Digest of Benefit Entitlement Principles Chapter 5 - Section 13

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5.13.0 Monies arising out of a pension fund

Pension monies arising out of any employment are earnings for benefit purposes. This applies whether these pension monies are paid or payable on a periodic basis, or in a lump sum Footnote 1 . The very nature of pensions and the fact that they are usually payable when employment is truly terminated results in two special provisions in their handling. Pension earnings do not prevent an interruption of earnings from occurring Footnote 2 and the earnings are allocated concurrently with other earnings Footnote 3 .

Once payments under a pension plan are paid or payable to the claimant, they must be allocated, notwithstanding the manner in which the claimant chooses to dispose of them. Pension earnings are allocated, and may prevent the payment of EI benefits, regardless of the fact that they may be transferred to a RRSP at the claimant's request, even if the RRSP is locked-in and non-commutable. However, locked-in pension credits Footnote 4 , directly transferred to a locked-in vehicle Footnote 5 , are not considered as paid or payable until they come out of these locked-in vehicles Footnote 6 .

Pensions are allocated to the period for which they are paid or payable regardless of the method of payment or when the payment is ultimately made. The manner of allocating pension monies depends on whether a pension is paid on a periodic basis, Footnote 7 or in a lump sum in lieu of a pension Footnote 8 .

Pensions are not considered as earnings if the claimant has accumulated, while in receipt of the pension, sufficient pension requalifier insured hours Footnote 9 . The benefit period on which the pension is to be exempted must be based on insured hours that include these hours.

Although not pension earnings, refunds of the employer or employee contributions to a pension fund and the accumulated interest nevertheless are earnings arising out of employment Footnote 10 . Their method of allocation varies according to the type of contributions which are being returned. A refund of the employee contributions on termination is allocated back to the period of employment Footnote 11 . These monies would have formed part of the claimant's gross weekly earnings during the period of employment and therefore have no effect on any current period. A refund of the employer contributions is allocated as earnings paid or payable by reason of separation, that is, at normal weekly earnings commencing with the week of separation Footnote 12 .

5.13.1 Pension plan structure and legislation

A pension plan is a formal agreement, contract, or arrangement entered into by the employer with employees for the purpose of providing retirement benefits. Pension plans may also pay other monies on termination of employment prior to retirement. In order to determine the nature of these monies, whether these monies are earnings, and properly allocate any earnings, understanding the basic provisions of pension plans Footnote 13 and the relevant legislation under which these plans are registered and operate Footnote 14 is essential. An explanation of some of the common terms used in pension plans and legislation is contained in the section, "Pension Plan Terminology" Footnote 15 .

5.13.1.1 Pension plan legislation

Pension plans must be registered under provincial or federal pension legislation as well as with the Canada Revenue Agency for the purposes of the Income Tax Act. Any provisions in the pension plan must comply with not only any applicable pension legislation, but also with the conditions and limitations on pension benefits imposed by Canada Revenue Agency through the Income Tax Act. In general, it is the pension legislation that sets the minimum provisions a plan must contain and the Income Tax Act that sets the maximum. During the entire time the pension fund is in operation, the authorities who administer this legislation control what may go into the plan, what may come out, how it may come out, and what happens while the monies are in there.

Separate federal legislation establishes the pension plans that cover all federal government employees, employees of the Armed Forces of Canada, the RCMP, and members of parliament. This legislation setting up the pension plans is subject to the Income Tax Act and meets all the income tax provisions. However, it is not subject to the federal or provincial pension legislation regarding such provisions as vesting and lock in.

All provinces except for Prince Edward Island have pension legislation which sets out the provisions that pension plans registered in that province must contain. The Pension Benefits Standards Act of the Government of Canada applies to the employees of any province who are under federal jurisdiction. Footnote 16 The applicable provincial legislation is determined by the location of the employee's work site. The provisions required by the federal or provincial legislation are the minimum that must be met; however, any plan can offer more generous terms within the limits set by Canada Revenue Agency. In addition, plans for an employer whose operations span several provinces must meet the conditions set out in each of those provincial Acts. One way an employer can achieve this is to adopt the provisions of the most generous provincial legislation. The other way is to have separate sections in the plan containing the provisions for employees in each province. For this reason, it is important that the particular provisions of the employer's pension plan are known, so that the true nature of the monies, and the conditions under which they are being paid can be determined.

In addition to defining the benefits that are payable on retirement, every pension plan must also define when pensions are payable and the benefits and rights upon termination of the employee's services. These rights may include having the locked-in pension credits transferred to a locked-in vehicle, Footnote 17 having the right to a refund of their own contributions, or a refund of their own and their employer's contributions, or a deferred annuity.

Some provincial legislation, as well as the federal one, have undergone changes since their inception. Contributions made prior to the effective date of the change in legislation may have one set of rules for when the contributions are vested and locked in, and those made on that date and after may have another. The relevant dates and their provisions will be found in the pension plan itself.

5.13.1.2 Pension plan structure

Pension plans are as varied as the needs of those individuals they cover. However, generally, all pension plans share the same purpose and have some similar provisions on the payment of benefits. This similarity arises from the fact that they must meet the demands of diverse legislation–the Income Tax Act and the applicable federal or provincial pension legislation. However, retirement plans may exist which are not registered under the Income Tax Act. These plans are not very common as no income tax deduction is possible for any contributions made to such a plan Footnote 18 .

Pension plans may require employees to contribute, and the employer pays the balance of the costs, a contributory plan. In other pension plans the employer pays the full cost, a non-contributory plan. Contributions made by the employee, if required, are collected by the employer, usually by a deduction from the employee's gross pay, and are placed in the pension fund. The employer's contributions go directly into the fund. These employer contributions do not form part of the employee's gross earnings and are not included for the purposes of calculating income tax, EI premiums, and CPP contributions. While in the pension fund, both employer and employee contributions accumulate interest.

The whole purpose of a pension plan is to provide a pension benefit upon retirement Footnote 19 . However, contributing to a pension plan does not necessarily guarantee a pension as not all employees remain employed by the same employer until retirement age. Some employees may work for an employer and contribute to the plan for a short time. The benefits, if any, that are payable to an employee who leaves employment prior to retirement age, depend on whether vesting and lock-in have occurred.

Vesting is the employee's right to receive some sort of benefit under the pension plan Footnote 20 . Normally, this vested benefit takes the form of either a return of the contributions made to the plan and the accumulated interest, or a deferred pension (an annuity Footnote 21 ). Whether contributions are vested under the terms of a pension plan depends on the length of employment with that employer. The type of benefit or the nature of the benefit that the employee receives, a refund of contributions or a deferred pension, depends on whether lock-in has occurred.

Locking in Footnote 22 of contributions simply means that they can no longer be refunded in a lump sum as a return of contributions. As a consequence, the only benefit that can be paid by the pension fund, based on those contributions, is an immediate or deferred pension. Furthermore, that pension can only be paid upon reaching retirement age. Locking in of contributions, like vesting, depends on the length of time employed and is set out in the plan's provisions. While vesting establishes the right to a benefit under the plan, locking in restricts access to that benefit until retirement age is reached. Vesting usually occurs at the same time as lock-in, although it can occur earlier. The actual pension plan will describe when vesting and lock-in occur.

Return of contributions, whether they are employer or employee, can only occur when these contributions are not locked in. In addition, to be refunded, the employee must have a vested right to these contributions. Under all pension plans, vesting occurs immediately for the employee's own contributions. This means, no matter how long the employee has been employed, he or she can receive all of his or her own contributions and the accumulated interest upon termination of employment, as long as these contributions are not locked in. If these contributions are locked in, they cannot be refunded as they will be used to support the payment of a pension at retirement age. If the pension plan permits vesting to occur earlier than lock-in, the employee may also be entitled to a lump-sum payment of the employer contributions and the accumulated interest as well as to the return of his or her own contributions.

The provisions of a particular pension plan may allow vesting of the employer's portion of the pension contributions to be contingent, or in other words, conditional. This means that full benefits from the contributions (the receipt of both employer and employee contributions) occur only if a certain option is chosen (the deferred pension). Contingent vesting therefore prevents the immediate payment of the employer contributions.

The term pension credits refers to contributions and the accumulated interest that are locked in and can no longer be refunded in cash on termination of employment. Therefore, a benefit from these pension credits can only be paid as a pension. However, this does not mean that these pension credits have to remain with that employer's pension plan until the employee reaches retirement age. Pension plans allow for some degree of portability Footnote 23 of pension credits. The condition on the transfer of these credits is that they must move directly from one locked-in vehicle to another, and must remain locked in until retirement age is reached. As long as these pension credits are transferred in this manner to another locked-in vehicle, where access to them cannot be gained until retirement age is reached, a transfer may be made. These locked-in vehicles can be another employer's pension plan (if the other plan so permits); a locked-in non-commutable RRSP or its equivalent; Footnote 24 or an annuity purchase contract.

Upon reaching retirement age, either normal retirement age or an early retirement age as set out in the plan, employees may access their locked-in pension credits as a pension. Pension plans require that employees apply for their pension as it is not paid automatically upon reaching retirement age. Employees can delay the start of their pensions to a time of their choosing, however, this cannot be later than the maximum age allowed by legislation. This also applies to locked-in vehicles. Whether a pension is paid periodically as an annuity or as a lump-sum pension payment depends on the provisions of the pension plan. Footnote 25

5.13.1.3 Categories of pension plans

There are six types of pension plans that can be classified into three broad categories Footnote 26 . These categories depend on whether the pension is defined on the basis of a set formula (defined benefit), or a set level of contributions (defined contribution), or some combination of the two (hybrid or combination).

Defined Benefit Pension Plans specify the formula for calculating the pension that will be paid to the employee on retirement. Contribution rates are then established during the years employed to provide for a sum of money on retirement that will be able to support the payment of that pension. Any shortfalls, between what the accumulated contributions would support as a pension and the pension to which that employee is entitled, must be made up by the employer. There are three types of defined benefit pension plans:

  • Final Earnings Pension Plan

    The pension is based on the member's length of service and average earnings for a stated period before retirement, for example: 2% multiplied by the number of years of service multiplied by an average of the member's earnings during the last or best five consecutive years of service.

  • Career Average Earnings Pension Plan

    The pension is equal to a percentage of the aggregate earnings in the member's entire career, for example: 2% of the aggregate earnings during the employee's period of service.

  • Flat (or Uniform) Benefit Pension Plan

    The pension is based on a specified number of dollars for each year of service, for example: $20 per month for each year of service would yield a pension of $600 per month for someone with 30 years of service.

