Digest of Benefit Entitlement Principles Chapter 5 - Section 13
5.13.0 Moneys arising out of a pension fund
Pension moneys arising out of any employment, are earnings for benefit purposes. This is true whether these pension moneys are paid or payable on a periodic basis, or in a lump sum (EIR 35(2)(e); Digest 5.13.3). The very nature of pensions and the fact that they are usually payable when employment is permanently terminated, results in 2 special provisions in their handling. Pension earnings do not prevent an interruption of earnings from occurring, and may be allocated concurrently with other earnings (EIR 35(5); EIR 36(16)). Conversely, pension earnings are not taken into account when allocating other earnings to weeks for which pension moneys are payable.
Once payments under a pension plan are paid or payable to the claimant, they must be allocated, regardless of what the claimant does with them. Pension earnings are allocated and may prevent the payment of EI benefits, even if they are transferred to a RRSP at the claimant's request. Whether the RRSP is locked-in and non-commutable is not relevant. However, locked-in pension credits that are directly transferred to another locked-in vehicle are not considered paid or payable until they are withdrawn from these locked-in vehicles (Digest 5.13.2; Digest 5.13.7). Locked-in pension credits are the moneys in a pension fund that support a member's pension entitlement under the plan. For defined contribution pension plans, these credits are the contributions made to the pension fund, plus accumulated interest. For defined benefit pension plans, these credits are the commuted value of the pension to be paid. In most cases, locked-in pension credits cannot be refunded in cash on termination of employment; they can only be paid as a pension benefit.
Pensions are allocated to the period for which they are paid or payable, regardless of the method of payment, or when the payment is made. The manner of allocating pension moneys depends on whether a pension is paid on a periodic basis, or in a lump sum in lieu of a pension (EIR 36(14); EIR 36(15); EIR 36(17)).
Pensions are not considered earnings if, after the date the pension became payable, the claimant has accumulated a sufficient number of hours of insurable employment that would allow them to establish a benefit period (Digest 5.13.13). The benefit period during 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 into a pension fund and the accumulated interest are earnings arising out of employment (EIR 35(2)). The method for allocating these earnings varies according to the type of contributions being returned. A refund of the employee contributions on termination is allocated back to the period of employment (EIR 36(4); Digest 184.108.40.206). These moneys would have formed part of the claimant's gross weekly earnings during the period of employment and therefore would have no effect on the payment of EI benefits. A refund of the employer contributions is allocated as earnings paid or payable by reason of separation (that is, starting from the week of separation, at normal weekly earnings) (EIR 36(9); Digest 220.127.116.11).
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 moneys on termination of employment, but prior to retirement. In order to determine the nature of these moneys (that is, whether these moneys are earnings) and how to properly allocate them, it is essential to have an understanding of the basic provisions of pension plans and the relevant legislation under which these plans are registered and operate (Digest 18.104.22.168; Digest 22.214.171.124; Digest 126.96.36.199). An explanation of some of the common terms used in pension plans and legislation is contained in section 5.13.2 of this chapter.
188.8.131.52 Pension plan legislation
Pension plans must be registered under provincial or federal pension legislation, as well as with the Canada Revenue Agency (CRA), 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 CRA through the Income Tax Act. In general, the pension legislation sets the minimum provisions a plan must contain, and the Income Tax Act 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 moneys are in the plan.
Pension plans that cover all federal government employees, employees of the Canadian Armed Forces, the RCMP, and members of parliament, are established by separate federal legislation. The legislation setting up these pension plans is subject to the Income Tax Act and must meet all the income tax provisions. However, it is not subject to the federal or provincial pension legislation regarding provisions related to vesting and lock in.
All provinces, except Prince Edward Island, have pension legislation that sets out the provisions that must be contained in each province’s registered pension plan. The Pension Benefits Standards Act of the Government of Canada applies to the employees of any province who are under federal jurisdiction. This includes employees of Crown corporations, banks, railways, airlines, shipping companies, radio stations, communication companies, and employees of the Canadian territories. 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 CRA. In addition, plans for an employer whose operations span several provinces must meet the conditions set out in each of those provincial acts. An employer may achieve this by adopting the provisions of the most generous provincial legislation, or they may have separate sections in the plan containing the provisions for employees in each province. It is important that the particular provisions of the employer's pension plan are known, so that the true nature of the moneys, 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 of the employees upon termination of their services. These rights may include having the locked-in pension credits transferred to a locked-in vehicle, having the right to a refund of their own contributions, a refund of their own and their employer's contributions, or a deferred annuity.
Some provincial legislation, as well as federal legislation, periodically undergo changes. Contributions made prior to the effective date of any changes in legislation may have one set of rules regarding when contributions are vested and locked in, and contributions made on or after the date of changes may have a different set of rules. The relevant dates and their provisions can be found in the pension plan itself.
184.108.40.206 Pension plan structure
Pension plans are as varied as the needs of the individuals they cover. However, generally, all pension plans share the same purpose and have some similar provisions regarding the payment of benefits. The similarities arise from the fact that the plans 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. As no income tax deduction is possible for any contributions made to such a plan, these plans are not very common (Digest 5.13.10).
Pension plans may have various requirements for the employer and employees depending on the type of plan. A contributory plan requires employees to contribute, and the employer to pay the balance of the costs. In a non-contributory plan, the employer pays the full cost. If required, contributions made by the employee are collected by the employer, usually by way of a payroll deduction from the employee's gross pay, and placed in the pension fund. The employer's contributions go directly into the fund. The 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 purpose of a pension plan is to provide a pension benefit upon retirement. Retirement may be at an early retirement age or at normal retirement age; however it is important to note that receiving a pension from an employment does not necessarily mean that the individual is retiring from all employment (Digest 220.127.116.11). 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 of the pension contributions have occurred.
Vesting is the employee's right to receive some sort of benefit under the pension plan (Digest 5.13.2). 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). 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.
The locking in of contributions simply means that they can no longer be refunded in a lump sum, as a return of contributions. As such, 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 a specified retirement age. The locking in of contributions, like vesting, depends on the length of time employed, and is set out in the provisions of the plan. While vesting establishes the right to a benefit under the plan, locking in restricts access to that benefit until the specified 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 at what point vesting and lock-in occur.
