Re-engineering of Registered Pension Plan Processes

November 1, 2005

Dear Registered Pension Plan Client,

The purpose of this letter is to advise clients of the Registered Plans Directorate (the “Directorate”) of changes that will soon take place in our processing of pension plan submissions (including registrations and amendments) and audits. If you are a sponsor of a pension plan and have an administrator or consultant, you may wish to consult with them if you have any questions concerning the contents of this letter. You can also visit our Web site at www.cra.gc.ca/rpd for more information concerning changes to our processes, including Frequently Asked Questions (FAQs) that have been developed specifically for this letter at www.cra-arc.gc.ca/tax/registered/reengfaq-e.html. We will regularly update the Web site as changes occur and to add further responses to other FAQs.

WHY WE ARE CHANGING NOW

Part of the mandate of the Directorate is to register and monitor employee pension plans to ensure that the requirements of the Income Tax Act and Regulations and related administrative rules are being met. In 1989, the rules for pension plans in the Income Tax Act and Regulations expanded considerably and we felt that, in order to assist our clients with the transition to the new legislation, it was necessary to do extensive reviews of pension plan documents (e.g., plan texts, funding agreements, etc.). Fifteen years later, we are satisfied that, for the most part, documents are being written that satisfy the rules. Accordingly, we believe the time is right to change the focus of our program to a verification of how registered pension plans are being administered.

We held consultations with groups representing the pension plan industry who agreed we should change the focus of our program and suggested potential service enhancements that we should explore. We listened to your input, and many of the changes described in this letter reflect your ideas. For more information about these consultations, please visit our Web site at www.cra-arc.gc.ca/tax/registered/consultations/rpp_info04-e.html.

WHAT WE ARE CHANGING

We are moving from an all-encompassing review of plan documents to a selective review of plan documents based on risk, and to more reviews (audits) of on-going plan operations. Most of the resources currently dedicated to pre-registration reviews will be shifted to post-registration desk audits and the field audit program will be maintained or enhanced. Plan documents not subject to review at the time of registration or submission may be reviewed during an audit, but our main focus will be to verify if the plan is being administered in accordance with the Income Tax Act and Regulations.

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DETAILS OF CHANGES - NEW PROCESSES

Key Changes to the Application for Registration Process

Beginning on November 7, 2005 (the implementation date), upon receipt of an application for registration of a plan:

• If the application is incomplete, it will be returned to the submitter. The Directorate has already started this process, which was announced April 3, 2004 in Newsletter 04-2, Registered Pension Plan Applications - Processing an Incomplete Application. This Newsletter is available on our Web site at www.cra-arc.gc.ca/tax/registered/newsletters/04-2-e.html.
• If the application is complete, in most cases a letter confirming registration of the plan will be sent immediately. However, if the application falls into a certain risk category (such as an application for an individual pension plan), it will be subject to a review, and registration will only take place after the review is completed and the Directorate's concerns are addressed. Plan applications and other documents submitted at registration that have not been reviewed prior to registration may be subject to a review at a later date in conjunction with an audit of the plan.

Key Changes to the Plan Amendment Process

When a plan amendment is submitted, a letter acknowledging receipt will be sent to the submitter. The amendment will be subject to a risk analysis and there could be a request by the Directorate for information or changes shortly after submission. Plan amendments could also be subject to review at a later date in conjunction with an audit of the plan.

Outstanding Issues

As of the implementation date, we will have an inventory of recently submitted amendments and applications for registration that have not yet been subjected to a review by Directorate staff, or that have been reviewed and have outstanding issues that have not yet been resolved.

New amendments and applications for registration that have not been reviewed will be subject to the new process and will be dealt with as described above.

Plans that have outstanding issues previously identified by us will be reviewed to determine the severity of the problem. Depending on the outcome of that review, we may continue to pursue the outstanding issue. We will advise the submitter if the plan will be subject to an on-going review or dealt with under the new process (subject to review for compliance during a future audit).

Reviewing Specific Draft Provisions

In the past, it has not been our practice to review draft plan texts or amendments. We recognize that there may be uncertainty about the acceptability of certain plan wording under the new process and, to address this, we will begin reviewing draft submissions. We will not review drafts of complete plan texts but will review drafts of specific plan provisions that contain wording of which the submitter is uncertain.

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DETAILS OF CHANGES - CONTINUING OR ENHANCED PROCESSES

Actuarial Valuation Reports (Defined Benefit Plans)

Actuarial Valuation Reports (AVRs) will continue to be reviewed under a risk-based approach on a first-in/first-out basis and without having to wait for approval of amendments. A response to any funding request will be provided to the submitter after the review.

Specimen Plans

Many submitters make use of specimen plans that have been approved for the purpose of registering new plans. We encourage the continuation of this practice and we will continue to review new specimen plans for approval. See Newsletter 95-6R (Specimen Pension Plans - Speeding up the process) for further information on this process at the following page on our Web site www.cra-arc.gc.ca/tax/registered/newsletters/95-6r-e.html.

Requests for Ministerial Discretion (Waivers)

We will continue to reply to requests for approvals required under the Income Tax Act and Regulations. Such requests should be separately identified in any submission to us.

Requests for Information from Clients

Under the new process, we will be focusing our efforts on the audit of areas such as:

• Pension adjustments (PAs) and past service pension adjustments (PSPAs);
• Transfers in and out of plans;
• Contributions;
• Pension benefits; and
• Proper and timely reporting on returns, slips, and summaries.

In order to assist with our audits, information may be requested that should be currently maintained by our clients. For example, one of our first priorities will be to increase the PA audit presence. Where a reported PA cannot be verified through data already maintained at the CRA, we may request that you verify all or some of the elements, such as compensation or accrued service. The Directorate is studying the issue of information requests for more complex calculations with the input of clients.

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Results of Audits

Where an audit of a plan's operation reveals the plan is not in compliance with the Income Tax Act and Regulations, the approach we take will depend on the nature of the non-compliance. In addition to our current practice of issuing education letters, reassessments and, in exceptional cases, revoking registration, we are studying the possibility of broadening our penalty structure. It will continue to be our practice to assist clients to comply with the law and revocation will remain a last resort when all other avenues have been exhausted.

More Information Available to Clients

It is important to us that you, as our client, have the right mix of services and tools to comply with your obligations under the Income Tax Act and Regulations. Since we will cease the intensive review of plan documentation, we will improve and increase the information made available to you to assist in achieving compliance with the Income Tax Act and Regulations in both plan documentation and administration. Information will be available on-line and will consist of the following types of publications:

• Compliance bulletins;
• Answers to frequently asked questions (FAQs);
• Technical manual on our Web site at www.cra-arc.gc.ca/tax/registered/techmanual-e.html; and
• Information releases.

If you are a subscriber to our electronic mailing list, you will automatically be notified when any information is posted to the Web site. For more information on this service, please visit our Web site at www.cra-arc.gc.ca/eservices/maillist/subscribe-e.html.

Client Feedback

Should you have any questions or comments about the upcoming changes to pension plan processes, you may write to the Director General, Registered Plans Directorate, Ottawa, ON K1A 0L5, or send an email to RPDRG-DRERG@ccra-adrc.gc.ca. We value your feedback and should you desire a response, please provide your phone number, e-mail or mailing address.

Yours sincerely,
Annelisa Gillespie
Director General