulations receive Royal Assent on June 29, Effective date of most provisions in Manitoba s Bill 10, which amends the Pension Benefits Act. Amendments include changes to participation standards, vesting, locking in, survivor pensions and death benefits, normal retirement age, funding standards, and governance and investment standards. Effective date of Saskatchewan Bill 47, which contains amendments to the Saskatchewan Pension Benefits Act, The bill contains provisions with respect to vesting on the death of a beneficiary, the right to waive an entitlement to a death benefit, and new definitions for optional ancillary contributions and optional ancillary benefits designed to accommodate flexible pension plan designs. Ontario passes legislation abolishing mandatory retirement in that province. Most provisions of Bill 211 will come into effect on December 12, This makes Ontario the first province to eliminate mandatory retirement since Manitoba and Quebec abolished it in the early 1980s (with the exception of Nova Scotia, which abolished it for public servants only in 2003).

12 Seq: 12 Free lead: 50D Next lead: 220D Comment: 12 Canadian Pensions and Retirement Income Planning 115 Advantages of Tax-Sheltered Retirement Plans The primary advantage of the tax sheltering that is provided for certain retirement plans is the fact that investment income is sheltered from taxation until the benefits are ultimately paid out to individuals. The compounding effect of the tax-sheltered investment earnings over a period of many years is quite significant. Numerous studies have shown that the benefits received on an after-tax basis from an arrangement where the investment income is tax-sheltered are higher than those benefits payable from an arrangement whose investment income is taxed as it is earned. There are two other important advantages: The individual s contributions, where permitted, are tax deductible. Employer contributions to an RPP or DPSP are generally tax deductible by the employer within limits and do not confer an immediate taxable benefit on the individual. 120 Alternatives to Tax-Sheltered Retirement Plans Not all retirement income provided by companies for its employees is from traditional registered retirement savings vehicles such as registered pension plans, deferred profit sharing plans, or RRSP arrangements. For various reasons, a company may decide that that it needs to provide retirement income from outside a registered vehicle, either in whole or supplemental to a registered vehicle. There are two main methods of providing retirement income outside of a registered vehicle: 1. A promise or commitment to pay a lifetime pension or an equivalent lump sum when the individual retires, with no advance funding. 2. The setting aside of funds in advance, known as pre-funding, in respect of a formal commitment to provide a pension or a lump sum upon retirement. There are two main vehicles for accommodating the first method: 120 retiring allowance, paid in the form of a lump sum or a limited series of payments upon loss of office or in recognition of long service part or all of these amounts may be transferred directly into an individual s RRSP, up to certain limits; and superannuation or pension benefit, as defined by subsection 248(1) of the Income Tax Act (Canada), which represents any payment

13 Seq: 13 Free lead: 10D Next lead: 110D Comment: Overview 13 made during retirement from a superannuation or pension program, usually payable for life. These two vehicles are often not differentiated. Some employers may believe that the payments which they may be making to their pensioners, outside of any registered pension plan that may otherwise be in place, are qualified retiring allowances for the purposes of the Income Tax Act (Canada). However, if these non-registered payments are structured and communicated as a lifetime pension, they are expressly excluded from the definition of a retiring allowance under the Income Tax Act (Canada), and therefore do not qualify for preferential tax treatment. Apart from a simple lump-sum cash payment, there are a number of vehicles for accommodating the second method of providing retirement income (i.e., pre-funding), including: Retirement Compensation Arrangement (RCA) This vehicle applies when non-registered retirement benefits are pre-funded, (with certain exceptions including the Employees Profit Sharing Plan described below). In general, the RCA fund is subject to a 50% refundable tax payable to the CRA on all contributions and realized investment income, the tax being refunded without interest by the CRA to the custodian when benefits are actually paid out to the beneficiary. Although employer contributions are tax-deductible (as may be the employee s contributions, if made to a trust and matched by the employer where the custodian of the trust is a resident of Canada), the 50% tax renders this mechanism somewhat unattractive. However, it probably receives more attention than the other pre-funding vehicles. Letter of Credit LOCs have been attracting the most interest of the various SERP funding vehicles in Canada in recent years, as they provide third-party protection with little current cash outlay on the employer s part. Under a typical LOC, a financial institution such as a bank agrees to pay the beneficiary of the LOC in the event that the company should default on its non-registered benefit payments or in other predetermined circumstances, for which the bank charges a fee in return. For LOCs to work as intended, the CRA in its assessing practices requires that the LOC not be secured in advance (e.g. by pledging the organization s assets or by reducing its normal lines of credit, in which case, the CRA may attempt to argue that the full face amount of the LOC has been contributed to the RCA, not just the annual fee). Furthermore, the bank must issue the LOC to a third party (normally a trust company). The employer makes a contribution to the trust equal to the bank s LOC fee, plus the trustee s expense charges, thereby creating an RCA, and makes a matching RCA refundable tax remittance to the CRA. 120