Return of contributions, whether the employer’s or employee’s, 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, as long as these contributions are not locked in, they can receive all of their own contributions and the accumulated interest, upon termination of employment. 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 be entitled to a lump-sum payment of the employer contributions and the accumulated interest, as well as to the return of their own contributions.
The provisions of a particular pension plan may allow vesting of the employer's portion of the pension contributions to be contingent on certain factors (conditional). This means that full benefits from both the employer’s and employee’s contributions are only paid 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 (transferability) of pension credits (Digest 5.13.2; Digest 5.13.7). 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 conditions are met, a transfer may be made. Eligible 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 (provincial locked-in retirement account (LIRA) or Quebec’s compte de retraite immobilisé (CRI)); or an annuity purchase contract.
Upon reaching 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, it cannot begin 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 (Digest 5.13.6).
18.104.22.168 Categories of pension plans
There are 6 types of pension plans that in turn, can be classified into 3 broad categories. These categories depend on whether the pension is defined on the basis of a set formula (that is, a defined benefit), a set level of contributions (that is, a defined contribution), or a combination of the 2 (that is, a 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 3 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: $40 per month for each year of service would yield a pension of $1200 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 2 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 Planthe employer contributes an amount that varies each year with the profits earned.
It is allocated to each member on a point system. Taxation authorities require 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 provide 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 2 types of benefits; in hybrid plans, the pension is the greater of 2 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:
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 (Black’s Law Dictionary).
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).
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) (Digest 22.214.171.124).
Locked in means that the contributions to the plan cannot be withdrawn by the employee, and the employee can only receive the benefit of those contributions in the form of a pension, at retirement. The employer and the employee portion of the pension fund contributions must stay in the fund, and cannot be refunded. Although they can’t be refunded, they may be transferred to another locked-in vehicle. Locked-in pension contributions may also be referred to as pension credits.
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 they have a vested right; that is, they cannot receive them in cash until retirement age is reached. 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, when Additional Voluntary Contributions are returned (Digest 126.96.36.199), or when provisions exist regarding Maximum Funding by Employee Contributions (Digest 188.8.131.52).
When identifying moneys paid out of a pension fund, any payout of pension moneys 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, or its equivalent (LIRA, CRI), 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, which 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. Additional information regarding the consequences these RRSPs have on whether they are considered payable for the purposes of EI benefits, is available in section 5.13.7 of this chapter.
Such a locked-in, non-commutable RRSP is distinguishable from a personal, collapsible RRSP used as an individual investment tool. Personal RRSPs may or may not require the funds to be locked-in for a specific term, in order for the individual to gain a specific rate of return or growth for the investment. As the entire amount of personal RRSP funds belongs to the claimant, they may receive them at any time by collapsing the RRSP and converting it into cash, even if a penalty may be assessed by the financial institution for doing so before the end of the specified term.
A locked-in vehicle is a financial instrument designed so that moneys contained within it can only be used to pay a pension on retirement. The locked-in vehicles from which most provincial pension legislation allow the transfer of pension credits (locked-in contributions) are:
- another employer's Registered Pension Plan (RPP), if there is a 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 LIRA, or CRI which have all the same provisions, and
- an annuity purchase contract
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 is the right of an employee to a benefit from the pension plan, on termination of employment. Vesting allows the employee to retain a pension (or the value thereof), even if the employee leaves the plan before a pension benefit is immediately payable. The length of time an employee must be employed before vesting is allowed is set out in the pension legislation and the pension plan. Normally, this vested benefit takes the form of either a return of contributions made to the plan and any accumulated interest, or a deferred pension. What the employee receives on termination of employment depends on whether the contributions are locked in. 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, the 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 at retirement age. If the contributions have not become locked in, they are refunded to the employee on termination of employment.
The contributions that may be refundable to an employee on termination depends on whether they were made by the employer or the employee, and the provisions of the pension plan. Employees always have a right to a return of 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 conditional vesting of the employer's portion of the pension contributions. This means that full benefits from the contributions (that is, 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.
A definite link exists between payments to a claimant as a pension, and the employment that gave rise to those payments. It is because of the work that was performed for that employer by the claimant, that the pension payments are being made. That link between pensions and employment is sufficient to support a finding that these payments are earnings pursuant to EIR 35(2)(e). This express provision makes pension income arising out of employment, earnings for benefit purposes (FCA A-178-86).
Only those pensions that consist of contributions resulting from employment, and made by the employer, the employee, or a combination of 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 (EIR 35(1) – definition of employment). This applies whether the pension plan is registered or non-registered, as long as the pension benefits arise from employment (Digest 5.13.10).
Included in consideration of pension income are pensions that arise from service in any armed forces, or a police force (EIR 35(1) – definition of pension). Also included are pensions paid or payable under the Canada Pension Plan or a provincial pension plan. A pension from a provincial government pension plan is considered earnings for EI purposes, provided that the payment of the pension is based on employment contributions and the attainment of a specific age, or is based on a specific age and years of service formula.
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. A group annuity can be distinguished from an individual annuity by examining the annuity cheque/deposit stub. If the contract is only 6 digits, it is an individually purchased annuity and is exempt from consideration as earnings. If the contract is ten digits (4 then 6), then it is a group annuity arising from employment and will be considered as earnings.
Pension bridging benefits, whether paid from the pension fund or out of general company revenues, are considered a retirement pension arising out of employment, paid on a periodic basis in lieu of a pension (Digest 5.12.7; Digest 184.108.40.206).
Group RRSPs are not pension plans for EI purposes, and any moneys arising out of them are considered earned during the period worked. They are simply a collection of individual RRSPs, where the funds are not required by legislation, to be locked-in until retirement, in the same way as pension plans. The ownership of individual accounts is fully and immediately vested in the employees; the employer is only acting as an agent for the employee in the Group RRSPs, when making the deductions and remitting them to the claimant's individual RRSP. Group RRSP monies are considered savings when they are withdrawn from the RRSP. These moneys formed part of the gross earnings during the period the claimant was employed.