Defined Contribution Pension Plans specify the contribution rate. Whatever money is in the fund on retirement will be used to purchase an annuity. There are two types of defined contribution pension plans:

  • Money Purchase (Defined Contribution) Pension Plan

    The contribution amount is specified, however the pension amount is not known until the employee retires, for example: 5% of the employee's salary per year from both the employer and the employee, reduced by the required contributions under CPP and QPP. The amount of pension that these contributions will be able to purchase as an annuity will not be known until the employee retires.

  • Profit Sharing Pension Plan

    The employer contributes an amount that varies each year with the profits earned. It is allocated to each member on some sort of point system. Taxation authorities insist that the employer make a minimum contribution equal to at least 1% of remuneration of plan members in any year. The amount of pension that these contributions will be able to purchase as an annuity will not be known until the employee retires.

Hybrid or Combination Plans include characteristics of both defined benefit and defined contribution plans. In combination plans, the pension is the sum of two types of benefits. In hybrid plans, the pension is the greater of two types of benefits.

5.13.2 Pension plan terminology

An explanation of some of the specialized terms contained in pension plans and pension legislation follows in alphabetical order:

Actuary

An actuary is a business professional who computes insurance and pension rates and premiums on the basis of experience tables by using probability, risk theory, and statistics Footnote 27 .

Annuity

An annuity is a fixed sum payable to a person at specified intervals for a specific period of time or for life. Each payment represents a partial return of the capital invested and a return on the capital investment (commonly called interest) Footnote 28 .

Commuted value

To commute something in a financial sense is to convert it to cash. The commuted value of a pension represents the cash equivalent of what that pension would have been if paid in a lump-sum payment. It is the value of the monthly pension payments to be made in the future converted into a fixed or gross amount (a cash lump-sum settlement) Footnote 29 .

Locked in

Locked in means that the contributions to the plan Footnote 30 cannot be withdrawn by the employee and that the employee can receive the benefit of those contributions only in the form of a pension at retirement. The employer and the employee portion of the pension fund contributions must stay with the fund, they cannot be refunded. Although they cannot be refunded, they may be transferred to another locked-in vehicle.

Through vesting, an employee establishes a right to receipt of the contributions. The lock-in provisions limit what the employee can do with the contributions to which he has a vested right, that is, he cannot receive them in cash until he reaches retirement age. There are exceptions to the locking-in rule, and if the terms of the particular plan permit, the employee may receive a cash sum. These exceptions occur when the periodic pension amount that the employee is entitled to is below a set limit, when there is a shorter than normal life expectancy, when partial commutation is allowed by legislation, Footnote 31 when Additional Voluntary Contributions are returned, Footnote 32 and when provisions exist regarding Maximum Funding by Employee Contributions Footnote 33 .

When identifying monies paid out of a pension fund, any payout of pension monies prior to lock-in is normally a return of contributions, whereas any payment after lock-in has occurred is generally a lump-sum pension benefit.

Locked-in, non-commutable RRSP

A locked-in, non-commutable RRSP Footnote 34 is a financial vehicle that can be likened to a portable pension plan. A non-commutable RRSP is one that can never be de-registered. The full value of the RRSP cannot be obtained in a lump sum and this is why it is said to be non-commutable. These types of RRSPs can only be used to purchase an annuity. An RRSP will be recognized as both locked-in and non-commutable when the RRSP agreement is accompanied by an additional guarantee. Both the claimant and the financial institution guarantee that the funds in the RRSP will never be used for any purpose other than to purchase a monthly annuity at retirement age Footnote 35 .

Such a locked-in, non-commutable RRSP is distinguished from a personal, collapsible RRSP used as an individual investment tool. These personal RRSPs may or may not require the funds to be locked-in for a specific period of time in order for the individual to gain a specific rate of return or growth for the investment. Personal RRSP funds are fully the claimant's, he or she may receive them at any time by collapsing the RRSP and turning it into cash, even if the financial institution may assess some penalty for doing this before the end of term.

Locked-in vehicle

A locked-in vehicle is a financial instrument designed so that the monies contained within it can only be used to pay a pension on retirement. The locked-in vehicles allowed by most provincial pension legislation to transfer pension credits (locked-in contributions) are:

  • another employer's Registered Pension Plan (RPP), if there is provision for this transfer in the other employer's pension plan;
  • a prescribed RRSP that is both locked-in and non-commutable, or its equivalent, such as a Locked-in Retirement Account (LIRA) in Manitoba, or a Compte de Retraite Immobilisé (CRI) in the province of Quebec which have all the same provisions; and
  • an annuity purchase contract.

Portability

Portability means that the commuted value of a terminating employee's pension may be transferred to another locked-in vehicle. Most pension plans give a terminating employee the right to have the commuted value of the vested pension transferred to a locked-in vehicle.

Vesting

Vesting is the right of an employee on termination of employment to a benefit from the pension plan. Vesting allows the employee to retain a pension (or the value thereof), even if the employee should leave the plan before a pension benefit is immediately payable. The length of time an employee must be employed before vesting occurs is set out in the pension legislation and the pension plan. Normally, this vested benefit takes the form of either a return of the contributions made to the plan and the accumulated interest, or a deferred pension. What the employee receives on termination of employment depends on whether the contributions have become locked in or not. According to pension legislation, vesting normally occurs at the same time as lock-in, however, individual pension plans may provide vesting at an earlier date.

If the contributions have become locked in by the terms of the pension plan or pension legislation, these employer and employee contributions cannot be refunded. They must remain with the fund to support the payment of the deferred pension that the employee has a vested right to receive upon reaching retirement age. If the contributions have not become locked in, they are refunded to the employee on termination of employment.

Which contributions are refundable to an employee on termination depends on whether the contributions were made by the employer or the employee and the provisions of the pension plan. Employees always have a right to their own contributions, no matter how long they were employed with that particular employer. Therefore, vesting is always immediate for employee contributions. However, whether there is a right to the employer contributions on leaving employment depends on the terms of the pension plan and the employee's length of employment with that employer. If the pension plan allows vesting to occur prior to lock-in and the employee was employed the required length of time, the employer contributions are refunded.

The provisions of a particular pension plan may allow vesting of the employer's portion of the pension contributions to be contingent or in other words, conditional. This means that full benefits from the contributions (the receipt of both employer and employee contributions) occurs only if a certain option is chosen (usually the deferred pension). The plan will indicate whether vesting is conditional or not.

5.13.3 Determination

A definite link exists between payments to a claimant as a pension and the employment that gave rise to them. It is because of the work that was performed by the claimant for that employer that the pension payments are being made. That link, between pensions and employment, is sufficient to allow the Commission to make a regulation determining these payments to be earnings Footnote 36 . This express provision makes pension income, arising out of employment, earnings for benefit purposes Footnote 37 .

Only those pensions that are predicated upon contributions resulting from employment, and made by the employer, or the employee, or the employer and the employee, are earnings for benefit purposes. Pension payments are earnings whether they are based on employment within Canada, foreign employment, insurable employment, or non-insurable employment Footnote 38 . This applies whether the pension plan is registered or non-registered Footnote 39 as long as the pension benefits arise from employment. Included in consideration of pension income are pensions that arise from service in any armed forces, or any police force Footnote 40 . Also included are pensions paid or payable under the Canada Pension Plan or a provincial pension plan Footnote 41 . Annuities paid pursuant to the Government Annuities Act are considered pension earnings if they are under a group pension certificate as part of an employer's pension plan Footnote 42 . Payments under the Program for Older Workers (POWA) are also considered to be a pension Footnote 43 . Pension bridging benefits, whether paid from the pension fund or out of general company revenues, are considered to be a retirement pension arising out of employment, paid on a periodic basis in lieu of a pension Footnote 44 .

Group RRSPs are not pension plans for EI purposes and any monies arising out of them are considered to have been earned during the period worked. Group RRSPs, which are just a collection of individual RRSPs, are not considered to be a pension plan as these funds are not subject to legislative locking-in provisions until retirement as are pension plans; the ownership of individual accounts is fully and immediately vested in the employees; and the employer in the Group RRSPs is only acting as an agent for the employee when making the deductions and remitting them to the claimant's individual RRSP. Group RRSP monies are considered as "savings" when they come out of the RRSP. These monies would have formed part of the gross earnings during the period the claimant was employed.

Disability pensions are specifically excluded from consideration as earnings Footnote 45 . In addition, the following pensions are not earnings as they do not meet the definition of pensions Footnote 46 arising out of one's employment:

  • survivors' or dependants' pensions;
  • old age security pensions and supplements;
  • pensions or part of pensions that arise from a divorce settlement, or from spousal assignment of a Canada Pension Plan or Quebec Pension Plan pension; Footnote 47
  • allowances paid to veterans under War Veterans' Allowance Act;
  • individually purchased RRSPs, which do not result from the transfer of locked-in pension credits from a pension plan; Footnote 48
  • privately purchased pension plans or annuities; and
  • additional voluntary contributions (AVCs) Footnote 49 .

5.13.4 Monies arising out of a pension fund–paid or payable

It is critical to determine at what point pension monies actually become paid or payable. The best sources are the pension plan; the pension legislation; and information provided by the employer regarding the claimant's entitlement, and any payments due or made. There are only certain types of monies that can arise out of a pension fund and there are only a limited number of places they can go. All these monies become paid or payable due to specific terms of the pension plan itself.

Monies that are actually received by the claimant do not present a problem as they are clearly paid. Examination of the plan's terms leads to the nature of the monies received and allocation can commence. However, questions arise when the claimant has a legal right to receive monies immediately and chooses to defer the payment of these monies to some later date.

For EI purposes, payable means that there is a legal entitlement to these monies and these monies are immediately due Footnote 50 . The due date is not open to speculation but is found in the terms and conditions of the pension plan itself. The plan sets the normal retirement age, early retirement age, and any monies due on termination if a pension is not immediately payable. The plan also covers any transfer actions that are allowed in respect to the locked-in pension credits that are in the plan on termination.

Although the claimant may have reached the normal retirement age or an early retirement age as stated in the plan, the plan may make provision for receipt of that pension to be deferred until the claimant actually applies for it. If the claimant has that choice under the plan and exercises it, these monies cannot be considered payable, that is, immediately due until the claimant applies for the pension to be effective a certain date. For example, a claimant retires early at 55 and, according to the provisions of the plan, defers the payment of the pension until age 57. The pension, according to the provisions of the pension plan, is not immediately due until the claimant requests that it commence. It is only considered to be payable at age 57.

5.13.5 Periodic pensions

The primary purpose of a pension plan is to provide income support to retired employees Footnote 51 in the form of a pension benefit for the lifetime of the plan member. Pension legislation defines a pension benefit as an annual, monthly, or other periodic amount to which an employee is, or will be, entitled upon retirement. This periodic payment is commonly called an annuity. Pension benefits, as conceived by pension legislation and the pension plans themselves, are in the form of an annuity payable on retirement for the life of the employee. However, there are some restricted circumstances where a lump-sum pension benefit may be paid rather than an annuity Footnote 52 .

