Registered Plans Directorate Newsletter, no. 01-3 February 21, 2001

Tailored Individual Pension Plan (TIPPs)

This Newsletter is to advise you that we have concluded our review of the plan design referred to as the Tailored Individual Pension Plan (TIPP) and have determined that such plans will not be accepted for registration by the Registered Plans Directorate.

In general terms, a TIPP is a defined benefit pension plan established for an individual who has earnings that would support a benefit accrual each year that is equal to the defined benefit limit or $1,722.22 (i.e. earnings over $86,111). The plan terms may limit the individual's benefit accrual to a specific amount for each year until 2005, by imposing a dollar limit on the accrual or by capping pensionable earnings. The limit is then indexed strategically each year by the growth in the average wage so that, after indexing, the individual's benefit accrual for the year will be at or close to the defined benefit limit of $1,722.22 in 2005, when indexing of the limit is scheduled to resume. Since the pension adjustments (PAs) are determined on the basis of the pre-indexed accrual, the individual is able to preserve additional room for contributions to their registered retirement savings plan (RRSP).

We are denying registration of pension plans based on the TIPP design under the authority of paragraph 8502(l) of the Income Tax Regulations. This paragraph contains a broad anti-avoidance rule that is intended to ensure that the terms of a pension plan are designed in such a way that there is an appropriate relationship between the PAs and the benefits provided under the plan. A TIPP produces PAs that are inappropriately low in relation to the benefits provided under the plan.

In particular, a TIPP fails to comply with paragraph 8502(l) because the terms of the plan produce PAs that are inappropriate having regard to the "purposes for which the PA is determined". The premise of the PA is to ensure that retirement savings in registered pension plans (RPPs) are appropriately taken into account in the comprehensive 18% limit on tax-assisted retirement savings. This is achieved by reducing the annual amount of RRSP deduction room that becomes available to an individual by the amount of RPP savings, as measured by the PA, provided to the individual in the preceding year. The comprehensive limit is intended to ensure that all taxpayers have equivalent access to tax-assisted retirement savings regardless of whether they save in RPPs, RRSPs, or both.

The TIPP design enables a plan member to generate additional RRSP contribution room (through artificially low PAs) while accruing pension benefits that will be at or close to the maximum pension limit. In effect, TIPPs have been designed to specifically circumvent the freeze of the defined benefit limit through 2004, as well as the elimination of new RRSP room for high-income earners of defined benefit RPPs, as announced in the 1995 and 1996 Federal Budgets.

We recognize that it is possible to design a pension plan in a way that achieves the same result as a TIPP but without explicitly setting out the benefit accrual restrictions and strategic indexing. The approach generally involves artificially manipulating the member's pensionable earnings in order to minimize PAs. In our view, these plans are similar to the TIPP design and contravene one or more of the PA anti-avoidance rules contained in the Regulations. Depending on the circumstances, we will either refuse to register such plans under the authority of paragraph 8502(l) or we will invoke the authority provided under subsection 8310(2) to require appropriate PAs to be reported. These submissions will be reviewed on a case-by-case basis.

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