Disability pensions are specifically excluded from consideration as earnings (EIR 35(7)(a); Digest 5.13.14). In addition, the following pensions are not earnings, as they do not meet the definition of pensions arising out of one's employment (EIR 35(1)):
- 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 (Digest 5.13.12)
- allowances paid to veterans under War Veterans Allowance Act
- moneys paid for disability under the Veteran’s Affairs Charter
- individually purchased RRSPs, which do not result from the transfer of locked-in pension credits from a pension plan (Digest 5.13.2)
- privately purchased pension plans or annuities, and
- additional voluntary contributions (AVCs) (Digest 220.127.116.11)
5.13.4 Moneys arising out of a pension fund - Paid or payable
It is critical to determine at what point pension moneys actually become paid or payable. The best sources of information to do so are the pension plan, the pension legislation, or information provided by the employer regarding the claimant's entitlement and any payments due or made. There are only certain types of moneys that can arise out of a pension fund, and there are limited ways in which they can be handled. These moneys become paid or payable based on specific terms of the pension plan itself.
The treatment of moneys actually received by the claimant is straightforward as these moneys are clearly paid. Examination of the terms of the plan will confirm the nature of the moneys received, before they are allocated against an EI claim. However, a closer look is required when the claimant has a legal right to receive moneys immediately, but chooses to defer the payment of these moneys to a later date.
For EI purposes, payable means that there is a legal entitlement to the moneys and they are immediately due (Digest 5.6.1). The due date is not open to speculation but is specified in the terms and conditions of the pension plan itself. The plan sets the normal retirement age, early retirement age, and any moneys due on termination, if a pension is not immediately payable. The plan also covers any allowable transfer actions, with respect to the locked-in pension credits in the plan at the time of 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 provisions for pension payments to be deferred until the claimant actually applies for it. If the claimant has that choice under the plan and exercises it, these moneys 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. Based on the provisions of the pension plan, the pension is not immediately due until the claimant requests that it start; it is only considered payable at age 57.
5.13.5 Periodic pensions
The primary purpose of a pension plan is to provide income support to retired employees in the form of a pension benefit, for the lifetime of the plan member. This does not necessarily mean that the employee is retired from the labour force, but rather, only from that particular employment. 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. This could happen where the employee’s calculated monthly pension amount is below a certain minimum level, or if the employee establishes that their life expectancy is short.
A pension benefit, whether in the form of an annuity or lump-sum, cannot be received until the claimant establishes that they have locked-in pension credits, have reached a retirement age as specified in the plan, and apply for the pension. An exception occurs when an employee terminates their employment prior to retirement, and locked-in pension credits are unlocked by special provisions in the pension plan (Digest 18.104.22.168).
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 , as well as payments being made out of a locked-in vehicle to which pension credits had previously been transferred (Digest 5.13.10). Thus, the locked-in, non-commutable RRSP that is subsequently used to purchase an annuity at retirement age is considered earnings when the annuity payments start. The same would be true of any periodic amounts where pension credits were transferred directly from an employer's pension plan to purchase a deferred annuity, and are now paid.
22.214.171.124 Retirement age
All pension plans set out a normal retirement age. This is the age at which an employee can retire with a full, unreduced pension. Normal retirement age can be anywhere from 60 to 65 years of age. However, some plans may provide a full, unreduced pension at a date earlier than normal retirement age. Normal retirement age simply governs the age at which the unreduced payment of pension benefits can start, under the provisions of the pension plan. Normal retirement age is not the same as a mandatory retirement age. An employer may establish a mandatory 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 paid at an earlier age. If the option to defer the pension benefits is taken, they may be deferred up to age 71. 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 an actuarial pension reduction formula to compensate for the extra number of years the pension will be paid.
An employee must apply for their 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 pension plan. It involves a conscious choice by the employee, and the employee must meet eligibility criteria in terms of pension credits. If the pension plan allows an employee to defer the receipt of their pension to a future date, that pension is not considered payable until the employee applies and qualifies for it. Until this happens, that pension is not considered immediately due and therefore has no impact on EI benefits (Digest 5.6.1).
If the claimant is of retirement age and has an option to defer the collection of a pension, but elects to receive it, that pension is considered 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 the retirement age is reached. The determination that the pension is payable does not change if the claimant chooses to make alternate arrangements to dispose of these moneys. Any transfer of that periodic pension into a regular RRSP or a locked-in, non-commutable RRSP does not change the fact that the pension amount is payable, even if it is alleged that the money was never actually physically received (CUB 66832).
126.96.36.199 Pension bridging benefits
Pension bridging benefits allow an individual earlier access to moneys that normally are only payable at a 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 ceases when the point of planned future compensation is reached.
Bridging benefits can be paid out of a pension fund or out of general company revenue. However, not all bridging benefits paid by an employer are considered pension bridging benefits. The fact that the pension bridging benefit is not paid out of the pension fund is not relevant in determining that it is in fact a pension bridging benefit, when the criteria for a pension bridging benefit has been met.
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 moneys 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 take 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 (OAS)
- the amount of the bridging benefit is based on a periodic payment
- 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
If the pension bridging benefits are to be paid out of general company revenues, 3 additional conditions must be met:
- the bridging benefit payment period does not count towards years of service for the company pension that is to be paid
- the employer’s bridging benefit program must be based on the worker meeting a set age, years of service and retirement date requirements, and
- 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
Periodic payments include situations in which employees have a choice of receiving the bridging benefits in a lump sum rather than in monthly instalments. If a lump-sum bridging benefit meets all the other conditions to be considered a pension bridging benefit, then the monthly amount upon which the lump-sum payment was based will be determined and allocated pursuant to EIR 36(14) over the period for which it is payable, in the same manner as monthly pension bridging benefits.
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 benefit 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 the employer’s Group RRSPs (Digest 5.13.3) and/or Deferred Profit Sharing Plans (DPSPs) (Digest 5.15.3).
It is not necessary that a bridging benefit be paid along with a pension to be considered 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 OAS.
An example of a pension bridging benefit is the payment of an amount equal to future CPP/QPP and/or OAS entitlement. The pension bridging benefit may be paid alone, or in addition to the basic pension, or some other retirement income already payable to the employee. It is paid until the CPP/QPP pension and/or the OAS commence.
The fact that OAS is not pension earnings cannot change the nature of pension bridging benefits that are paid to compensate the employee at a level equivalent to their future OAS (EIR 35(1)). The employer or the pension fund has taken on the obligation of paying an equivalent amount until the actual OAS benefits start, and that equivalent amount becomes a retirement pension. This does not qualify these payments as OAS benefits. OAS does not meet the definition of a retirement pension arising out of employment as it is based solely on age and residence in Canada.