A pension benefit, whether in an annuity or lump-sum form, cannot be received until the claimant establishes that he or she has locked-in pension credits, reaches a retirement age as specified in the plan, and applies for the pension Footnote 53 .

Included in the category of periodic pensions, are annuity payments that are made out of a pension fund, whether that pension plan is registered under the Income Tax Act or not Footnote 54 , as well as payments now being made out of a locked-in vehicle to which pension credits had previously been transferred. Thus, the locked-in, non-commutable RRSP that is subsequently used to purchase an annuity at retirement age (on or before age 69) is considered as earnings when the annuity payments commence. The same would be true of any periodic amounts that have now commenced that resulted from the purchase of a deferred annuity using pension credits that were directly transferred from an employer's pension plan.

5.13.5.1 Retirement age

All pension plans set out a normal retirement age. This is the age that an employee can retire on a full, unreduced pension. Normal retirement age generally can be anywhere from 60 to 65 years of age. Nevertheless, some plans may provide a full, unreduced pension at a date earlier than normal retirement age. Normal retirement age, as set out in a pension plan, simply governs the age at which the unreduced payment of pension benefits can commence under the provisions of the pension plan. Normal retirement age is not the same as a compulsory retirement age. An employer may establish a compulsory retirement age through personnel policies, whereby an employee is forced to resign when they reach that age.

In addition to setting out the normal retirement age, pension plans may allow the payment of pension benefits to be either deferred or to be paid at an earlier age. If the pension benefits are to be deferred, they may be deferred, on an optional basis, up to the day preceding an individual's 69th birthday. Early retirement age, as set out in a pension plan, is the age at which a member may elect to retire and begin receiving pension payments prior to reaching normal retirement age. This age may be within ten years of normal retirement age, and may involve the application of some sort of actuarial pension reduction formula to compensate for the extra number of years the pension will be paid.

An employee must apply for his or her pension entitlement, whether it is upon reaching normal retirement or early retirement age. A pension is not automatically payable upon reaching a specified age, unless that age is beyond the maximum allowed under the legislation, which is presently 69 years of age. It involves a conscious choice by the employee and the employee must meet eligibility criteria in terms of pension credits. If the pension plan permits an employee to defer the receipt of his or her pension to a future date, that pension cannot be considered payable until the employee applies for, and qualifies for, that pension. Until this happens, that pension cannot be considered immediately due Footnote 55 .

If the claimant is of retirement age, has an option to defer the collection of a pension, and elects to receive it, that pension is considered as paid or payable. In addition, if a claimant has no choice under the plan and a pension is immediately due upon reaching a certain age, the pension is considered payable when that retirement age is reached. This determination as payable cannot be changed by any subsequent arrangement to dispose of these monies. Any transfer of that periodic pension into a regular RRSP Footnote 56 or a locked-in, non-commutable RRSP Footnote 57 cannot prevent the pension amount from being considered as payable, even if it is alleged that the money was never actually physically received Footnote 58 .

5.13.5.2 Pension bridging benefits

Pension bridging benefits allow an individual earlier access to monies that normally are only payable at some future date. Bridging benefits, in the form of additional compensation, allow for an easier transition between an individual's present and future financial circumstances. The payment of bridging benefits will cease when the point of planned future compensation is reached.

Bridging benefits can be paid out of a pension fund and may also be paid out of general company revenue Footnote 59 . However, not all bridging benefits paid by an employer are considered pension bridging benefits.

A pension bridging benefit is financial payment designed to allow an individual to move from one level of pension compensation to a future level of higher pension compensation with the addition of payments from the employer’s pension fund, Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). It is structured so that the total monies received each month, during the entire period, are constant. Pension bridging benefits are paid along with a pension to top-up that pension or until the pension entitlement is reached. This top-up may be necessary as the pension that is payable may have been reduced or delayed due to forced early retirement. Pension bridging benefits may also act as an incentive to early retirement.

A pension bridging benefit has the following characteristics:

  • It bridges to future pension entitlement, such as a company pension, CPP/QPP and Old Age Security;
  • the amount of the bridging benefit is based on a periodic payment Footnote 60 ;
  • the individual who is receiving it has reached retirement age (either early or normal);
  • the amount that is being paid as the pension bridging benefit is approximately at the same level as the additional pension that is to be paid in the future; and
  • if the pension bridging benefits are to be paid out of general company revenues, there are three additional conditions that must be met:
    1. the bridging benefit payment period does not count towards years of service for the company pension that is to be paid;
    2. the employer’s bridging benefit program must be based on the worker meeting a set age, years of service and retirement date requirements; and
    3. the bridging benefit payment must not reduce the individual’s entitlement to severance payments accumulated from that employment according to the contract or collective agreement and/or provincial or federal labour standards.

Because a pension bridging benefit arises out of employment, is paid at retirement age, and is usually calculated based on the employee’s age, years of service and retirement date, it resembles a retirement pension and is treated and allocated as such for EI purposes.

Pension bridging benefits may be paid until pension entitlement is reached or to supplement a pension or other retirement compensation, such as a pension payment from his or her employer Footnote 61 Group RRSPs Footnote 62 and/or Deferred Profit Sharing Plans [DPSPs] Footnote 63 .

It is not necessary that a bridging benefit be paid along with a pension to be considered as a pension bridging benefit. It is sufficient that it allows the employee to make the transition to a future pension such as a company pension, CPP/QPP or Old Age Security.

Pension bridging benefits may be necessary because the company pension that is payable may have been reduced due to forced early retirement or the company pension cannot, for some reason, be paid at that time. Pension bridging benefits may also be offered to act as an incentive to early retirement.

An example of a pension bridging benefit is the payment of an amount equal to future CPP/QPP entitlement and/or Old Age Security Benefit entitlement. This pension bridging benefit may be paid alone or in addition to the basic pension or some other retirement income already payable to the employee, and is paid until the CPP/QPP pension and/or the Old Age Security Benefits commences.

The fact that Old Age Security Benefits are not pension earnings Footnote 64 cannot change the nature of pension bridging benefits that are paid to compensate the employee at a level equivalent to their future Old Age Security Benefits. The employer or the pension fund has taken on the obligation of paying an equivalent amount until the actual Old Age Security Benefits commence, and that equivalent amount becomes a retirement pension. This does not transform these payments into Old Age Security Benefits.

Pension bridging benefits cannot be considered to be a loan unless, under the terms of the pension bridging benefit plan, there is, on the part of the pensioner, an obligation to repay the loan and documentary evidence supporting that obligation Footnote 65 .

A bridging benefit paid out of general company revenue which does not meet the characteristics listed in the shaded box above cannot be considered a pension bridging benefit and cannot be treated as a periodic pension. The allocation will depend on whether the claimant remains an employee while these payments are being made Footnote 66 or the employee has separated from that employment and the payments are part of termination payments Footnote 67 .

Pension bridging benefits are no longer considered as earnings if the claimant can meet the requalifier exemption for pension income. This is true whether the pension bridging benefits are paid out of the pension fund, or are paid out of general company revenues. When the actual company’s pension, CPP or QPP becomes payable any insurable hours earned during which the pension bridging benefits were paid qualify as pension requalifier insurable hours towards meeting the requalifier exemption Footnote 68 .

[ April 2006 ]

5.13.5.3 Amount of periodic pension to be allocated

It is the gross amount of the periodic pension that must be allocated. This includes the basic pension amount as well as any supplement to that pension, including any pension bridging benefits Footnote 69 . It also includes any deductions made for the purpose of buying back previous service or non-existent service under the terms of the pension plan or any other financial obligation undertaken by the claimant that he or she uses his or her pension to satisfy Footnote 70 . The one exception to this occurs where the claimant's pension has been divided due to marital dissolution Footnote 71 or due to spousal assignment of a CPP or QPP pension Footnote 72 .

Periodic pensions are not always the same amount for the life of the employee. Periodic pension payments from a pension fund can increase. Increases may come about when the pension is indexed to the cost of living; Footnote 73 when the pension annuity is reviewed periodically, and ad hoc increases are given to compensate for the decreased buying power of the pension; or when the pension payment is a variable or escalating life annuity.

Periodic pension payments from a pension fund can also decrease. Decreases in periodic pensions may occur when bridging benefits from a pension plan cease; or when CPP/QPP or Old Age Security payments start in a pension plan that is integrated with these benefits, whether through exercising an option or not; Footnote 74 or when a pension is split due to marital dissolution; or CPP or QPP payments are assigned to a spouse Footnote 75 .

Whether the amount increases or decreases, the amount to be allocated is the amount of pension that is payable. In the case of those employment pensions that decrease due to bridging benefits or integration with social security benefits, the amount to be allocated from the employment pension will decrease. However, there may be a corresponding new allocation in the amount of the pension now being paid from another source (CPP or QPP). However, should the pension bridging benefit be designed to bridge to Old Age Security entitlement, there would be no corresponding increase in allocation as Old Age Security Benefits are not considered to be a pension for EI purposes Footnote 76 .

Periodic pensions resulting from employment are usually paid monthly, towards the end of the month. If the exact amount of the gross pension is not known, an estimate will be used until the exact figure is available.

Monthly periodic pensions are converted to a weekly amount by multiplying the monthly amount by twelve (12) to obtain the yearly figure and then dividing that by fifty-two (52) to obtain the weekly amount for allocation. If the start of the pension begins other than at the beginning of a week, the weekly amount will be prorated for the number of working days the pension was payable (one-fifth for each working day).

Periodic pensions are allocated to the period that they are paid or payable Footnote 77 . A periodic pension, like a lump-sum pension benefit, is allocated concurrently with all other earnings that are applicable to that period Footnote 78 . In addition, periodic pension payments do not prevent an interruption of earnings Footnote 79 .

5.13.6 Lump-sum pension benefit

The ultimate goal of all pension plans is to pay some kind of pension benefit on retirement Footnote 80 . A pension benefit is an annual, monthly, or other periodic amount to which an employee is, or will be, entitled upon retirement. This periodic payment is commonly called an annuity. Although the goal of all pension plans is the same, the type of pension benefit payable under a pension plan depends on whether the pension plan is registered under the Income Tax Act Footnote 81 .

What is envisioned by the pension legislation, and what is reflected in the registered pension plans themselves, is that the pension benefit employees will receive will be in the form of an annuity. In addition, that annuity will be payable only on retirement. Although the stated intention of pension plans is to pay pension benefits as an annuity, there are some restricted circumstances where the pension plan allows the commutation of accumulated pension credits (locked-in contributions) into a lump-sum payment. This is called a lump-sum pension benefit. Although it is normally paid on termination of employment due to retirement, Footnote 82 it may be paid earlier under special "unlocking" provisions allowed under some pension plans, Footnote 83 or to return Additional Voluntary Contributions (AVCs) to the claimant Footnote 84 . Lump-sum pension benefits are considered as payable no matter how the claimant chooses to dispose of them Footnote 85 . The allocation of a lump-sum pension benefit is by conversion to an annuity and commences with the week that it was paid or payable Footnote 86 .

