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Pooled Registered Pension Plans an Alternative to CPP

Pooled Registered Pension Plans or PRPPs provide Canadians with an increased range of retirement savings options beyond CPP and RRSPs.

Ottawa has shown interest in overhauling the Canada Pension Plan (CPP) to accommodate a rapidly aging population, longer life spans and fewer young people to pay the taxes to fund the government-run pension system.

The government has also investigated a private sector option called Pooled Registered Pension Plans (PRPPs).

PRPPs have rapidly evolved from study phase to a virtual certainty and all discussion about updating CPP seems to have disappeared from the radar.

The federal government has all the provinces onside with PRPPs and has introduced legislation to modify both The Income Tax and Excise Tax Acts to accommodate the new financial instrument.

The move to PRPPs should provide Canadians with an increased range of retirement savings options beyond CPP and RRSPs.

Regulated companies, such as insurance firms, will administer the pooled funds and be required to act in a fiduciary (i.e., legally responsible) manner on behalf of participants.

It is assumed that large regulated institutions have the ability to acquire, invest and manage large money pools more efficiently and at lower costs to participants.

Participation in the program is structured in two ways:

  1. Small businesses, including an agricultural producer or rancher, with as few as two people can set up a pension plan through a PRPP provider
  2. Self-employed people and workers at non-participating companies can contribute as independent participants

The new legislation will allow any province the option to make participation in a PRPP mandatory for some businesses and industries.

Much like other investment portfolios, you will have available to you different levels of risk and reward options that you are willing to assume in your investment profile.

Similar to your RRSP you will have allowable contribution room based on your earned income.To prevent a large employer from accidentally placing employees in an over contribution situation, the amount assigned to each employee will be their RRSP dollar limit in that year.

The contribution room is different based on whether the contributor is employed or self-employed.

Contributions from a self-employed person are for a fixed sum per period to be negotiated between the plan administrator and the taxpayer. The previous year’s notice of assessment will indicate your available contribution room. 

The contributions made by employers and individuals will be deductible for tax purposes. Alternatively, employers will be allowed to make direct contributions on behalf of an employee that can be excluded from the employee’s taxable income as happens now with contributions to any other employer-operated pension plan.

The program is also structured to allow the spouse or common-law partner of a deceased PRPP investor to take over participation in the fund or transfer the funds to their own registered account, such as an RRSP, RRIF, or other registered pension plan.