Pension bridging benefits cannot be considered a loan unless, under the terms of the pension bridging benefit plan, there is an obligation on the part of the pensioner, to repay the loan, and documentary evidence supporting that obligation exists (FCA A-1050-90; CUB 15686B).
A bridging benefit paid out of general company revenue, which does not meet the characteristics listed 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, or the employee has separated from that employment, and the payments are part of termination payments (EIR 36(5); EIR 36(9); Digest 5.7.2; Digest 5.12.7).
Pension bridging benefits are no longer considered earnings if the claimant meets the requalifier exemption for pension income (Digest 5.13.13). This is true whether the pension bridging benefits are paid out of the pension fund, or out of general company revenues. As well, when pension bridging benefits are no longer payable, and the claimant starts or continues to receive the company pension, any insurable hours earned while receiving pension bridging benefits, qualify as insurable hours towards meeting the requalifier exemption for the company pension.
188.8.131.52 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 (Digest 184.108.40.206)
- 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 of the claimant for which their pension is used to satisfy
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; 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
- when CPP/QPP or OAS payments start where a pension plan is integrated with these benefits, whether through exercising an option or not
- when a pension is split due to marital dissolution, or
- CPP/QPP payments are assigned to a spouse
Whether the amount increases or decreases, the amount to be allocated is the amount of pension that is payable. When employment pensions decrease due to bridging benefits or integration with social security benefits, the amount to be allocated from the employment pension will also decrease. However, there may be a corresponding new allocation for the amount of the pension now being paid from another source (CPP or QPP). Should the pension bridging benefit be designed to bridge until OAS entitlement, there would be no corresponding increase in allocation, as OAS is not considered a pension for EI purposes (EIR 35(1)).
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.
In order to obtain the weekly amount for allocation, monthly periodic pensions are converted to a weekly amount by multiplying the monthly amount by twelve (12) to obtain the yearly figure, then dividing that figure by 52. If the start of the pension begins other than at the beginning of a week, the weekly amount will be pro-rated for the number of working days the pension was payable (that is, one-fifth for each working day).
Periodic pensions are allocated to the period for which they are paid or payable (EIR 36(14)). A periodic pension, like a lump-sum pension benefit, is allocated concurrently with any other earnings earned during that period (EIR 36(16)). In addition, periodic pension payments do not prevent an interruption of earnings (EIR 35(5)).
5.13.6 Lump-sum pension benefit
The goal of all pension plans is to pay a pension benefit at retirement (Digest 220.127.116.11). 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 plan is registered under the Income Tax Act (Digest 5.13.10).
What the pension legislation envisions, 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. However, 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 transfer 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, it may be paid earlier under special unlocking provisions allowed under some pension plans, or as a return of additional voluntary contributions (AVCs) to the claimant (Digest 18.104.22.168; Digest 22.214.171.124). Lump-sum pension benefits are considered payable no matter how the claimant chooses to dispose of them (Digest 126.96.36.199). A lump-sum pension benefit is converted to an annuity, and then allocated starting with the week for which it became paid or payable (Digest 188.8.131.52).
184.108.40.206 At retirement age
If a lump-sum pension benefit is to be paid, it is normally payable at retirement. These 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. The full amount is then paid to the employee immediately, rather than as a monthly pension
shortened life expectancy
if the plan member establishes through a statement from a qualified medical practitioner that they have only a short life expectancy, the total pension credits will be commuted into a lump-sum amount. The full amount is then paid to the employee immediately, rather than as a monthly pension
220.127.116.11 Prior to retirement age
If the employee has not reached retirement age (early or normal retirement age), it is highly unlikely that what is being paid is a lump-sum pension benefit. The one exception to the "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.
This special provision allows the employee to choose to receive, as partial discharge of their rights under the plan, a transfer of a portion of their locked-in pension credits. If allowed under the employee's pension plan, this option is open to the employee on the termination of employment, even if the employee has not reached normal retirement age. The partial transfer allowed is usually an amount up to 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 generally applies to 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. The employee, on termination, can only access up to 25% of the locked-in contributions in this fashion. The remaining 75% must be used to support the payment of either a deferred or an immediate annuity. Which one, depends on the employee's specific circumstances and whether they have applied for, and are entitled to receive a pension.
Partial transfer amounts generally do not identify which contributions (employer, employee, or both) are being returned. Nevertheless, even if these amounts are identified as employee contributions, it is not relevant to the determination that these moneys are a lump-sum pension benefit. These moneys are not a return of excess employee contributions as established by the provisions of the pension legislation. They are in reality a portion of the employee’s pension that has been unlocked, therefore allowing the employee immediate access to this part of their pension annuity in the form of a lump-sum payment (Digest 18.104.22.168). The total pension amount that the employee will receive will be the same using this option; the only difference is that it includes 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 on the specific terms and wording included in the pension plan documents and the point at which the pension contributions are locked-in by the legislation. For example, a pay out of moneys prior to lock-in is normally a return of contributions, whereas a payout after lock-in is generally a lump-sum pension payment arising out of unlocking pension credits.
Any other lump-sum payment linked to a retirement or separation, but made outside the terms of the pension plan and without immediate pension entitlement according to the terms of the pension plan, is likely a lump-sum payment made by reason of separation. As they result from a lay-off or separation, these retirement payments are allocated from the week of the lay-off or separation, at normal weekly earnings (EIR 36(9); Digest 5.12.7).
22.214.171.124 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, they are considered to have exercised a choice, to be entitled to these moneys. These moneys become immediately due and are considered payable, regardless of the way that the claimant chooses to dispose of them.
The claimant may also choose to immediately unlock and receive amounts previously locked in. These payments are immediately due as soon as the claimant makes their choice, regardless of what they do with the money.
126.96.36.199 Allocation of a lump-sum pension benefit
Lump-sum pension benefits are allocated in a special way. Since these earnings are paid to the claimant in lieu of a pension, they are meant to compensate them in the same way as a pension does. If allocated using normal weekly earnings, this would apportion these earnings to a relatively short period of time and not as they are actually intended; to cover the claimant for the rest of their life, in the same manner as a periodic pension would. As such, lump-sum pension benefits are converted to the equivalent of what these payments would have been, had they been paid as an annuity (EIR 36(15); EIR 36(17)).
