The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management


Do You Know Trusts?

people reviewing assetsMost employers who sponsor registered pension plans (RPPs), deferred profit sharing plans (DPSPs), and other types of retirement plans and arrangements providing for the deferral of employment income (tax deferral arrangements) will know that plan assets are often held in trust, typically by a trust company, and that a trust agreement governs the administration of the trust. Some will also be aware of something called a ‘master trust,’ but how many of those employers really understand these trusts and the terms of the governing trust agreements?

The following is a quick recap of trusts in the retirement world.

Why a Trust?

First, RPPs, DPSPs, and other types of retirement plans and tax deferral arrangements are made possible by tax rules. For example, were it not for the fact that the Income Tax Act (Canada) (ITA) provides that:

there likely would be no pension plans as we know them. The same is true for all such plans and arrangements, whether they cover a group, like RPPs and DPSPs, or individuals, such as registered retirement savings plans (RRSPs) and tax-free savings accounts. Without special rules that provide for advantageous tax treatment, these plans and arrangements simply would not exist.

One of the underpinnings of these tax rules is that the property contributed to such arrangements must be held in such a manner that it is segregated from the contributor’s property. This segregation makes them very good security devices. Although, as discussed below, trusts are not legal entities, the ITA deems them to be legal persons for tax purposes and trusts are subject to their own tax rules. Therefore, they are ideal for purposes of holding pension and benefit plan assets.1

What Is A Trust?

Most people are not aware of this, but there are trusts all around us. One reason is that trusts are very flexible and, therefore, are used for all sorts of purposes. Another is that trusts, at least in common law jurisdictions, have been around since the Middle Ages.2 Trusts came into being as a device to hold property for the use primarily of those without legal capacity, and out of the Crown’s residual powers to bring equity to the application of the law.

The standard definition of a trust is that it is a ‘relationship.’ The fact that the ITA taxes trusts as if they were legal persons does not change that fact. The trust relationship is between the ‘trustee’ who holds the trust assets, and the ‘beneficiary’ for whom the assets are held. The third player is the “settlor”, who contributes the trust property. In some cases, such as in RRSPs, the settlor and the beneficiary are the same person.3

A trust is also considered to be a form of property transfer. When the settlor of a trust contributes property to a trust, the single property interest of the settlor is split in two; with the trustee holding the ‘legal title’ and the trust beneficiary holding the ‘beneficial title.’4 Put another way, the settlor ceases to have title to the trust assets, and among the other two players, the trustee ‘owns’ the property, and the beneficiary enjoys the exclusive benefits of the trust assets. Even though the trustee technically owns the trust property, the trustee is obligated to hold the trust assets for the exclusive benefit of the beneficiary and to only have the beneficiary’s interests in mind when dealing with trust property.

What Is A Master Trust?

When an employer sponsors more than one trusteed RPP, it may decide that, for investment purposes, it would make more sense to aggregate the assets of the RPP trusts and invest them together. Such an aggregation is done in order to achieve efficiencies and economies of scale and is quite common.

The way in which the pooling of assets for investment purposes is done is to use what is known as a ‘master trust.’ In a master trust, the trusts of the various RPPs, often referred to in such a structure as ‘participating trusts,’ invest, indirectly rather than directly in the markets, by acquiring ‘units’ of a special trust that the employer creates for this purpose. This master trust is a ‘unitized trust’ (it issues, to the underlying RPP trusts, ‘units,’ each of which has a value determined by reference to the value of the master trust as a whole) and invests all of the funds that it receives from the underlying RPP trusts. The trustee of the master trust will typically also be the trustee of the underlying RPP trusts.

The master trust does not change the fact that each RPP’s assets are held in its own trust, nor does it mean that each RPP must invest exclusively in units of the master trust. In order to better match the investments to the needs of the its RPPs, an employer with several RPPs may establish more than one such master trust, each with its own investment goals, and/or determine that some RPPs should invest some of their assets directly in investment products which are not suitable for all participating RPP trusts.

The Tax Rules

RPP trusts are exempted from income tax under paragraph 149(1)(o) of the ITA. The ITA also exempts master trusts under paragraph 149(1)(o.4). That provision refers to “a trust that is prescribed to be a master trust and that elects to be such a trust ... in its return of income for its first taxation year.”5 Subsection 4802(1.1) of the ITA regulations provides that a trust is prescribed if it is a resident in Canada, its only undertaking is the investing of its funds, it never borrows except for a term not exceeding 90 days, it never accepts deposits, and each of its beneficiaries is an RPP, a DPSP or a pooled registered pension plan.

The T3 Trust Guide6 issued by the Canada Revenue Agency (CRA) indicates that a trust can elect to be a master trust by stating this in a letter filed with a T3 return in its first tax year. Once a master trust election is filed, it cannot be revoked and the trust must continue to meet the requirements of a master trust. No further T3s need be filed. In fact, if a future T3 return is filed, CRA will assume the trust no longer qualifies as a master trust, and it will therefore loose its exemption, become taxable, and be required to file a T3 annually thereafter.

Papering Trusts

When a trust is created, it is customary for some sort of constating document to be prepared setting out what the settlor expects the trustee to do with the trust assets. Although this is not a requirement of the law generally, it is one for RPPs since ITA regulations7 and pension standards legislation8 requires that such documents be filed. It is also a requirement for RRSPs and some other retirement plans and Tax Deferral Arrangements. This is understandable since such documentation evidences that there really is a trust in place.

The terms of RPP trusts and master trusts are typically found in documents called ‘trust agreements.’ The RPP trust agreements are usually drafted by the trust company acting as trustee. The sponsor of the RPP or master trust usually has limited scope in negotiating terms that substantially differ from the trust company’s preferred language. However, there are several provisions of a standard trust agreement that are always worth reviewing and negotiating such as those provisions that describe the standard of care to which the trustee is subject, that limit the trustee’s liability, or that provide for the indemnification by the trustee where a breach of its standard of care leads to losses to the trust and, ultimately, to the employer who funds the RPP. Failure to do this could lead to allegations of breach of fiduciary obligation by the plan administrator.

Because these trusts are ‘custodial’ trusts, unlike conventional trusts the trust agreement will relieve the trustee from most of what a trustee would normally be expected to do with trust assets, the most obvious being to invest the trust assets. The investment decisions are left to the RPP administrator and this state of affairs is recognized by pension standards legislation. Because of this, these trusts are commonly referred to as being ‘bare.’ but, as passive as the RPP and DPSP trustee may be, it retains the duty to hold the trust assets and otherwise act in respect of the trust assets with the trust beneficiaries’ interests in mind.

But Wait, There’s More

Much more could be said about trusts and their place in this area so it is best to seek legal advice for any questions you may have concerning trusts in general and trusts in the retirement and deferred employment income world in particular.

Lorraine Allard is a partner at McCarthy Tétrault LLP (

1. It should be noted that not all RPPs and RRSPs, for example, are trusteed arrangements, as the rules provide for pension plans to also be funded through insurance products and pension fund societies, and RRSPs to be also issued by insurance companies and banks.

2. Although trusts exist in Quebec, the nature of those civil law trusts, and their application to RPPs, is quite different and is not discussed here.

3. The settlor and trustee can also be the same person, although not typically in the context of retirement plans and tax deferral arrangements.

4. This is a lesson that many RPP sponsors, in their attempts to access pension plan surpluses, learned the hard way.

5. RRSP and other trusts are similarly exempted from income taxes under other paragraphs of subsection 149(1).

6. T4013

7. See section 8512

8. For example subsection 9(2) of the Pension Benefits Act of Ontario. Please note that master trust agreements are not subject to filing.

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