14 Seq: 14 Free lead: 70D Next lead: 220D Comment: 14 Canadian Pensions and Retirement Income Planning 120 The employer can take a current tax deduction for both payments. Under this approach, the employer normally makes retirement benefit payments on a pay-as-you-go basis, unless the LOC is called. It should be noted that once an LOC is in place, it is very difficult to unravel at a future date without the approval of all of the members. Annuities Immediate annuity purchases can be cost effective at retirement in comparison to pay-as-you-go funding on an after-tax present value cash flow basis for tax-paying entities. This is due to the fact that the cost of the annuity purchase is currently deductible by the employer, whereas pay-as-you-go benefits are only deductible when they are paid. At the same time, the annuity premiums are currently taxable to the employees (unless the annuity policy is owned by the employer, in which case an RCA is created) and a portion of the annuity payments is also taxable each year as interest income. As a result, when arranging for an annuity purchase in lieu of SERP benefit payments, the employer typically needs to give the employee a somewhat higher pre-tax amount than the accrued SERP liability in order to make the retiring employee whole on an after-tax or real world benefit basis. This approach is usually referred to as a grossed-up prescribed annuity, as the lump sum payment is grossed-up for the taxes the employee has to pay on the annuity purchase, and the interest portion of the annual annuity benefit is favourably taxed in a fixed manner for the employee s lifetime, as prescribed by Regulation 300 under the Income Tax Act (Canada). Life Insurance If life insurance is used to pre-fund retirement income benefits, it is taxed like an RCA, with the plan sponsor assumed to be the custodian. Thus, the plan sponsor must not only pay the annual premium, but must also send an equal amount to the CRA. However, the build-up in the underlying cash value of the policy is on a tax-sheltered basis, hence, no RCA tax is required on the investment income being credited as long as the policy is not cancelled or loaned against. Secular Trust Another arrangement that can be used to prefund retirement benefits for an individual is a secular trust. Under this approach, the employer pays the individual an additional amount of money on the condition that it is placed in a trust. The payment is tax-deductible by the employer as compensation, which means that it will also attract payroll and other taxes. The payment is included as taxable income to the employee. Relative to an RCA, this approach is advantageous when the employee s marginal tax rate is less than 50%. In addition, capital gains and dividends receive preferential tax treatment, instead of being taxed at the 50% RCA

15 Seq: 15 Free lead: 10D Next lead: 110D Comment: Overview 15 refundable tax rate. Insurance proceeds are also taxed in the same manner as if they were received directly by the individual. Employees Profit Sharing Plan (EPSP) The rules are set out in section 144 of the Income Tax Act (Canada). Employer contributions are made out of profits or by reference to profits. The individual is taxed each year on the share of the employer contributions and trust earnings allocated to him or her as if in immediate receipt of such amounts, even though the distribution from the trust fund will only take place at retirement or termination of service. The individual s allocated share of net capital gains or losses realized by the trust fund is subject to capital gains tax treatment. Company Stock There are a variety of long-term incentive plans available, usually for senior employees, the most typical varieties being stock option plans and stock purchase plans. Although these are not usually regarded as a primary means of providing retirement income, they are a means of providing employer monies or subsidies to individuals in advance of retirement to assist them in building an estate and, if significant, can provide a material source of income in retirement. Income Trusts Income trusts have gained in popularity due to the low returns on bonds and bank deposits. Income trusts raise capital by selling trust units and investing the proceeds to earn income from active businesses, equity or debt instruments, royalty interests, or real property. Income from income trusts flows directly back to the holder as a monthly distribution. Because they do not pay tax on investment earnings, this flow-through taxation of earnings makes income trusts a particularly attractive investment for tax-deferred entities such as pension funds. Any of these vehicles for pre-funding future retirement income may be appropriate, depending on the circumstances, and are often used in combination with each other and with vehicles that are not pre-funded. 125 Present System for Taxation of Retirement Savings The current retirement savings tax system is comprised of sections of the Income Tax Act (Canada), Regulations to the Act as well as various forms and guides to assist plan sponsors in complying and administering the rules. These sections of the Act set out the foundation for the system and contain elements which can only be changed by the House of Commons through a new Bill. The Regulations set out details which have been changed (and will continue to be changed) by the Department of Finance from time to time to accommodate policy and regulatory changes. The Regulations deal primarily with the rules for determining pension adjust- 125

16 Seq: 16 Free lead: 1670D Next lead: 0D Comment: 16 Canadian Pensions and Retirement Income Planning ments, past service pension adjustments, and pension adjustment reversals and set out the provisions that a pension plan must contain in order to continue to be registered under the Act. The role of the Department of Finance is to formulate federal government policy on financial, economic, and fiscal matters. The role of the CRA is to carry out this policy as it relates to taxation. Although the current system was developed by the Department of Finance, officials from the CRA were consulted throughout, since they were to be responsible for administering the system. The Department of Finance continues to provide input on any policy-related matters. The Province of Québec has brought its retirement savings tax rules into line with those of the federal government. The responsibilities imposed on retirement plan sponsors, particularly those who sponsor a defined benefit plan, are seen by some as quite onerous. The difficulty of complying increases with plan complexity. A fair degree of expertise is needed in order to comply with all aspects of the legislation. Unintended errors or misinterpretations have occurred, and will likely continue to occur, from time to time. It should be noted that the Income Tax Act (Canada) provides that offenders are liable for a fine of not less than $1,000 and not exceeding $25,000, and for imprisonment for up to 12 months, if they fail to comply with the Regulations or do not administer a pension plan in accordance with the terms of the plan as registered. In addition, the Act and Regulations provide the regulators with a very persuasive compliance tool: the ability to revoke the registration of the plan in the event that a plan sponsor does not comply with the requirements of the Act and the Regulations. If a plan s registration is revoked, the plan is retroactively treated as a retirement compensation arrangement, with all the less favourable tax-treatment accorded such an arrangement. 125