The table below, which is updated annually, is used to perform this calculation.
|Lump-sum pension benefit paid or payable from December 27, 2020 to December 25, 2021
(week code 2271 to 2322)
Calculated pursuant to subsection 36(17) of the EIR
|Lump-sum pension benefit paid or payable from December 29, 2019 to December 26, 2020
(week code 2219 to 2270)
Calculated pursuant to subsection 36(17) of the EIR
|Lump-sum pension benefit paid or payable from December 30, 2018 to December 28, 2019
(week code 2167 to 2218)
Calculated pursuant to subsection 36(17) of the EIR
|Age of claimant||Weekly annuity
|Age of claimant||Weekly annuity
|Age of claimant||Weekly annuity
|19 and under||0.43||19 and under||0.52||19 and under||0.56|
|90 and over||3.85||90 and over||4.05||90 and over||4.12|
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 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, 2020, to a claimant who was 56 years of age would be allocated at an amount of $25.50 (30,000/1000 = 30 x $0.85) per week. The impact on this claim is vastly different than if this amount was allocated at a normal weekly earnings rate of $600.00 for 50 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 are truly a lump-sum pension benefit are treated in this manner. To determine whether an amount is a lump-sum pension benefit, the provisions of the pension plan and the applicable pension legislation must be examined.
Lump-sum pension amounts are allocated concurrently with any other earnings paid or payable during that period (EIR 36(16)). In addition, lump-sum pension payments do not prevent an interruption of earnings (EIR 35(5)).
For registered pension plans, a lump-sum pension benefit includes only those sums paid or payable from locked-in pension credits, which are due to the claimant as a retiree under the terms and conditions of that plan, or, under the provisions of the plan or pension legislation that allows access to these locked-in moneys.
5.13.7 Portability of locked-in pension credits
Due to the mobility that occurs within the labour force, an employee may not spend their entire career with just one employer. The employee is protected in that, if the employment was only for a short time and lock-in has not occurred, they can receive a return of all the contributions made to the pension plan. However, no refund can be made once pension contributions are locked into the pension fund under the terms of the plan.
Recognizing the need to be able to move locked-in pension contributions, pension legislation 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 another financial vehicle, where they will ultimately be used to pay a pension, is called portability. Non-registered pension plan contributions cannot be transferred in this manner as they are not considered to be locked-in pension credits under pension legislation (Digest 5.13.10).
The condition on the transfer of 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 moneys 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
- a locked-in, non-commutable RRSP; or some other similar vehicle, such as a provincial Locked-in Retirement Account (LIRA), 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 (Digest 5.13.2), and
- an annuity purchase contract
Sometimes, due to the types of pension plans involved and the various benefits these plans provide, transfer of contributions from one plan to another is not possible. The plan, to which the pension credits are to be transferred, must permit this transfer.
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. Moreover, these pension credits can only be accessed at retirement age, according to the specified provisions of each locked-in vehicle. Therefore it is only at that time that any legal entitlement to an 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 71, any moneys in a locked-in RRSP must be used to purchase an annuity. Once the pension becomes payable, it is allocated against EI benefits.
5.13.8 Return of contributions on termination of employment
Although it is the intention of all plans to pay a pension benefit upon retirement from 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 (that is, they are locked-in). These contributions and the accumulated interest (pension credits), can only be used to support a deferred pension, or they can be transferred to another locked-in vehicle (Digest 5.13.7). Contributions and the accumulated interest that are not locked in, and to which the employee has a vested right under the terms of the plan, will be paid to the employee on termination of employment (Digest 5.13.2).
When reference is made to contributions in this section, whether they are employee or employer generated, they include the interest that has accumulated on them. 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 (Digest 188.8.131.52).
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, or the employer.
184.108.40.206 Return of employee contributions
Employee contributions to the pension fund are made while employed. These contributions can be based on either a fixed amount, or a percentage of salary. These contributions are made by way of payroll deductions, and form part of the employee's gross earnings from employment during each pay period.
All pension plans recognize that employees have a vested right to their own contributions. As a result, on termination, employees are entitled to 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, can be more than 50% of the commuted value of the pension. This type of refund is simply a return of the contributions that have been determined to be in excess of the amounts an employee is required to contribute, pursuant to pension legislation. This requirement is referred to by a number of terms: maximum funding by employee contributions, minimum employer cost, defined benefit, or maximum cost provision. When the employment is terminated, an actuary who reviews the employee's pension credits will determine whether there has been an excess of employee contributions. 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 are earnings arising out of employment (EIR 35(2)). That being said, these earnings formed part of the employee's gross weekly earnings during employment, and would have been considered earnings at that time, and not at the time of termination (EIR 36(4) & (5)). As a result, this return of employee contributions on termination of employment has no effect on any current benefit period.
220.127.116.11 Return of employer contributions
Employer contributions to the pension fund are made during the periods of employment. These contributions can be directed into a pension fund based on:
- a matching of employee contributions
- a fixed amount per employee
- a percentage of the employee's earnings, or
- a percentage of the employer's profits for a certain period
The very nature of employer contributions makes them different from those of the employees. Employer contributions do not form part of the employee's gross wages, and are not used in the calculation of the employee's income tax deductions, CPP contributions or EI premiums at the time the employee is paid.
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 on termination. 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 entitled 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 give employees vested rights to the employer contributions that are not locked-in. These moneys are fully refundable because they are not locked-in under the pension plan. If they were locked-in, the claimant would not have access to them. 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 moneys are earnings as they fall under the entire income arising out of any employment (EIR 35(2)). Once these moneys are identified as earnings, it must be determined how they are to be allocated. These earnings are paid out of the pension fund because the employee's employment ended, which gives them the characteristics of a retirement benefit. As the reason these earnings were paid is because of a lay-off or separation, they must be allocated as a termination payment, at normal weekly earnings, starting from the week of lay-off or separation (EIR 36(9); Digest 5.12.7). These earnings are considered payable and must be allocated, even if the claimant places them into a locked-in non-commutable RRSP. Only locked-in pension credits can benefit from transfer to a locked-in vehicle, and avoid being considered payable; the 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. Termination of employment due to business closures or bankruptcies, and any resultant pension plan wind-up, can result in the payment of employer contributions to workers, who are not covered under the provisions of the pension plan. If these moneys are given to the workers, they cannot be considered 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). They also cannot be considered a return of contributions under the pension plan, as there is no such provision within the plan. Therefore, these moneys, which have not been locked-in, are considered to be 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. As such, they would be allocated at normal weekly earnings starting from the week of lay-off or separation, as are all payments made by reason of a lay-off or separation (EIR 36(9); Digest 5.12.7; Digest 5.12.4).