5.13.6.1 At retirement age

If a lump-sum pension benefit is to be paid, it is normally payable at retirement. Lump-sum pension benefits, paid as an alternative to an immediate periodic pension, may be paid for the following reasons:

  • commutation of small benefit

    If the employee's calculated annuity, or pension amount, is below a certain minimum level, as set out in the pension plan and allowed by pension legislation, the total pension credits will be commuted into a lump-sum amount. This amount is then paid to the employee rather than a monthly pension.
  • shortened life expectancy

    If the plan member establishes through a statement from a qualified medical practitioner that he or she has only a short life expectancy, Footnote 87 the total pension credits will be commuted into a lump-sum amount. This amount is then paid to the employee rather than a monthly pension.

5.13.6.2 Prior to retirement age

If the employee has not reached retirement age, either early retirement age or normal retirement age, it is highly unlikely what is being paid is a lump-sum pension benefit. The one exception to this "only payable at retirement" rule would be if the payment results from special "unlocking" of previously locked-in pension credits allowed by some pension plans and under pension legislation.

A lump-sum pension benefit can result from the "unlocking" provisions contained in some pension plans and allowed by some pension legislation. This special provision allows the employee to choose to receive, as partial discharge of his or her rights under the plan, a commutation of a portion of his or her locked-in pension credits. If allowed under the employee's pension plan, this option is open to the employee on the termination of employment prior to the employee's reaching normal retirement age. The partial commutation allowed is usually an amount up to twenty-five per cent (25%) of the employee's accumulated locked-in pension credits prior to a date specified in the pension plan and the applicable pension legislation. Although this provision is generally in terms of pension credits accumulated prior to a specified date, this may not be the same under all legislation. Whether a date is specified or not, the guidance is the same for any of these types of payments. It is only up to twenty-five per cent (25%) of those locked-in contributions that can be accessed in this fashion by the employee on termination. The remaining seventy-five per cent (75%) must be used to support the payment of either a deferred or an immediate annuity. Which one it is depends on the employee's specific circumstances and whether he or she has applied for, and is entitled to receive, a pension.

These partial commutation amounts are generally not identified as to which contributions (employer or employee, or both) are being returned. Nevertheless, even if there is such an identification of these amounts as employee contributions, it is irrelevant to the determination of these monies as a lump-sum pension benefit. These monies are not a return of employee contributions that were determined to be in excess by some provision of the pension legislation. They are the portion of a pension to which the employee is entitled that has been magically "unlocked," thus allowing the employee immediate access to part of his or her pension annuity as a lump-sum payment Footnote 88 . The total pension amount that the employee will receive will be the same using this option, the only difference is that it is comprised of both a lump-sum pension benefit and a periodic pension.

A lump-sum pension benefit can be distinguished from a return of contributions. This distinction is based upon the specific wording of the pension plan documents and the point at which the pension contributions are "locked" into the pension plan by legislation and the specific terms of the pension plan. A pay out of monies prior to lock-in is normally a return of contributions, whereas a pay out afterward is generally a lump-sum pension payment arising out of unlocking pension credits.

Any other lump-sum payment made in respect to a retirement or separation, outside the terms of the pension plan, and without immediate pension entitlement according to the terms of the pension plan, is probably a lump-sum payment made by reason of separation. These retirement payments, as they result from a lay-off or a separation, are allocated from the week of the lay-off or separation at normal weekly earnings Footnote 89 .

5.13.6.3 Consideration as paid or payable

If a claimant is entitled to pension benefits and chooses to receive a lump-sum pension benefit rather than a periodic pension, he or she has exercised a choice to be entitled to these monies. These monies are immediately due and are considered payable regardless of the way that the claimant arranges to dispose of them.

5.13.6.4 Allocation of a lump-sum pension benefit

These lump-sum pension benefits are allocated in a special manner. As these earnings were paid to the claimant in lieu of a pension, they were meant to compensate him or her in the same way as a pension does. To allocate them using normal weekly earnings, would be to assign these earnings to a relatively short period of time, whereas they were intended to cover the claimant for the rest of his or her life, in the same manner as a periodic pension. This is why lump-sum pension benefits are converted to the equivalent of what these payments would have been, had they been paid as an annuity Footnote 90 .

The table below entitled "Weekly Annuity Equivalents for a Lump Sum of $1,000 According to Age of Claimant" is used to perform this calculation. The table is updated annually.

Weekly annuity equivalents for a lump sum of $1,000 according to age of claimant
Lump-sum pension benefit
paid or payable
from December 31, 2017 to
December 29, 2018
(week code 2115 to 2166)
Calculated pursuant to
subsection 36(17) of the EIR
Lump-sum pension benefit
paid or payable
from January 1, 2017  to
December 30, 2017
(week code 2063 to 2114)
Calculated pursuant to
subsection 36(17) of the EIR
Lump-sum pension benefit
paid or payable
from December 27, 2015  to
December 31, 2016
(week code 2010 to 2062
Calculated pursuant to
subsection 36(17) of the EIR
Age of claimant Weekly annuity
equivalent
Age of claimant Weekly annuity
equivalent
Age of claimant Weekly annuity
equivalent
19 and under 0.55 19 and under 0.52 19 and under 0.56
20 0.55 20 0.52 20 0.57
21 0.56 21 0.53 21 0.57
22 0.56 22 0.53 22 0.58
23 0.56 23 0.54 23 0.58
24 0.57 24 0.54 24 0.58
25 0.57 25 0.55 25 0.59
26 0.58 26 0.55 26 0.59
27 0.58 27 0.56 27 0.60
28 0.59 28 0.56 28 0.60
29 0.59 29 0.57 29 0.61
30 0.60 30 0.57 30 0.62
31 0.60 31 0.58 31 0.62
32 0.61 32 0.58 32 0.63
33 0.62 33 0.59 33 0.63
34 0.62 34 0.60 34 0.64
35 0.63 35 0.60 35 0.65
36 0.64 36 0.61 36 0.65
37 0.65 37 0.62 37 0.66
38 0.65 38 0.63 38 0.67
39 0.66 39 0.64 39 0.68
40 0.67  40 0.64 40 0.69
41  0.68 41 0.65 41 0.70
42 0.69 42 0.66 42 0.71
43 0.70 43 0.67 43 0.72
44 0.71 44 0.68 44 0.73
45 0.72 45 0.69 45 0.74
46 0.73 46 0.71 46 0.75
47 0.74 47 0.72 47 0.76
48 0.76 48 0.73 48 0.77
49 0.77 49 0.74 49 0.79
50 0.78 50 0.76 50 0.80
51 0.80 51 0.77 51 0.82
52 0.81 52 0.79 52 0.83
53 0.83 53 0.80 53 0.85
54 0.84 54 0.82 54 0.87
55 0.86 55 0.84 55 0.88
56 0.88 56 0.86 56 0.90
57 0.90 57 0.88 57 0.92
58 0.92 58 0.90 58 0.95
59 0.94 59 0.92 59 0.97
60 0.97 60 0.95 60 0.99
61 0.99 61 0.97 61 1.02
62 1.02 62 1.00 62 1.05
63 1.05 63 1.03 63 1.08
64 1.08 64 1.06 64 1.11
65 1.11 65 1.09 65 1.14
66 1.15 66 1.13 66 1.18
67 1.19 67 1.17 67 1.22
68 1.23 68 1.21 68 1.26
69 1.27 69 1.25 69 1.30
70 1.32 70 1.30 70 1.35
71 1.37 71 1.35 71 1.40
72 1.43 72 1.41 72 1.46
73 1.49 73 1.47 73 1.52
74 1.55 74 1.53 74 1.59
75 1.62 75 1.60 75 1.66
76 1.70 76 1.68 76 1.74
77 1.79 77 1.77 77 1.83
78 1.88 78 1.87 78 1.92
79 1.99 79 1.97 79 2.02
80 2.10 80 2.09 80 2.14
81 2.23 81 2.21 81 2.26
82 2.37 82 2.35 82 2.39
83 2.52 83 2.51 83 2.54
84 2.69 84 2.68 84 2.70
85 2.88 85 2.87 85 2.88
86 3.09 86 3.08 86 3.07
87 3.31 87 3.31 87 3.28
88 3.56 88 3.56 88 3.51
89 3.84 89 3.83 89 3.77
90 and over 4.13 90 and over 4.13 90 and over 4.04

The table shows the annuity equivalent amount for each $1000 of lump-sum payment made. The claimant's age at the time of the lump-sum payment determines the annuity equivalent amount to be used in the calculation. The lump-sum amount is then divided by 1000, and the resulting figure is multiplied by the annuity equivalent amount.

For example: A $30,000 lump-sum pension payment paid July 10, 2017, to a claimant who was 56 years of age would be allocated at an amount of $25.80 (30 x $0.86) per week. The impact on this claim is vastly different than if this amount would have been allocated at a normal weekly earnings rate of $600.00 for fifty weeks.

Due to the vast difference in the outcome between an allocation as a lump-sum pension benefit and other types of lump-sum earnings, only amounts that truly are a lump-sum pension benefit are handled in this way. In determining whether an amount is a lump-sum pension benefit, the provisions of the pension plan and the applicable pension legislation are examined.

Lump-sum pension amounts are allocated concurrently with all other earnings that are applicable to that period Footnote 91 . In addition, lump-sum pension payments do not prevent an interruption of earnings Footnote 92 .

For registered pension plans, a lump-sum pension benefit includes only those sums paid or payable out of locked-in pension credits, under the terms and conditions of a pension plan, which are due to the claimant as a retiree under the plan, or payable under some provision of the plan and the pension legislation that allows access to these locked-in monies.

5.13.7 Portability of locked-in pension credits

Due to the mobility that occurs within the labour force, an employee may not spend his or her entire career with just one employer. The employee is protected in that, if the employment was of a short duration and lock-in has not occurred, he or she can receive a return of all the contributions made to the pension plan. However, no refund can be made for those pension contributions locked in to the pension fund under the terms of the plan.

Pension legislation, recognizing the need to be able to move locked-in pension contributions, requires that pension plans under its jurisdiction allow for the transfer of pension credits (locked-in pension contributions and the accumulated interest) when employment ends. This ability to transfer pension credits to some other financial vehicle, where they will ultimately be used to pay a pension, is called portability Footnote 93 .

