Thanks, Susan.
Mr. Chair and committee, thank you for inviting us tonight.
I have to admit that as I reviewed the IPP proposals I was reminded of a point of discussion with my tax professor at law school. As I struggled to understand the application of a certain tax provision he told me, “Remember, there is no equity in tax law; each word and provision stands by itself and will not bend to the specific facts of a particular situation.” In other words, he was telling me that the tax laws will be applied as they are written, even if the result is not fair.
Because of this fundamental rule of tax interpretation, I believe it's incumbent on the drafters of such legislation to make sure the rules are not crafted in such a broad manner as to create unfair results. It is incumbent on organizations such as CALU to alert the government of those circumstances where unfairness can arise. I would like to spend the remaining time highlighting some of the unfair impacts of the IPP rules as they relate to the RRIF minimum withdrawal requirement.
As you may be aware, typically some members of large defined benefit pension plans have formed corporations as transfer vehicles for the commuted value of their pension benefits. In doing so, they create a pension surplus that is not subject to any withdrawal requirements, creating a tax deferral opportunity. The RRIF minimum payout requirement is being imposed on all IPPs in order to minimize this tax deferral opportunity.
It bears noting that this specific planning is not being done by small-business owners, but by employees who create a fictional employment relationship with a newly incorporated company that has been established for this sole purpose. Yet the RRIF minimum rule will apply to any defined benefit plan with less than four members, irrespective of how the surplus was created in the plan. We believe the proposals need to be better targeted to prevent the abuse while not impacting other IPPs.
It must also be appreciated that these rules apply retroactively to any plan meeting the definition of an IPP. So whether the plan has been created to facilitate the transfer of pension benefits or whether it's one that's had the good fortune of being in a surplus position due to strong investment performance, it will be governed by these rules. And not only do these rules operate retroactively, but they can apply to plans that were not previously treated as IPPs, simply because one or more of the members have terminated their participation.