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. In a non-contributory plan, the employer contributes the entire cost of the pension benefit. The employee in these plans is not required to contribute anything. 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 or not those years have been worked.
When these pension benefits, funded through additional contributions to the pension fund, are 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) or additional required contributions (ARCs) to the pension fund.
18.104.22.168 Additional voluntary contributions (AVCs)
Some pension plans allow employees the option to make extra contributions to the pension fund, with a view to increase the amounts that they would otherwise receive from the pension plan on retirement. These extra contributions are commonly known as 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 an employee pays into the pension fund.
An employee may choose to put AVCs into their pension fund for a number of reasons. The investment rate offered by the pension fund may be higher than the individual could obtain if they invested with another institution. It may be chosen for the ease in investment, as 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, by their pension plan.
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 the employee’s required contributions. They 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 2 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. The employee cannot access them 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, all employees who had AVCs accumulated in the plan up until that date would be able to roll them over into a RRSP on a one-time basis.
On termination of employment due to retirement, AVCs are an exception allowed to the rule regarding pension contributions, under the Income Tax Act. 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 them in that form, 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 like a purchase of a private pension plan than a required contribution to the pension plan. Pensions arising from private pension plans are not earnings for EI purposes. They do not meet the definition of a pension, according to the Regulations, as they do not arise out of employment. Despite the fact that the moneys used for the contributions were earned during employment, the contributions were entirely voluntary and could have potentially been invested anywhere. This excludes them as a pension under the definition in EIR 35(1). If a portion of the claimant's pension entitlement is exempted from consideration as earnings due to its characterization as an AVC, it must be clearly identified as such by the pension administrators.
22.214.171.124 Additional required contributions (ARCs)
Members of defined benefit pension plans are often paid their pension entitlement based on years of service. During those years of service, contributions to the pension plan are required. Some pension plans may provide for increased pension payments if plan members obtain (that is, buy back) additional years of pensionable service.
Pursuant to this type of plan, 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 otherwise 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 moneys must be paid into the pension fund. Depending on 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 or will become entitled. These payments, once made, become part of the pension fund; meaning 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 an AVC. Although deciding to make the purchase may be voluntary, once that decision is made, these contributions are then required under the plan, and must be made in order to increase the employee's pension to the level desired. These contributions are considered ARCs by CRA. They become part of the pension plan and are not accounted for separately, as are AVCs. As a result, any pension payable from ARCs is earnings, as no portion is considered derived from AVCs.
126.96.36.199 Post-retirement benefit (PRB)
The Post-retirement benefit (PRB) is an additional benefit available to people who are already receiving CPP. Individuals who work while receiving their CPP pension can continue to make contributions to the CPP, based on employment after the start of their CPP pension. These individuals are then eligible for an additional amount from CPP, referred to as a post-retirement benefit.
In January of each year, a client’s eligibility for an additional PRB amount is determined based on the person’s employment from the previous year, and the new combined CPP and PRB amount is calculated.
The PRB is considered earnings pursuant to EIR 35(2)(e), and must be allocated against EI benefits. This applies even if the current CPP allocation (including any current PRB) is a re-qualified pension. However, the most recent PRB can also become a re-qualified pension if the required conditions are met (EIR 35(7)(e); Digest 5.13.13).
The equivalent exists for people who are receiving a retirement pension under the Québec Pension Plan. This additional benefit is called the Retirement Pension Supplement.
5.13.10 Non-registered pension plans
A retirement compensation package may comprise different pension plan components; 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, the 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.
The key to handling any payments made under a non-registered pension plan is to determine the true nature of the payment. These payments are then treated 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. The nature of these payments depends on whether or not an individual is eligible for retirement. 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 they 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. Regardless of the fact that this pension is paid by the company, and is not paid out of a registered pension plan, these moneys still meet the definition of a retirement pension arising out of employment (EIR 35(1)). 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 and lump-sum pension benefits are converted to an annuity and allocated from the week paid or payable (Digest 188.8.131.52; Digest 184.108.40.206). Should the employee defer the receipt of the registered portion, the non-registered portion, or both portions, allocation only occurs when the pension becomes payable (Digest 5.13.4).
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 treated in the same way as any deferred pension entitlement. The allocation does not start until the employee elects to receive their pension as it is only then that the pensions are considered payable (Digest 5.13.4).
On termination of employment prior to retirement age, a claimant may receive the commuted value of their non-registered pension entitlement. These moneys are earnings and are allocated in the same manner as any other payment made by reason of a lay-off or separation, and the same way as a return of employer contributions (Digest 220.127.116.11). The manner in which the claimant disposes of these moneys does not alter this allocation. As these moneys are accessible to the claimant on termination, they cannot avoid allocation by transferring them 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, or contributions which are in excess of those allowed by CRA. The implication of these payments on EI benefits depends on how the pension fund reassigns these moneys. Due to the pension legislation provisions, distribution of money from a pension fund is restricted to certain types of moneys that can only be paid under limited circumstances. It is the true nature of what is being paid that determines how these payments are treated.
18.104.22.168 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 the 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 to the plan each year, in order to accumulate an amount 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, rate of return on the moneys invested, or 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 (for example, a gain) or a deficit (for example, 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 happens when there is 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 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 is often the employer who benefits by receiving the surplus, should there be one 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. It may also be discovered on wind-up of the pension plan if a business closes or the plan terminates. Regardless of how it is discovered, CRA has 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 (that is, a period of no contributions) for the employer, 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.
Whatever happens with the surplus, the implications for EI benefits will depend on the way that these moneys are distributed to the employee: that is, based on the true nature of these moneys. Due to the limited options open to the employer, a surplus can only be distributed in certain ways. The fact that these moneys 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, there will be no implication for a claimant's EI benefits, unless the employer chooses to pass the benefits of the surplus on to the employees. Since 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 manner as all gratuitous payments, and will depend on whether the payment is by reason of a lay-off or separation (EIR 36(9); Digest 5.12.2; Digest 5.12.4). If the employer uses the money to satisfy any of their other obligations, such as paying wages in lieu of notice or severance pay , it will be treated as such (Digest 5.12.5; Digest 5.12.6).
