Canadian Financial Services Commission Warns Of Pension Plan Tax Liabilities

by Robert Lee, Tax-News.com, London

26 September 2001

Ontario's Financial Services Commission (FSCO) has warned clients to take care when transfering money from a pension plan to an Individual Pension Plan (IPP) because there may be some taxation consequences. 'The administrator of the IPP receiving the transfer must certify that the funds will be treated like a pension,' said Dave Gordon, Deputy Superintendent - Pensions, 'as well as being in violation of the Pension Benefits Act, some IPPs may not always comply with the federal Income Tax Act.'

He added: 'The Canada Customs and Revenue Agency are concerned that in setting up these new IPPs, there is no bona fide employment relationship with the salaries to support the past service benefits that they are, in theory, buying.'

When an employee leaves a job, he/she can create a corporation with an IPP, shift the money from their pension into the new plan, and can attribute the plan to a low income that they pay themselves. When an actuarial valuation is performed a surplus may appear which the individual will claim from the new pension plan. But Mr Gordon has warned: 'Pensions are designed to provide a stable income during retirement, if we discover people are trying to use their IPP to circumvent the Pension Benefits Act, we will take steps to deregister the plan. If we deregister the plan, there will be serious tax consequences.'

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