There are various retirement savings plans in Canada, and the Pooled Registered Pension Plan [PRPP] is one of such savings plans. This plan is unique and different from the other retirement savings plan because it is for self-employed individuals who cannot access a workplace pension plan or individuals who work in a place where there is no workplace pension plan.
If you fall under any of the two situations, then the PRPP is just what you need. In this article, you will find all you need to know about the PRPP contribution.
What is the PRPP?
The Pooled Registered Pension Plan [PRPP] is a retirement savings option for individuals. It involves making various contributions towards achieving their retirement target. Members of the PRPP benefit from access to lower administration costs due to participating in a large, pooled pension plan.
It is a portable and flexible pension plan that moves with its members from job to job and manages their savings. It also helps these individuals meet their retirement targets with various investment options.
Who is Eligible to Become A PRPP Member?
To be eligible for participation in a PRPP, you are required to have a valid Canadian Social Insurance Number [SIN]. Then, you must be;
- Working in a federally registered business or industry for an employer who chooses to participate in a PRPP
- Employed or self-employed in Yukon, Northwest Territories, and Nunavut or live in a province with the required provincial standards legislation in place.
Your province is required to make provisions and enact its legislation to make PRPP available if you do not fall under any of the categories mentioned above.
You can participate in a PRPP in several ways. You can be enrolled by;
- Your employer if he or she chooses to participate in a PRPP or,
- A PRPP administrator, e.g., banks, insurance companies
Once you are enrolled, a PRPP account will be created for you under your SIN. You can select the amount to be contributed from your paycheque based on the income you earn on your income tax and benefit return for previous tax years. Your contributions [including your employer’s and any other lump-sum contributions] will then be pooled together and credited into your account.
The maximum amount a member or an employer can contribute to a PRPP in a tax year without tax consequences is determined by the member’s RRSP [Registered Retirement Savings Plan] deduction limit.
Your contributions as an employer, combined with a member’s contribution to their PRPP, RRSP, SPP [Specified Pension Plan] along with their spouse or common-law partner’s RRSP and SPP, must not exceed the RRSP deduction limit.
Otherwise, it may be considered an excess contribution. Therefore, you must know how much more donations you can have available in a tax year. You should also file a return each year as long as you participate in a PRPP to keep your RRSP deduction limit updated.
There are various categories of contributions that can be made to the PRPP. Based on the person contributing, they include;
- Member contributions
As a member, you can make voluntary contributions to your PRPP between the 1st of January in a year and 60 days into the following year. You can make these contributions up until the end of the year you turn 71.
Your contributions can be deducted on your tax return, but it must not be more than the difference between your RRSP deduction limit and your employer’s contribution to his or her PRPP. If you are no longer employed, you can still contribute to your PRPP if you still have RRSP contribution room available.
You can also designate your contributions as repayments to the Home Buyers’ Plan [HBP] or the Lifelong Learning Plan [LLP].
- Employer’s contributions
An employer’s voluntary contributions are not included in the member’s income and cannot be deducted from the member’s tax return.
- Contributions from tax-exempt income
These are contributions made by an Indian [as defined by the Indian Act]. The Income Tax Act allows them to include their tax-exempt income in calculating their RRSP deduction limit for the year to contribute to a PRPP. However, these contributions are not tax-deductible but can be used to repay under the HBP or the LLP.
PRPP contributions are sectioned depending on the period you make the contributions. Below are the categories:
- Employee contributed amount [prior year]
This refers to contributions made by an employee in the final ten months of the previous year.
- Employee contributed amount [current year]
This is the contribution made by an employee in the first 60 days of the current year.
- Employee contributed amount from exempt income [prior year]
These are contributions made from exempt income in the last ten months of the previous year.
- Employee contributed amount from exempt income [current year]
This refers to contributions made from exempt income in the first 60 days of the current year.
- Employer contributed amount
This is the employer’s contribution between the 1st of January and the 31st of December of a tax year.
Transfers and Withdrawals to and from a PRPP
You can transfer amounts directly from another PRPP [that you hold] to your PRPP. You can also transfer from other pension plans like RRSP, SPP, RRIF, amongst others [as long as you are a member of the beneficiary [annuitant]. Or if they belong to your spouse/common-law partner, you’re entitled in case of separation/death] to your PRPP.
Alternatively, you can transfer amounts from your PRPP to either another PRPP that you hold or other pension plans you’re are a member of. Your spouse or common-law partner can also receive amounts if your marriage or relationship breaks down or you die.
You can also make withdrawals, but under certain circumstances, as the PRPP Act limits them. This is to ensure that your contributions are available for your retirement. That is the primary goal of your contributions.
Generally, your contributions are locked and can’t be accessed until you retire. When you receive an amount from your PRPP, you must include it in your tax return in the year you receive the amount.
This may reduce some benefits such as the Old Age Security [OAS] or Guaranteed Income Supplements [GIS] on your tax return. To avoid this, your PRPP administrator can transfer funds in your PRPP to other registered pension plans on a tax-free basis. Thus, you won’t have to include the shared fund in your tax returns, and other benefits you are entitled to will not be affected.
PRPP Contribution Limits
PRPP contribution limits are the same as the deduction limits for your RRSP. This limit is also known as the contribution room, and you can obtain it from:
- Your Notice-Of-Assessment (NOA) letter from CRA
- Your “My Account” online service
- By calling the Tax Information Phone Service
Note that if you do not donate your allocated amount in a year, the unused limit rolls into the following year and gives your next year’s limit a boost.
PRPP in the Case of Death
The donations in the account of a PRP member is considered to have been distributed immediately before death. If the agreement between the deceased and a financial institution [PRPP administrator] names the surviving spouse or common-law partner as the beneficiary of the PRPP in case of death, the surviving spouse or partner can either choose to receive a lump-sum payment from the PRPP. Or can transfer the funds on a tax-deferred basis into another savings plan.
Suppose the deceased has a financially-dependent child or grandchild, and he or she has been designated as a qualifying survivor. In that case, he or she will receive the funds from the deceased’s PRPP account up to any amount specified.
These payments are taxable; the child or grandchild would have to include the amount they receive on their income tax and benefit return. Suppose the child or grandchildren is physically or mentally challenged and is eligible for the disability tax credit.
In that case, the lump-sum amount from the deceased’s PRPP can be directly transferred or “rolled-over” to registered disability savings plan on a tax-free basis if he or she is eligible.
PRPP in Case of a Marriage Or Common-Law Partnership Breakdown
A current spouse or common-law partner or former spouse or common-law partner of a PRPP member can transfer the lump-sum amount from the member’s account due to a breakdown of the marriage or the relationship to another registered plan.
Purchasing A Qualifying Annuity
A dependent child or grandchild can instead transfer the funds they receive to a licensed annuity provider to acquire a qualifying annuity. The amount paid out of the grant the year it is obtained should be included in their tax return. Note that annuity is the right to receive amounts of money regularly over a certain fixed period indefinitely.
Investments Options for PRPP
Investment options for PRPP accounts are limited to prevent tax avoidance planning. Investments such as mortgages, debts, and shares of companies where a member has a significant interest are restricted and cannot be held by a member of the PRPP. Find out more here.
The PRPP contributions can be of great help to individuals, employed and self-employed, who lack access to a workplace pension plan. It is relatively straightforward and flexible. Also, it ensures that its members reach their retirement target.