Pooled Registered Pension Plan (PRPP)

By Randall Orser | Personal Income Tax

Digital Piggybank VisualizationA pooled registered pension plan (PRPP) is a new, accessible, straightforward retirement savings option for employed and self-employed individuals who do not have access to a workplace pension plan or where a workplace pension plan does not exist.

A PRPP enables its members to benefit from lower administration costs that result from participating in a large, pooled pension plan. It’s also portable, so it moves with its members from job to job.

Since the investment options within a PRPP are similar to those for other registered pension plans, its members can benefit from greater flexibility in managing their savings and meeting their retirement objectives.

Eligibility

Starting in 2013 those persons with a valid Canadian Social Insurance Number are able to participate in a PRPP. If you wish to participate you must meet one of the following criteria:

  • Employed or self-employed in the Northwest Territories, Nunavut or Yukon;
  • Work in a federally regulated business or industry for an employer who chooses to participate in a PRPP; or
  • Live in a province that has the required provincial standards legislation in place.

Participation

You can enroll in a PRPP by your employer (if the employer so chooses) or a PRPP administrator (bank or insurance company). Your PRPP is created under your SIN, and you choose the amounts to be contributed from your paycheques. You and your employer contributions, including any lump-sum contributions, are pooled together and credited to the your account.

The member must file an income tax and benefit return each year to participate in the PRPP since the amount that can be contributed depends on the income reported on their return. The total amount that a member or employer can contribute without tax implications depends on the member’s RRSP deduction limit. This is also known as your ‘contribution room’.

Contributions

Any employer PRPP contributions, combined with your contributions to your PRPP, RRSP, and spouse or common-law partner’s RRSP, that are above the RRSP deduction limit may be considered excess contributions. These excess contributions may be subject to a tax of 1% per month for every month they are left in the account, therefore it is important for members to know how much unused contribution room they have available in a given tax year.

Any contributions made to a PRPP that are not deducted on your income tax and benefit return in a given year are referred to as Unused RRSP contributions. If you withdraw the unused contributions from his or her PRPP, an offsetting deduction may be claimed.

You can make voluntary contributions to their PRPP between January 1 in a given year and 60 days into the following year, up until the end of the year in which they turn 71. Your contributions are deductible on your income tax and benefit return, but the deduction must not exceed the difference between their RRSP deduction limit and the employer’s contributions to their PRPP.

Any voluntary contributions made by your employer are not included in the your income, and they are not deductible on the your income tax and benefit return.

Withdrawals

To ensure that the funds within a PRPP are available for your retirement purposes as intended, the Pooled Registered Pension Plans Act (PRPPA) limits the distributions (withdrawals) that a member can make. As with limitations in other registered pension plans (RPPs), the funds in a PRPP are generally “locked-in” and cannot be withdrawn until the member retires from employment.

There are certain life events that allow you to withdraw funds from a PRPP. Your death, you have a financially dependent child or grandchild, or the breakdown of your marriage or common-law partnership.

In the case of the your death and you had a spouse or common-law partner, your spouse or common-law partner will become a successor PRPP member of the plan, taking over ownership and future direction of the deceased PRPP account. The successor member is then entitled to receive a lump-sum payment from the PRPP or can choose to transfer the funds directly, on a tax-deferred basis, into another investment plan such as another PRPP, an RRSP, RRIF or RPP.

In the case of a PRPP member who had a financially dependent child or grandchild, the child or grandchild is deemed to be a qualifying survivor, and is also eligible to receive the funds from the deceased’s member’s PRPP account. Since payments made out of the PRPP are taxable, the child or grandchild would include the amount received as income on his or her income tax and benefit return.

Your spouse or common-law partner or former spouse or common-law partner who is entitled to the funds from the your PRPP account as a result of a breakdown of the marriage or common-law partnership, may transfer the lump sum amount to: another registered plan such as another PRPP, an RRSP, RRIF or RPP of the individual; or purchase a qualifying annuity.

When you receive an amount from a PRPP, you must include it on your income tax and benefit return in the year you receive it. Since benefits such as old age security (OAS) or guaranteed income supplements (GIS) are calculated on the your income reported on your income tax and benefit return each year, these benefits may be reduced accordingly.

Investment options

The investment options available for PRPPs are similar to those available for other registered plans, but there are some restrictions. The Income Tax Act does limit the type of investments that can be held in a PRPP to prevent tax avoidance planning. For example, you cannot hold restricted investments in a PRPP such as your mortgage or debts, and shares of companies in which you have a significant interest.

A PRPP is another way for Canadians to invest for their retirement and with the contributions coming off each cheque it makes it easier to contribute. PRPPs are also similar in many ways to an RRSP. You will want to check your Notice of Assessment from the prior tax year to see how much you can contribute to your PRPP. If you’re already contributing to an RRSP you’ll want to figure out how much is that and contribute to your PRPP accordingly.

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