The condition on the transfer of these accumulated pension credits is that they must move directly from the pension fund into one of the locked-in vehicles approved by the pension legislation for this purpose. In addition, these monies must remain locked in until retirement age is reached.

The acceptable locked-in vehicles are the following:

  • another employer's pension plan, if the other plan permits this transfer of pension credits; Footnote 94
  • a locked-in, non-commutable RRSP; or some other similar vehicle, such as a Locked-in Retirement Account (LIRA) in Manitoba, or a Compte de Retraite Immobilisé (CRI) in the province of Quebec, which have all the same provisions as a locked-in, non-commutable RRSP; Footnote 95 and
  • an annuity purchase contract.

If pension credits are transferred directly from one locked-in vehicle to another on termination of employment, it is considered that nothing was paid or payable to the claimant. These pension credits can only be accessed at retirement age according to the specified provisions of all these locked-in vehicles. It is only at that time that any legal entitlement to any immediate payment exists. Claimants who arrange for the transfer of their pension credits in this manner will not have any earnings allocated from these vehicles until they are paid out under the terms of the locked-in vehicle.

At age 69, any monies in a locked-in RRSP must be used to purchase an annuity. Once the pension becomes payable, it will be allocated.

5.13.8 Return of contributions on termination of employment

Although it is the intention of all plans to pay a pension benefit upon leaving employment, sometimes the employment ends before an employee reaches retirement age. If the employee has worked a sufficient period of time according to the terms of the pension plan, the contributions made while employed are non-refundable (locked-in). These contributions and the accumulated interest, or pension credits as they are called, will be used to support a deferred pension or they can be transferred to another locked-in vehicle Footnote 96 . Contributions and the accumulated interest to which the employee has a vested right Footnote 97 under the terms of the plan, but which are not locked in, will be paid to the employee on termination of employment.

Whenever contributions are mentioned in this section, whether they are employee or employer generated, they include the interest that has accumulated on these contributions. Should the claimant be entitled to additional interest on any contributions because the employer has delayed in refunding those contributions to the claimant, that interest amount would not be included in any allocation Footnote 98 .

Pensions can be funded through contributions made by both the employer and the employee or the employer alone. How this return of contributions will be treated for benefit purposes depends on who made them–the employee Footnote 99 or the employer Footnote 100 .

5.13.8.1 Return of employee contributions

Employee contributions to the pension fund are made during the periods employed. These contributions can be based on either a fixed amount or a percentage of salary. These contributions were a deduction on the employee's paycheque at the time that they were made and formed part of the employee's gross earnings from employment during that period.

It is considered by all pension plans that employees have a vested right to their own contributions. As a result, on termination, employees will receive a refund of all their own employee contributions that were not locked in.

However, it is not only employees who have been employed for a short period of time with an employer who may receive a return of their employee contributions. There are times when an employee may receive a refund of employee contributions even after lock-in has occurred. Pension legislation for defined benefit pension plans may require that no employee's contributions, including any accumulated interest, shall be more than fifty per cent (50%) of the commuted value of the pension. This type of refund is simply a return of the contributions that are now determined to be in excess of the amounts required by the pension legislation to be contributed by an employee. This requirement is called by a number of terms: Maximum Funding by Employee Contributions, Minimum Employer Cost, Defined Benefit, or Maximum Cost Provision. Whether there is an excess of employee contributions is determined by the actuary who reviews the employee's pension credits when the employment is terminated. These excess employee contributions must be returned to the employee according to the terms of the pension legislation.

In all cases where employee contributions are returned to the employee on termination, they have not lost their characterization as earnings arising out of employment. Footnote 101 However, they were part of the employee's gross weekly earnings during employment and would have been considered as earnings at that time. Footnote 102 As a result, this return of employee contributions on termination of employment has no effect on any current period.

5.13.8.2 Return of employer contributions

Employer contributions to the pension fund are made for the periods employed. These contributions can be made into a pension fund on the basis of matching employee contributions, a fixed amount per employee, a percentage of the employee's earnings, or a percentage of the employer's profits for a period. The very nature of employer contributions makes them different from those of the employees. Employer contributions do not form a part of the employee's gross wages and are not used in the calculation of the employee's income tax, CPP contributions and EI Premiums when the employee's paycheque is issued.

In all present pension legislation, vesting occurs at the same time as lock-in. If vesting and lock-in do occur at the same time, there will be no payment of the employer contributions upon termination as they are locked in. However, pension legislation only sets out the minimum requirements that plans must follow and individual plans may set vesting at an earlier date than lock-in. If an employee is to receive any employer contributions on termination, it will be because the employer contributions are vested but not locked in.

Vested right to the employer's contributions according to the terms of the plan

Some pension plans contain provisions that vest the employee's rights to the employer contributions that are not locked in. Under the pension plan, as these monies are not locked in, they are fully refundable. If they were locked in, the claimant would not have access to them. These employer contributions that are not locked in cannot have the character of an amount on account of or in lieu of a pension as the employee is not of retirement age and is not entitled to a pension benefit. They are solely a return of contributions. Although they are not considered as pension earnings, these monies are earnings as they fall under the entire income arising out of any employment Footnote 103 . Once these monies are identified as earnings, how they are to be allocated must be determined. These earnings were paid out of the pension fund because the employee's employment ended and have the characteristics of a retirement benefit. As these earnings were paid by reason of a lay-off or separation, they must be allocated as a termination payment at normal weekly earnings commencing with the week of lay-off or separation. Footnote 104 These earnings are considered as payable and must be allocated even if the claimant places them into a locked-in non-commutable RRSP. It is only locked-in pension credits that can benefit from transfer to a locked-in vehicle and avoid being considered payable. This return of employer contributions cannot be considered as such.

No vested right to employer's contributions according to the terms of the plan

Some pension plans have no provision for the vesting of employer contributions when employment is terminated prior to retirement age. Terminations of employment for these workers due to business closures or bankruptcies, and any resultant pension plan wind-up, can result in the payment of employer contributions that are not covered under the provisions of the pension plan. Footnote 105 If these monies are given to the workers, they cannot be considered to be a pension benefit under the terms of the plan as there is no right to such a benefit (only a deferred annuity or death benefit may be allowed by the plan). Nor can these monies be considered to be a return of contributions under the pension plan as there is no such provision within the plan. Therefore, it is considered that these monies, which have not been locked in, are paid by virtue of provincial legislation or through the employer's gratuitous gesture due to the closure of the company. These payments are made by reason of the termination of employment and the resultant wrap-up of the pension plan. Their true nature is a type of termination payment and not a pension benefit and they should be allocated at normal weekly earnings from the week of lay-off or separation, as are all payments that are made by reason of lay-off or a separation Footnote 106 .

5.13.9 Additional contributions to a pension fund

Pension plans can be contributory or non-contributory. Whether a plan is contributory depends on whether the employee is required to make contributions or not. In a non-contributory plan, the employer contributes the entire cost of the pension benefit. The employee in these plans is required to contribute nothing. A contributory plan, on the other hand, is a plan where the employees are required to contribute towards their pensions and the employer pays the balance of the costs.

All pension plans set out what is required in contributions, whether by their members and the employer, or the employer alone. Some pension plans allow their employees to increase their pension amounts on retirement by: making additional pension contributions on a voluntary basis; buying back past service where no contributions had been made; or purchasing additional years of service, whether those years have been worked or not.

When these pension benefits, funded through additional contributions to the pension fund, are finally paid out, either through receipt of an annuity or in a lump sum, they are handled differently depending on whether they were Additional Voluntary Contributions (AVCs) Footnote 107 or Additional Required Contributions (ARCs) Footnote 108 to the pension fund.

5.13.9.1 Additional voluntary contributions (AVCs)

Some pension plans allow employees the option to make extra contributions to the pension fund to increase the amounts that they would otherwise receive from the pension plan on retirement. These extra contributions are commonly called Additional Voluntary Contributions (AVCs). There is a limit on the extent of the AVCs that an employee can make into the pension plan. AVCs have no direct effect on the employer's pension costs. The employer is not required to match these AVCs as the employer may do with the required contributions that an employee pays into the pension fund.

An employee may choose to put AVCs into his or her pension fund for a number of reasons. The investment rate offered by the pension fund may be higher than the individual could obtain if he or she invested with another institution. It may be chosen for the ease in investment in that contributions are made through payroll deductions and saving is thus ensured. Whatever the employee's reasons for choosing to place AVCs into the pension fund, the fact remains that the individual could have made that same investment elsewhere. They had that option, as these AVCs are not required of the employee.

AVCs are tax deductible and count towards the pension adjustment amount for income tax purposes. They, therefore, reduce the amounts available for contribution into a personal RRSP in a particular tax year.

AVCs, once made, are accounted for separately from employees' required contributions. These contributions are never combined with the required contributions in the fund. They must remain separate, or they lose their characterization as AVCs. When employees receive a summary of their contributions in the fund, they will receive a report on the status of two separate amounts, their required contribution accumulation as well as their AVCs.

Although not locked in under pension legislation, once made, AVCs must remain in the pension plan during the entire period of employment. They cannot be accessed by the employee while still employed. There is one exception to this rule and it occurs if the pension plan is subsequently amended so that it no longer has the provision allowing AVCs. In that case, the AVCs accumulated in the plan to that date may be rolled over into a RRSP on a once-and-for-all basis. Footnote 109

On termination of employment due to retirement, AVCs are an exception, allowed under the Income Tax Act, to the rule regarding pension contributions. Although AVCs cannot be withdrawn until the termination of employment, they can be paid on termination as a lump-sum payment should the employee choose to receive it in that fashion, rather than as an annuity for life.

Lump-sum payments of AVCs and portions of annuities derived solely from AVCs are not earnings for EI benefit purposes. AVCs are more in the way of a purchase of a private pension plan than a required contribution to the pension plan. Pensions arising from private pension plans cannot be considered as earnings for EI purposes. They cannot meet the definition of a pension according to the Regulations as they do not arise out of employment. Footnote 110 If a portion of the claimant's pension entitlement is to be exempted from consideration as earnings due to its characterization as an AVC, it must be clearly identified as such by the pension administrators.

5.13.9.2 Additional required contributions (ARCs)

Pension plan members in defined benefit plans are often paid their pension entitlement based on years of service. During those years of service, contributions to the pension plan are required to be made. Some pension plan members find themselves in situations where their pensions would be increased if they could somehow obtain additional years of pensionable service.

If the pension plan so permits, plan members can have years of service when no contributions were previously made, considered as years of pensionable service by making the contributions that would have been required. Depending on the provisions of the particular pension plan, this may apply to years of past service with the present employer or other previous employers. Once the employee decides to do this, the additional contributions now required to support those additional years of service are calculated and these monies are required to be paid into the pension fund. According to the provision of the pension plan, this may be done through the payment of a lump-sum amount, by installments, or as a deduction from the periodic pension to which the employee has become entitled. These payments, once made, become part of the pension fund; they are not accounted for separately and can no longer be differentiated from any other required locked-in contribution under the pension plan.