If a surplus is identified and the choice is made to use that surplus to increase benefits under the pension plan, it 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 (Digest 5.13.5; Digest 5.13.6). If it increases the amount of accumulated pension credits, these credits are treated in the same manner as any other pension credits (Digest 5.13.7). If it is refunded to employees on termination, as part of the employer or employee contributions, it is treated as such (Digest 5.13.8).
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 changes the nature of past contributions made. Although a rare occurrence, the nature of past contributions may be altered by the utilization of a surplus to provide a contribution holiday for plan members. A surplus may be used to make a contributory plan (employee and employer contribute) into a non-contributory one (only employer contributes) 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. The employee contributions that were previously required now become AVCs. If this occurs, when these newly created AVCs come out of the fund, they will be treated in the same way as all other AVCs (Digest 5.13.9).
Contribution holidays for employees, whether for present or future contributions, will not have any impact, as it is only a pause in the requirement to make contributions. Furthermore, as their regular contributions are made out of the employees' gross earnings, the only benefit of the contribution holiday is to increase the employees’ net pay.
|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.
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|
22.214.171.124 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 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 have their plan un-registered (Digest 5.13.10). 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. As a result, there will be a subsequent reduction of accrued pension benefit.
The calculation of whether a specific employee has exceeded the maximum level of benefits 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 CRA maximum are taxable.
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 it is no longer locked in and is refunded to the employee, it is treated as a lump-sum pension benefit for EI purposes. This is because accumulated pension credits are being refunded after lock-in has occurred (Digest 5.13.6). 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 (Digest 5.13.4; Digest 5.13.5).
5.13.12 Division of pension assets
Pensions and pension credits have been considered 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 from one person 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 their pension benefits. However, it must be a legal transfer of ownership or rights, not simply a direction by the owner that part of the moneys due them be paid to another party (Digest 126.96.36.199).
This division of pension assets can occur when a couple separates or divorces. However, it can also occur under the Canada or Quebec Pension Plans while a couple is still married (Digest 188.8.131.52). The general principle used in dealing with these types of cases is the following:
Once the rights to the asset (that is, 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 claimant’s pension income. The test used to determine this is not to whom the pension payments are distributed or paid, but rather who is entitled to the moneys, or who has a vested right to them.
184.108.40.206 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 period the 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 to satisfy 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 amount transferred will not constitute earnings of the spouse who receives that portion of their former spouse's pension. This is because these moneys do not arise out of the receiving spouse’s pension contributions during their employment.
Whether part of the pension paid or payable to a claimant is no longer their property, and whether it has become the property of their spouse, will depend on the documentation presented. 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 2 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 a financial obligation of a claimant, which they may use their pension to satisfy. Satisfying financial obligations does not alter the fact that this money remains paid or payable, and belongs to the claimant (Digest 5.6.1).
If the pension has been divided by a separation or divorce decree or agreement, then it does not matter if one payment for the full amount is issued directly to the claimant. The portion belonging to the spouse will not be earnings of the claimant, as the claimant is considered to be legally acting as a trustee only, for the spouse's portion, even if they initially receive both portions. 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 makes separate payments is not sufficient to prove that the pension rights have been divided, and that the amount of earnings determination should be reduced. An arrangement to have more than one payment issued may be made simply to facilitate the claimant's discharge of legal obligations to pay alimony or child support.
220.127.116.11 Spousal assignment of a CPP or QPP pension
A provision within the Canada and Quebec Pension Plans 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. On application, the spouse is normally entitled to the pension owed based on 50% of the pension credits accrued by the pensioner, during the years of co-habitation. Both spouses must be at least 60 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 Minister, upon request, automatically grants the assignment; however, the assignment may be appealed if it was made without the consent of the pensioner. This assignment will only be revoked by CPP under 4 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
As well, 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 assigned to the spouse will not be considered 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 their pension entitlement. Should this spouse be on claim, it cannot be considered as earnings since this spouse is no longer legally entitled to receive the assigned portion of the pension. In addition, the assigned portion will not be considered as income of the spouse who receives it, as this pension does not arise from that person's employment, nor their own pension contributions.
If the spousal assignment is subsequently revoked, the question of the allocation of pension earnings will need to be reviewed.
5.13.13 Requalifier exemption for pension earnings
Pensions are different than all other types of earnings, because they continue to be paid for life. To consider the same pension as earnings on every claim for the entire life of the claimant would result in inequities. To do so would mean that claimants who become re-employed after starting to receive a pension would pay EI premiums on that employment, but if they become unemployed may never be able to collect EI benefits, or may only be entitled to reduced benefits. Although pension income is earnings, these earnings can be exempted from allocation if all 3 of the following conditions are met (EIR 35(7)(e)):
- the claimant must accumulate the number of insured hours required to establish a claim (including claims for special benefits)
- 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 they are accumulating the required insured hours
It does not matter whether an insured hour for a pension requalifier is from fishing or regular employment. Fishing insured hours for regular claims are obtained by using a formula that converts insurable earnings to insurable hours (EIR Fishing 13). 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 (EIR Fishing 2; EIR Fishing 8; EIR 35(7)e). Pension requalifier insured hours may be earned with any employer, including the employer who is paying the pension.
Where a claimant is receiving more than one pension, each pension must be considered separately, for requalification. Pension start dates are critical to this determination. The same insured hours may be counted towards requalifier insured hours for more than one pension, as long as each of the pensions was paid or payable during that period.
To be considered pension requalifier insured hours, the hours must be accumulated in employment held after the start date of the pension payments, 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, when payment is delayed due to administrative difficulties), as long as the pension was payable. It is when the insurable hours are worked in relation to when the pension is paid or became payable that is relevant (Digest 18.104.22.168).
To be considered a pension requalifier insured hour, the pension payment must continue during the entire period of employment from which the claimant is accumulating the required insured hours. Some pension plans have a provision that suspends payment of a pension during any subsequent period of employment covered under the same pension plan, with the same employer, or a subsidiary of that employer. If the pension payment is suspended during a subsequent period of employment, the hours worked do not count towards meeting the pension requalifier insured hours (CUB 80755).