Some pension plans allow an employee to purchase years of non-existent service in order to meet retirement requirements. The employee may be responsible for both the employer's and the employee's portion of the contributions in these pension buy-back situations. As it is with buying back years of previously worked service, the amount of additional contributions now required to purchase those additional years is calculated and the employee must pay that amount. The payment arrangements may be the same as in the case of buying back previous service.

Purchasing years of service, whether they were previously worked or not, cannot be considered to be an additional voluntary contribution. Although deciding to make the purchase may be voluntary, once that decision to purchase those years of service is made, these contributions are now required under the plan. These contributions must be made in order to increase the employee's pension to the level desired. These contributions are considered to be Additional Required Contributions by Canada Revenue Agency. They become part of the plan and are not accounted for separately as are AVCs. As a result, any pension payable as a result of additional required contributions is earnings in its totality as no portion can be considered to be derived from AVCs.

5.13.10 Non-registered pension plans

A retirement compensation package may be composed of different pension plan components containing a pension plan registered under the Income Tax Act as well as a non-registered pension plan.

The Income Tax Act sets out the maximum pension benefit that a pension plan may provide to remain registered for the purposes of receiving income tax deductions for pension contributions. If an employer makes a commitment to pay pension benefits in excess of this maximum, provisions for excess benefits cannot be included in the registered pension plan. If these excess benefits were to remain in the pension plan, the entire pension plan would no longer meet the criteria for registration under the Income Tax Act. In order to avoid this, the employer may create a non-registered pension plan just to pay these excess benefits. These benefits are then paid out of general company revenues and not out of the registered pension fund.

Information

The key to handling any payments made under these non-registered pension plans is to determine exactly what is being paid the true nature of the payment. These payments are then handled in the same manner as any similar payment out of a registered pension plan.

Generally, payments from a non-registered pension plan are either a lump-sum pension benefit, a periodic pension, or a return of contributions. Identifying these payments depends on whether an individual is eligible for retirement or not. The applicable early and normal retirement ages are set out in the provisions of the non-registered pension plan. These ages are generally the same as those in the registered pension plan as these payments from the non-registered pension plan are designed to supplement the registered pension amounts.

When an individual reaches retirement age, either early or normal, the employee's pension is calculated using all components based on the formula developed by the company for this purpose. Any pension payable from the registered pension plan is supplemented by either an additional periodic pension or a lump-sum pension benefit paid out of the non-registered pension plan. However, the non-registered pension may be paid separately. The fact that this pension is paid by the company, and is not paid out of a registered pension plan, is of no consequence as these monies meet the definition of a retirement pension arising out of employment Footnote 111 . The allocation will be the same as for any pension, that is, periodic pensions are allocated to the period for which the pension is paid or payable Footnote 112 and lump-sum pension benefits are converted to an annuity and allocated from the week paid or payable Footnote 113 . Should the employee defer the receipt of the pension on retirement, the registered portion, the non-registered portion, or both, allocation only occurs when the pension becomes payable Footnote 114 .

If an individual leaves employment prior to retirement age, the plan may allow the employee to leave all pension entitlement in the pension plans (both registered and non-registered) until retirement age is reached. This is handled in the same way as any deferred pension entitlement. The allocation, in cases such as these, does not commence until the employee elects to receive his or her pension. It is only then that the pensions are considered to be payable Footnote 115 .

On termination of employment prior to retirement age, a claimant may receive the commuted value of his or her non-registered pension entitlement. These monies are earnings and are allocated in the same manner as any other payment made by reason of a lay-off or separation in the same fashion as a return of employer contributions Footnote 116 . The manner in which the claimant disposes of these monies does not alter this allocated. As these monies are accessible to the claimant on termination, they cannot avoid allocation by being transferred to a locked-in vehicle.

Situation Type of payment Allocation of earnings
Retirement age reached Periodic pension Regulation 36(14)
Lump-sum pension benefit Regulation 36(15) and 36(17)
Pension deferred Not until payable
Prior to retirement age Pension deferred Not until payable
Return of contributions Regulation 36(9)

5.13.11 Pension fund surplus and contributions in excess of CRA limitations

In addition to the various payments that may arise from a pension fund, an employee may also receive a payment that is attributed to either a surplus in the pension fund itself Footnote 117 or contributions which are in excess of those allowed by Canada Revenue Agency Footnote 118 . The implication of these payments on EI benefits depends on how the pension fund reassigns these monies. Due to the pension legislation provisions, distribution of money from a pension fund is restricted to certain types of monies that can only be paid under limited circumstances. It is the true nature of what is being paid that determines what is done with these payments.

5.13.11.1 Pension fund surplus

In a defined contribution pension plan, the yearly contribution level is set out in the pension plan and is designed to accumulate a "reasonable" amount in the pension fund. The pension that a plan member will receive on retirement is whatever amount of annuity the accumulated contributions and interest will purchase. Defined contribution pension plans can have no surplus as the pension to be paid is based on the amount of accumulated contributions in the fund at retirement age.

In a defined benefit pension plan, actuaries must estimate how much must be contributed each year to the plan in order to accumulate an amount in the fund sufficient to support the level of benefits promised in the pension plan. This is not an easy task. In estimating yearly levels of contributions for the final average and career average pension plans, the actuary must factor in anticipated future salary levels, longevity, and rate of return on the monies invested, as well as other assumptions. Higher than expected return on investments, or setting the contribution rate too high, can result in a greater amount in the fund than is required to support all the present and anticipated commitments of the pension fund. This is called a pension plan surplus. The surplus exists in the pension fund itself and not in each individual employee's accumulated pension credits.

As defined benefit pension plans are based on estimates of the amounts needed to be able to pay a future benefit, these plans can have a surplus (a gain) or a deficit (a deficiency). Pension legislation requires the administrator of the pension plan to file an actuarial report annually, certifying that all contributions for that fiscal year have been made. In addition, at specified intervals, a more detailed report is required on the status of the fund and whether there are any surpluses or deficiencies.

What will be done with a surplus will depend on who ultimately owns the surplus according to the provisions of the pension plan. These provisions include any subsequent amendments made to that pension plan. The surplus will revert to the employer if there is such a provision in the pension plan. Generally, it is the employer who is responsible for making up any shortfalls in pension funding in defined benefit plans. As a result, it often is the employer who benefits by receiving the surplus, should there be any surplus in the fund. However, this may not always be the case.

A surplus in a pension fund may be discovered when the periodic reports of the plan's status are prepared. A surplus may also be discovered on wind-up of the pension plan on business closure or plan termination. Regardless of how it is discovered, Canada Revenue Agency has made very specific rules as to whether any identified surplus can be used and how it can be used. The surplus may be refunded directly to the employer; may be used to provide a contribution "holiday" (a period of no contributions) for the employer, or the employee, or both; or may be used to increase benefits under the plan.

The way in which a surplus will be used is often a joint decision of the parties who contribute to the fund, even for pension funds where the employer has ownership of the surplus. In plans where employees make contributions to the pension fund, decisions on what the employer will do with the surplus may be influenced by the employee's representatives.

Information

Whatever use is made of the surplus, the implications for EI benefits will depend on the way that these monies are distributed to the employee, that is, based on the true nature of these monies. Due to the limited options open to the employer, a surplus can only be distributed in certain ways. The fact that these monies may have resulted from a surplus will not change the character of what they represent.

If the choice is to have the surplus refunded to the employer in cash, normally there will be no implication for any claimant's EI benefits unless the employer chooses to pass the benefits of the surplus on to the employees. Since the ownership of the surplus is the employer's, the means used to pass on the surplus will have to be examined. If it is simply given to the employees, it will be handled in the same fashion as all gratuitous payments and will depend on whether the payment is by reason of a lay-off or separation Footnote 119 , or not Footnote 120 . If the employer uses the money to satisfy any of the employer's other obligations, such as the paying of severance pay Footnote 121 or wages in lieu or notice Footnote 122 , it will be handled as such.

If the choice is to use the surplus to increase benefits under the pension plan, the surplus, if identified as such, will be allocated according to the nature of the payment. If it increases the amount of a periodic or a lump-sum pension, it is allocated in the same fashion as these pensions Footnote 123 . If it increases the amount of accumulated pension credits, pension credits resulting from a surplus are treated in the same manner as any other pension credits Footnote 124 . If it is refunded to employees on termination, as part of the employer or employee contributions, it is treated as such Footnote 125 .

If the choice is to use the surplus to provide a contribution "holiday" to the employee, the only implication for EI benefits is if the contribution "holiday" is applied to change the nature of contributions made in the past. The nature of past contributions may be altered by the utilization of a surplus to provide a contribution "holiday" for plan members Footnote 126 . A surplus may be used to make a contributory plan (the employee is required to make contributions along with the employer) into a non-contributory one (the employer is the only one who makes contributions) for a portion of the years of past service. In these situations, the surplus funds replace contributions already made by plan members for a specific period of their past pensionable service. Those years of pensionable service, which were funded by the employee's required contributions, are now funded by the surplus funds. These employee contributions which previously were required, now become Additional Voluntary Contributions (AVCs). If this does occur, these newly created AVCs, when they come out of the fund, will be treated in the same way as all other AVCs Footnote 127 .

Contribution "holiday" for the employee for present or future contributions will not have any impact as it is only a pause in the need to make contribution for the employees. Furthermore, as their regular contributions are made out of the employees' gross earnings, the only benefit of the contribution "holiday" is to increase the "take home" pay of the employees.

Pension fund surplus use: Method Allocation
Refunded to employer passed gratuitously to the employees allocation will depend on whether the payment was made by reason of the lay-off or separation, or not.



Regulation 36(9); or 36(19)
used to fulfil other financial obligations of the employer in regards to separation allocate depending on what type of payment the employer is making
To increase benefits of the pension plan increased pension allocate as a pension
Increased amount of contributions returned to the employee on separation allocate as a return of either employer or employee contributions depending on how identified
increased amount of pension credits in the fund not considered as payable if transferred to a locked-in vehicle or left in the fund
To provide a contribution "holiday" replaced past required contributions with the surplus and these past contributions become AVCs if pension portion attributable to the AVC can be clearly identified–not earnings
if AVCs returned to the claimant in a lump sum–not earnings

5.13.11.2 Pension fund contributions in excess of CRA limitations

Under the Income Tax Act, there is a restriction on the maximum level of pension benefits that a defined benefit pension plan or a combination pension plan may provide. An employer cannot register a pension plan that contains stated provisions for benefits to be paid in excess of these maximums. If an employer wishes to provide benefits in excess of these amounts, the employer will have to pay them outside the terms of the pension plan or face non-registration of the pension plan Footnote 128 . Non-registration of a pension plan means that any contributions made to that plan are not eligible as a deduction for the purposes of income tax.