Other pension plans may require the individual to repay the pension received and resume making pension contributions on the new employment, if they subsequently become re-employed with the same organization. Any insured hours accumulated during a period a claimant was required to repay a pension do not count towards pension requalifier insured hours.
In some cases, the employer may forgo repayment of the pension received during the entire period or part of the period of re-employment, and allow the employee to restart contributing to the same pension plan. In these situations, any hours of insurable employment accumulated during the EI qualifying period, during which the claimant was re-employed and was in receipt of a pension, would count towards pension requalifier insured hours, even if they restarted contributing to the company’s pension plan.
The requalifier exemptions also apply to CPP and QPP retirement pensions, should the claimant start subsequent employment after pension payments start. Any insured hours accumulated during a period in which CPP or QPP was paid or payable, count as pension requalifier insured hours.
A recipient may cancel their CPP or QPP pension within 6 months of the first payment. If the CPP or QPP pension is cancelled, all benefits received must be repaid, and contributions must continue to be made on any new CPP or QPP pensionable earnings. If the claimant cancels their CPP or QPP, any insured hours previously accumulated in relation to the exemption of the pension are no longer counted for this purpose. This is not the case if an early retirement CPP or QPP pension in cancelled in favour of a CPP or QPP disability pension.
Insured hours accumulated during a period in which pension bridging benefits are paid or payable to bridge to a future company pension, CPP/QPP or OAS payments, meet the conditions to be considered pension requalifier insured hours. When the company’s pension plan becomes payable (if not already being paid), payments under that pension 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 became 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 payable to the employee, as these credits will support the payment of a pension at a later date, when the employee retires.
If a claimant has obtained a requalifier exemption of a pension amount, any subsequent increases of that pension due to indexing of the pension would also be exempt.
5.13.14 Disability pensions
Not all individuals are physically able to continue working until retirement age. An employer can choose to provide coverage for employees who are no longer able to work, through either a long-term disability wage-loss indemnity plan or a disability pension (Digest 5.11.2). As the purpose of a long-term disability wage-loss indemnity plan and a disability pension are somewhat similar, they share some of the same characteristics and may be difficult to differentiate at first glance. Nevertheless, the effect of each type of payments is not the same, for EI benefit purposes. Disability pensions of any kind are specifically excluded as earnings, whereas, wage-loss indemnity payments that are paid from a group plan are earnings (EIR 35(7)(a); EIR 35(2)(c)(i)). As disability pensions are not specifically defined in the legislation, the ordinarily accepted meaning is applicable. This also includes CPP/QPP disability pensions.
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 up to the date of the disability, without the actuarial reduction that is often made when early retirement is taken for non-disability reasons. 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 age, at their present salary.
Another approach is to integrate a deferred pension with a long-term wage-loss indemnity plan, should one exist, allowing the employee to accumulate 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 that the individual could have earned had the disabling disease or accident not occurred. However, a disability pension generally has the following characteristics (CUB 45917):
- 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
- this period may not be as long depending on the length of the employment with the employer
- this is unlike long-term disability indemnity payments which usually cover an individual for 24 months, for not being able to work in their own occupation
- after the first 2 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 may be 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 they can find work that they are 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. There are some disability pensions that are hybrid plans, combining the features of a disability pension with a top-up amount that is more in line with a wage-loss indemnity payment
- 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 be completed, and
- it can be likened to permanent settlement workers' compensation payments
In certain cases, a person may have the option of receiving a lump-sum payment in lieu of periodic payments. When lump-sum payments are substituted 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. As such, they are considered as earnings from the date they are converted to the retirement pension and are allocated, unless the claimant meets the pension requalifier conditions (Digest 5.13.13).
Since it is the nature of the pension that has changed, and not the pension plan source, nor the period paid, any insured hours accumulated while in receipt of the disability pension count towards pension requalifier insured hours and the exemption of the retirement pension.
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. 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.
|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 moneys 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 (Digest 5.13.14).|
|Regulation 35(7)(e)||Determines a pension as not earnings if sufficient pension requalifier insured hours are accumulated (Digest 5.13.13).|
|Pensions not earnings||Rationale||Regulation|
|Survivors' or Dependant's Pension
|Not earnings arising from one's employment.||35(1)|
|Old Age Security Pensions and Supplements
|Not earnings arising from one's employment.||35(1)|
|Allowances Paid to Veterans under War Veterans Allowance Act
|Not earnings arising from one's employment.||35(1)|
|Pensions Arising from Divorce Settlement or from Spousal Assignment of CPP or QPP benefits
|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
|These moneys could have been invested with any financial institution. Not earnings arising from one's employment if these moneys are accounted for separately and can be clearly identified as AVCs.||35(1)|
|Privately Purchased Pension Plans
|These moneys 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)|
|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 36(15) and 36(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
|Although determined to be earnings, these payments do not affect an EI claim as the earnings would have formed part of the gross income while employed.||36(4) or
|Lump-sum return of employer portion of pension contributions
|As these moneys 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 manner as a "retiring allowance."||36(9)|
|Transfer of locked-in contributions to another locked-in vehicle
|Not considered as paid or payable when transferred from one locked-in vehicle to another. 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
|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 used to fulfil alimony or child support
|It is the gross amount of a pension that must be allocated. What a claimant does with their monthly pension including the financial obligations that the claimant chooses to fulfill with it, cannot exclude a portion from consideration as earnings.||36(14)|
|Monthly pension, periodic pension, a pension annuity
|To the applicable period paid or payable.||36(14)|
|Additional voluntary contributions (AVCs)
|These contributions are completely voluntary, in addition to the normal contributions required by the plan. They are considered to be more in the line of savings and are not considered as earnings.||n/a|
|Portion of a pension arising from Additional required contributions (ARCs)
|These contributions are not the same as AVCs. 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 resulting from 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"||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:
||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)
|Non-registered pension plans
|Whether these moneys come from a registered pension plan or a non-registered pension plan, all moneys are handled in the same manner as any payments of a similar nature out of a registered pension plan, based on the true nature of the payment. Either the payment is:
|Distribution of a Pension plan surplus
|The fact that these moneys arose from a surplus does not alter their true nature. These moneys are handled on the basis of how they are distributed to the claimant:
36(15) & (17)
|Moneys are handled on the basis of how distributed to the claimant.
||36(15) & 36(17)|
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