In addition to the pension plan's provisions regarding the anticipated level of pension benefits, the accumulated contributions and interest in the plan for a specific employee cannot generate a pension benefit that exceeds the maximum limit. The regulations under the Income Tax Act require that all pension plans include a provision allowing for the return of excess employer and employee contributions to the contributor. Conversely, there will be a subsequent reduction of accrued pension benefit.

The calculation of whether the maximum level of benefits is exceeded for a specific employee is done on termination of employment if the employee chooses to transfer locked-in pension credits out of the pension plan. The calculation to determine if there are any excess contributions only applies to employees whose contributions are locked in. In all other instances, employees simply receive a return of contributions.

Employees whose contributions are locked in have acquired a right to a pension on retirement. However, it is only after all the contributions are made, the length of the pensionable service is known, and interest on the contributions has accumulated, that the final pension benefit can be calculated. If the employee elects to transfer the accumulated pension credits out of the pension plan on termination, any amounts in excess of the Canada Revenue Agency maximum are a taxable excess.

What happens to the taxable excess depends on the provisions of the applicable pension legislation. The pension legislation may require that the taxable excess be refunded to the employee. If the taxable excess is no longer locked in and is refunded to the employee, for EI purposes, it is treated as a lump-sum pension benefit. This is due to the fact accumulated pension credits are being refunded after lock-in has occurred Footnote 129 . Pension credits which are no longer locked in under the provisions of pension legislation are considered payable, even if the claimant arranges for their direct transfer to a RRSP or purchases a RRIF. Pension legislation may require that the taxable excess be transferred to a locked in vehicle or, remain within the employer's pension plan only to be used to fund an annuity. If under the pension legislation the taxable excess is still considered locked in and may only be used to fund an annuity, the pension credits cannot be considered payable until the annuity is actually payable. Footnote 130

5.13.12 Division of pension assets

Pensions and pension credits have been considered as a marital asset in court cases dealing with marital dissolution. As such, the ownership of the pension may be divided between the spouses like any other form of marital asset or property.

Like property, the right to a pension can be legally transferred to another. Once the rights to a pension have been legally transferred or disposed of, the pension is no longer owned entirely by the individual who first had the right to it. Since the ownership of that pension is no longer only the claimant's, the total amount can no longer be considered his or her pension benefits. However, it must be a legal transfer of ownership or rights, not simply a direction by the owner that part of the monies due to him or her be paid to some other party Footnote 131 .

This division of pension assets can occur when a couple separates or divorces. Footnote 132 However, it can also occur under the Canada or Quebec Pension Plans while a couple is still married Footnote 133 . The general principle used in dealing with these types of cases is the following:

Information

Once the rights to the asset, the claimant's pension credits or the pension itself, have been legally and formally assigned or transferred to the spouse, the assigned or transferred portion is no longer the pension income of the claimant. The test used to determine this is not to whom the pension payments are distributed or paid, but rather who is entitled to the monies or who has a vested right to them.

5.13.12.1 Pension split due to marital dissolution

In deciding on cases of marital dissolution, the courts have normally split the entitlement to the pension or the pension credits based on co-habitation during the time that contributions were made. This may not necessarily be one-half of the claimant's pension. For the purposes of determining whether this split will have an effect on the pension earnings of the claimant, the claimant must be transferring the right to the pension or the ownership of the pension and not simply arranging to use the pension as a method of satisfying a financial obligation connected with the marital dissolution. If the rights to a portion of the pension have been legally transferred to the spouse under the terms of a separation or divorce, then that portion is no longer pension income of the claimant. The spouse who receives a portion of his or her former spouse's pension will not have that amount determined to be earnings for benefit purposes. This is due to the fact that these monies cannot be said to have arisen out of that person's pension contributions during his or her employment.

It will depend on the documentation presented as to whether part of the pension paid or payable to a claimant, is, or no longer is, the claimant's property, and whether it has become the property of the spouse. This documentation should be in the form of a separation agreement, order or decree, or a divorce decree (nisi or absolute), that clearly states that the pension rights have been divided between the two spouses. The documentation must contain a specific reference to the division of the pension rights and not be merely an order to pay alimony or child support. An order to pay alimony or child support is just another financial obligation of a claimant which he or she may, or may not, use his or her pension to satisfy. The satisfying of financial obligations cannot alter the fact that this money is paid or payable and did belong to the claimant Footnote 134 .

If the pension has been divided by a separation or divorce decree or agreement, then it does not matter that only one cheque is issued to the claimant. The portion belonging to the spouse will not be earnings of the claimant as the claimant is considered legally to be acting only as a trustee for the spouse's portion even if he or she receives both. The claimant would be legally bound to forward the spouse's portion to the former spouse. On the other hand, the fact that a pension plan administrator issues more than one cheque is no guarantee that the pension rights have been divided and that the amount of earnings determination should be reduced. An arrangement of more than one cheque may be made simply to facilitate the claimant's discharge of legal obligations to pay alimony or child support.

5.13.12.2 Spousal assignment of a CPP or QPP pension

A provision within the Canada Pension Plan and Quebec Pension Plan allows for a portion of the CPP or QPP Pension that is credited to an individual to be assigned to the pensioner's spouse. Spouses in a continuing marriage and partners in a common-law relationship may apply to receive an equal share of the retirement pension earned by both parties during their life together. The spouse, upon application, is normally entitled to the pension which is owed on 50% of the pension credits accrued by the pensioner during the years of co-habitation. Both spouses must be at least sixty years of age and have applied for pensions to which they were entitled under the Plan.

Only one spouse has to apply for this assignment. The assignment is automatically granted by the Minister upon request; however, it may be appealed if it was made without the consent of the pensioner. This assignment will only be revoked by CPP under four specific circumstances: the death of the spouse or pensioner; the separation of the couple; their divorce; or the non-contributing spouse starts contributing to the fund. However, the couple, on their own, can request that their assignment of pension be terminated at any time.

If the pensioner provides written proof that such an assignment has been made, the portion of the pension that has been so assigned will not be considered as income of the pensioner. In cases of these pension assignments, the portion of the pension that has been assigned is no longer legally payable to the spouse who has lost that portion of his or her pension entitlement. As this spouse is no longer legally entitled to receive this portion of the pension that has been assigned, it cannot be considered as earnings should this spouse be on claim. In addition, the assigned portion of the pension will not be considered as income of the spouse who receives it as this pension has not arisen from that person's employment, nor his or her own pension contributions.

Should this spousal assignment ever be revoked, the question of the allocation of pension earnings will again arise.

5.13.13 Requalifier exemption for pension earnings

Pensions, because they continue to be paid for life, are different than all other types of earnings. To consider the same pension as earnings on every claim for the entire life of the claimant could result in inequities. Claimants who are paying premiums on post-retirement employment would not be able to collect any EI benefits or would be able to only collect reduced benefits if they became unemployed, due to the allocation of their pension. Although pension income is earnings, these earnings can be exempted from allocation if three conditions are met Footnote 135 .

  • the claimant must accumulate the number of insured hours required to establish a claim, Footnote 136
  • the insurable hours must be accumulated after the date the pension became payable, and
  • the claimant must be receiving pension payments during the entire period he/she is accumulating the required insured hours to establish a claim.

All three conditions must be met in order for pension payments to be exempted from allocation.

It does not matter whether a pension requalifier insured hour is a fishing or regular insured hour. Fishing insured hours for regular claims are obtained by using a formula that converts insurable earnings to insurable hours Footnote 137 . For fishing claims it is not insured hours but insured earnings from self-employment in fishing that determines whether the pension requalifier exemption is met Footnote 138 . Pension requalifier insured hours may be earned with a different employer or with the employer who is paying the pension.

Each pension received by the claimant is considered separately and tested for requalification individually, unless the pensions started simultaneously. Pension start dates are critical to this determination. The same insured hour may be counted as a pension requalifier insured hour for more than one pension, as long as each of the pensions was paid or payable during that period.

To be considered as a pension requalifier insured hour, the hours must be accumulated in subsequent employment held after the start date of the payment of the pension or after the start date that a pension became payable. It is not essential that the claimant actually have received the pension during this period, for example, the payment was delayed due to administrative difficulties, as long as the pension was payable Footnote 139 .

To be considered as a pension requalifier insured hour, the pension payment must continue during the entire period of employment the claimant is accumulating the required insured hours to establish a claim. Some pension plans have a provision that suspends payment of a pension during any subsequent period of employment covered under the same pension plan or with the same employer or a subsidiary of that employer. If the pension payment is suspended during a subsequent period of employment, the requirement of a pension requalifier insured hour cannot be met Footnote 140 .

Other pension plans may require the individual to repay the pension received and resume making pension contributions on the new employment if subsequently re-employed with the same organization. Any period of required pension repayment can no longer be counted towards pension requalifier insured hours.

In some cases, the employer may forgo repayment of the pension received during the entire period of re-employment, or for some part of the period re-employed, and still allow the employee to once again contribute to the same pension plan. In these situations, any hours accumulated during the qualifying period during which the claimant was re-employed in insurable employment and was in receipt of a pension would count towards pension requalifier insured hours, even if he or she was again contributing to the company’s pension plan.

All CPP and QPP retirement pensions Footnote 141 can benefit from the requalifier exemptions, should subsequent employment be obtained after the payment of the pension commences. Any insured hours during which CPP or QPP was paid or payable can count as a pension requalifier insured hours.

Once CPP or QPP retirement pensions commences, no further contributions are made to these plans. However, CPP and QPP pensions may be cancelled by the recipient within six months of the first payment. If the CPP or QPP pension is cancelled Footnote 142 all benefits received must be repaid and contributions must continue to be made on any new CPP or QPP pensionable earnings. If the CPP or QPP is cancelled by the claimant, any pension requalifier insured hours previously granted for the CPP or QPP pension will have to be revoked.

Insured hours accumulated in subsequent employment during which pension bridging benefits Footnote 143 are paid or payable to bridge to future pension entitlement such as a company pension, CPP/QPP or Old Age Security meet the conditions to be considered as pension requalifier insured hours. When the company’s pension plan, CPP/QPP or Old Age Security benefits becomes payable, payments under these pensions are exempted as earnings if the claimant accumulated the required insured hours while the pension bridging benefits were paid or payable.

The requalifier exemption also applies to pensions that are paid in a lump sum and have been converted to an annuity. In these cases, the pension requalifier insured hours must have been accumulated after the lump sum was payable.

Simply transferring pension credits from one pension plan to another cannot allow the claimant to accumulate pension requalifier insured hours. With a transfer of pension credits, no pension is paid or is payable to the employee, as these credits will support the payment of a pension at some later date when the employee finally retires.

Disability pensions which convert to retirement pensions at a specified age under the terms of the pension plan no longer have the character of a disability pension. These pensions have become retirement pensions Footnote 144 . The disability pensions are considered earnings from the date where they are converted to the retirement pension and are allocated unless the claimant meets the pension requalifier conditions. Because it is the nature of the pension which has changed not the plan source nor the period paid, any insured hours accumulated while in receipt of the disability pension count as a pension requalifier insured hours for the retirement pension.

If a claimant has obtained a requalifier exemption of a pension amount, any subsequent increases of that pension due to the indexing provisions of the pension plan would also be exempted.

[ April 2006 ]

5.13.14 Disability pensions

Not all individuals are physically able to continue to work until retirement age is reached. An employer can choose to provide coverage for these employees who are not able to work through the use of either a long-term disability wage-loss indemnity plan Footnote 145 or a disability pension. As the purpose of a long-term disability wage-loss indemnity plan and a disability pension are somewhat similar, it is not surprising that they share some of the same characteristics and may be difficult to differentiate at first glance. Nevertheless, the consequence of both types of payments is not the same for EI purposes. Disability pensions of any type are specifically excluded as earnings, Footnote 146 whereas, wage-loss indemnity payments that are paid from a group plan are earnings Footnote 147 . As disability pensions are not specifically defined in the legislation, the ordinarily accepted meaning is applicable Footnote 148 . This includes disability pensions under the Canada Pension Plan and the Quebec Pension Plan.

Pension plans may provide for retirement due to disability. A retirement due to disability is not the same as taking early retirement. Disability provisions contained within a pension plan are designed to provide income support when an individual can no longer work due to a disability but cannot otherwise qualify for a retirement pension.

The amount of a disability pension is often equal to the regular pension accumulated to the date of the disability, without the actuarial reduction that is so often made for early retirement for reasons other than disability. However, some pension plans may provide a disability pension based on both past and prospective service. In these cases, the pension is equal to what the employee would have received had the employee stayed employed until normal retirement date at his or her present salary.

Another approach is to integrate a deferred pension with a long-term wage-loss indemnity plan should one exist, allowing the employee pension service credits for the entire period of the disability. This allows the employee to receive long-term disability payments until normal retirement age and then receive a pension based on the years of actual work plus the years of disability.

The distinction between a disability pension and disability wage-loss indemnity benefit may seem difficult to draw. Both are likely to terminate should the disability terminate and both are designed to replace income, which the individual could have earned had the disabling disease or accident not occurred. However, a disability pension generally has the following characteristics Footnote 149 :

  • it is a periodic payment made as compensation for what is expected to be a permanent disability;
  • payments are likely to last over a long period of time, usually the lifetime of the employee. However, this period may not be as long if the employee's period of employment with the employer has not been extensive. This is unlike long-term disability indemnity payments which usually cover an individual for twenty-four months for not being able to work in his or her own occupation. After the first two years, the plan may only continue to pay if the employee is unable to perform any occupation for which the employee is qualified through education, training, and experience;
  • there is no requirement for the individual to look for and accept work that the individual is able to perform;
  • the provision for the disability pension is usually contained in the pension plan itself, and is distinct from early retirement;
  • the amount of the pension is not reduced should the individual obtain other employment or receive any other amounts designed to replace wages;
  • it is not necessary that the employee have retired from all employment, just that they are retiring from that particular occupation at that particular employer. The individual is not precluded from working as long as he could find work that he is able to do;
  • the amount paid is related to the individual's past years of service or prospective years of service in the same fashion as an ordinary pension and is not based on the individual's current salary; Footnote 150
  • it is paid beyond age 65, or it may switch to a regular pension at that time;
  • any unpaid benefits at death are paid to the spouse;
  • there is usually no requirement for a waiting period, or integration with other wage-loss benefits, although it may take some time for the assessment process to take place; and
  • it can be likened to permanent settlement workers' compensation payments.

In certain cases, Footnote 151 a person may have the option of receiving a lump-sum payment in lieu of periodic payments. When lump-sum payments are a substitute for the periodic payments the claimant would be entitled to under a pension plan, this sum is treated as a disability pension.

Disability pensions, which convert to retirement pensions at a specified age under the terms of the pension plan, no longer have the character of a disability pension. These pensions have become retirement pensions Footnote 152 . As such, they are considered as earnings from the point that they convert to the retirement pension and are allocated unless the claimant meets the pension requalifier conditions Footnote 153 .

Since it is the nature of the pension which has changed, not the pension plan source nor the period paid, any insured hours accumulated while in receipt of the disability pension counts towards pension requalifier insured hours.

In some pension plans, for those individuals who can establish that they are disabled, indexing may be paid at an earlier age than it normally would occur. In these cases, the indexed amount is not considered as earnings as it qualifies as a disability pension. This exemption continues until the age that the indexing would normally commence, at which time the indexed amount would be considered as earnings.

5.13.15 Summary

Determination Rationale
Regulation 35(1) A pension means any retirement pension: arising out of employment, service in the Canadian Forces, or in any police force; under CPP or QPP; or under any provincial pension plan.
Regulation 35(2)(e) Determines as earnings "the monies paid or payable to a claimant on a periodic basis or in a lump sum on account of or in lieu of a pension."
Regulation 35(7)(a) Disability pensions are not earnings (see 5.13.14).
Regulation 35(7)(e) Determines a pension as not earnings if sufficient pension requalifier insured hours are accumulated (see 5.13.13).
Pensions not earnings Rationale Regulation
Survivors' or Dependant's Pension

(see 5.13.3)
Not earnings arising from one's employment. 35(1)
Old Age Security Pensions and Supplements

(see 5.13.3)
Not earnings arising from one's employment. 35(1)
Allowances Paid to Veterans under War Veterans Allowance Act

(see 5.13.3)
Not earnings arising from one's employment. 35(1)
Pensions Arising from Divorce Settlement or from Spousal Assignment of CPP or QPP Benefits

(see 5.13.12)
Not earnings arising from the employment of the spouse in receipt of this settlement or assignment. 35(1)
Additional Voluntary Contributions (AVCs) to a Pension Fund

(see 5.13.9)
These monies could have been invested with any financial institution. Not earnings arising from one's employment if these monies are accounted for separately and can be clearly identified as AVCs. 35(1)
Privately Purchased Pension Plans

(see 5.13.3)
These monies are not placed in an employer-related pension plan. They are simply investment income that does not directly arise from one's employment. 35(1)
Disability Pensions

(see 5.13.14)
Not earnings due to specific provision of regulation 35. 35(7)(a)
Allocation of pension earnings Rationale
Regulation 36(14) If on a periodic basis, allocated to the period for which paid or payable.
Regulation 35(15) and 35(17) If paid as a lump sum, convert to an annuity using Regulation 36(17) and allocate at that weekly rate from first week paid or payable.
Arising from a pension fund Allocation Regulation
Lump sum return of own portion of pension plan contributions

(see 5.13.8.1)
Although determined to be earnings, these payments do not affect a current claim as the earnings would have formed part of the gross income while employed. 36(4) or

36(5)

Lump-sum return of employer portion of pension contributions

(see 5.13.8.2)
As these monies are being returned to the claimant prior to "lock-in", they cannot be considered to be a lump-sum pension payment. Allocated in the same fashion as a "retiring allowance." 36(9)
Transfer of "locked-in" contributions to another "locked-in vehicle"

(see 5.13.7)
Not considered as paid or payable when transfers from one locked-in vehicle to another occur. They are earnings only when they are paid as annuities or pensions. n/a
Pension bridging benefits paid out of the pension plan or out of general company revenues

(see 5.13.5.2)
Considered to be a top-up to a pension and are allocated in the same way as a monthly pension. 36(14)
Portion of monthly pension or using the pension to fulfil alimony or child support

(see 5.13.5)
It is the gross amount of a pension that must be allocated. What a claimant does with his or her monthly pension including the financial obligations that the claimant chooses to fill with it, cannot exclude a portion from consideration as earnings. 36(14)
Arising from a pension fund Allocation Regulation
Monthly pension, periodic pension, a pension annuity

(see 5.13.5)
To the applicable period paid or payable. 36(14)
Additional voluntary contributions (AVCs)

(see 5.13.9.1)
These contributions are completely voluntary, beyond the normal contributions required by the plan. They are considered to be more in the line of savings and are not considered as earnings at all. n/a
Portion of a pension arising from Additional required contributions (ARCs)

(see 5.13.9.2)
These contributions cannot be considered to be AVCs to the fund. Although the decision to purchase additional years of service is voluntary, once that decision is made, these contributions become required by the pension plan to support the additional pension entitlement created by those additional years of service. The portion of the pension annuity that is a result of these ARCs cannot be exempted and must be allocated. 36(14)
Employee contributions Returned due to the provisions regarding the "Maximum Funding by Employee Contributions"

(see 5.13.8.1)

Although these employee contributions are determined to be earnings, these payments will not affect the current claim as the earnings are allocated to the period worked. If left in the pension plan and clearly identified by the actuary, they become AVCs. 36(4)
Lump-sum pension payment due to:
  • small amount of monthly pension
  • shorter than normal life expectancy
  • 25% Partial Commutation of Locked-in Pension Credits

    (see 5.13.6)
These amounts are locked in to the pension fund. If they are paid out in a lump sum, they become an amount in lieu of a pension and are allocated accordingly. 36(15)

36(17)

Arising from a pension fund Allocation Regulation
Non-registered pension plans

(see 5.13.10)
Whether these monies come from a registered pension plan or a non-registered pension plan, all monies are handled in the same manner as any payments of a similar nature out of a registered pension plan on the basis of the true nature of the payment. Either the payment is:
  • a periodic pension;
36(14)
  • a lump-sum pension benefit;
36(15) (17)
  • a return of employer contributions
36(9)
Distribution of a Pension plan surplus

(see 5.13.11.1)
The fact that these monies arose from a surplus does not alter their true nature. These monies are handled on the basis of how they are distributed to the claimant:
  • increase in pension;
36(14) or

36(15) & (17)
  • increase in employer contributions;
36(9)
  • increase in employee contributions;
36(4)(5)
  • increase in pension credits;
Not payable
  • AVCs if identified;
n/a
  • used to fulfil employer obligations:
  • termination payments
36(19)
  • gratuitous payments
36(9)
Excess contributions

(see 5.13.11.2)
Monies are handled on the basis of how distributed to the claimant.
  • lump-sum payment of the commuted value of the pension credits is allocated as a lump-sum pension benefit;
36(15) & 36(17)
  • if not paid as a lump sum, allocated as a periodic pension when the annuity is paid.
36(14)
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