Registered pension plans (RPPs) frequently asked questions
- Growing in rule
- Early retirement eligibility service
- Increase in joint and survivor option
- Optional form exceeding 2%
- Surplus used on plan wind up to provide stand alone ancillary benefits
- Same sex partners
- Retroactive application (Same sex partners)
- Transfer of survivor benefits (Same sex partners)
- Administrator's obligation to send T10 when employee's address is unknown
- Application of the equal and periodic rule to pensions in pay
- Individual Pension Plans established primarily to accept a transfer of funds from a prior registered pension plan
- Guarantee period when a joint and survivor option is elected with a dependant as the beneficiary
- Multi-employer plan (MEP) and specified multi-employer plan (SMEP)
- Consumer Price Index (CPI) indexing of pre-retirement benefits
- Quebec's additional pension benefit
- Maximum 2 % Accrual Rate
- Variable benefits paid out from a money purchase provision
- Approval of foreign service for non-residents
- Commencement of ex-spouse's pension benefits
- Converting a single life annuity to a joint last survivor annuity
- Contributions for former employees of a predecessor employer
- What is a complete application for registering a pension plan?
- What is a complete application for amending a registered pension plan?
- What is a complete application for requesting the revocation (termination) of a registered pension plan (includes the cessation of the accrual of benefits or contributions)
- Designated plan waiver (no more accruals)
- Phased retirement
- Incorporation of 2010 defined benefit (DB) limit in preparing an actuarial valuation report
- Increase in the surplus threshold under the Income Tax Act from 10 per cent to 25 per cent
1. What is the "growing in" rule and how does it apply to a member who retires early, in accordance with paragraph 8503(3)(c) of the Regulations, but elects a deferred pension?
The early retirement reduction formula in paragraph 8503(3)(c) of the Regulations is:
X × (1-.0025 × Y)
Variable X is the amount of the member's unreduced lifetime retirement benefits. Variable Y is the number of months from the day lifetime retirement benefits (LRB's) commence to be paid to the day that is the earliest of the day that a member could have retired with an unreduced pension. One of these factors permit a member to retire without reduction if the combination of their age and early retirement eligibility service total 80 points. By combining age and service in reducing the member's LRB's, each month in the period between the day payment of LRB's commence and the day an unreduced pension could have been paid had the member continued in employment counts as two points. The effect, called the growing in rule when it is applied during a deferral period, is that component Y of the reduction is reduced by half when compared to a reduction based only on age or service.
A member retires at age 46 with 12 years of service. The member elects to defer receipt of their pension until age 57. The member's age, combined with the Y factor is equal to 80. (The member is 57, plus 12 years of service, plus another 11 years of deferral, total 80). The legislation does not require the member's pension to be reduced at age 57.
2. For the purposes of determining maximum early retirement benefit levels, subparagraph 8503(3)(c)(iii) defines "early retirement eligibility service" to include a "period throughout which the member was employed by an employer who has participated in the plan". Would this period include leaves of temporary absence and periods of layoff, subject to recall?
Subparagraph 8503(3)(c)(iii) of the Regulations defines early retirement eligibility service as a period of pensionable service or as a period throughout which the member was employed by an employer who participated in the plan or by a predecessor employer to such an employer.
Subparagraph 8503(3)(a)(iii) of the Regulations permits an eligible period of temporary absence, which includes a leave of absence or a period of layoff, to be included as eligible or pensionable service under a pension plan. If the terms of a plan as registered include in pensionable service periods of lay off and leaves of absence, these periods may be included as pensionable service for early retirement eligibility purposes.
It is a question of fact as to whether the employee/employer relationship has been severed in a particular situation. An opinion as to whether this relationship has been severed would be determined on a case by case basis.
3. Can a registered pension plan administrator increase the joint and survivor option from a 60% to a 66 2/3% survivor pension after the member has commenced receiving pension benefits?
The Income Tax Act and Regulations does not prevent such an increase when a member has commenced receipt of their pension.
Paragraph 8503(2)(a) provides that lifetime retirement benefits must be payable in equal and periodic amounts. There are some exceptions to this rule, for example, benefits may be adjusted for inflation, or reduced upon the death of the member's spouse.
Paragraph 8503(2)(d) and subparagraph 8503(2)(a)(i) do not provide that the surviving spouse's benefit must meet the equal and periodic rule and do not prevent such an increase. Although the value of the benefit would increase and additional funding would be necessary, the Regulations permit such an increase.
4. Paragraph 8503(3)(g) of the Regulations limits the accrual rate of a defined benefit plan to 2%. In a 2% plan that provides a joint and survivor pension with a 5 year guarantee, would the Canada Revenue Agency (CRA) allow a member to choose an optional Life only pension? The actuarial equivalent of this optional form of pension might exceed 2%.
The intent of paragraph 8503(3)(g) is to limit the benefit accrual rate under the normal form of pension payable to two percent. The effective benefit accrual rate, the accrual rate resulting from an optional form of pension that is the actuarial equivalent of the normal form, may exceed two percent. Pension plans that offer an optional form of pension where the effective benefit accrual rate exceeds two percent must state that the optional forms will be the actuarial equivalent of the normal form, and explicitly limit both the normal and optional forms of lifetime retirement benefits paid to the maximum pension limits in section 8504 of the Regulations.
5. A member terminates from their registered pension plan in 1995 and immediately transfers the commuted value of their benefits to a registered retirement savings plan (RRSP), in accordance with the Income Tax Act and Regulations. In 1999, the plan is wound up and there is an actuarial surplus in the plan. The employer decides to provide ancillary benefits to the plan members with this surplus. Can the member transfer the value of these ancillary benefits to their RRSP, even though they have already transferred the commuted value of their benefits out of the plan?
Subsection 8501(7) of the Regulations, which applies to benefits provided after 1996, contains a provision which generally allows surplus under a defined benefit provision to be used on wind up of the plan to provide for stand alone ancillary benefits to former members. Subsection 8517(3.1) allows the individual to use previously unused transfer room determined under section 8517 to accommodate a rollover of these ancillary benefits. In accordance with paragraph 8501(7)(e) of the Regulations, Ministerial approval is required regarding these transfers. We will require a demonstration indicating that the sum of the commuted value of the new ancillaries plus the commuted value of the original entitlement does not exceed the prescribed amount that was determined at the time of the initial transfer.
If the members had terminated after 1996, they may only have these stand alone ancillary benefits provided in respect of pre-1990 service. This is to ensure that these individuals are not provided with benefits that, had they been provided before the first termination, would have affected the determination of the pension adjustment reversal (PAR).
6. Bill C-23 introduced the term "common-law partner", which is defined as two persons who cohabit in a conjugal relationship and have done so for at least one year, or two persons who are the parents of a common child and cohabit in a conjugal relationship. How does this new definition affect the registration of pension plans?
Since this new definition does not restrict the relationship to two people of the opposite sex, the CRA will register pension plans that provide survivor benefits to same-sex partners. Should a plan sponsor wish to have such a pension plan registered, he or she is invited to submit an application to the Registered Plans Directorate of the CRA.
7. Will this new definition apply retroactively to registered pension plans?
The new definition takes effect for 2001 and subsequent taxation years. Therefore, plans submitted for registration on or after January 1, 2001, that provide for same-sex survivor benefits will be registered. This also applies to existing registered pension plans that are amended on or after January 1, 2001, to provide for these benefits. Plans submitted for registration on or after April 23, 1998, but before January 1, 2001, or existing plans amended within these dates, that provided for survivor benefits to same-sex partners, were accepted because of the decision reached in the Rosenberg (CUPE) v. Canada court case.
8. Can the survivor benefits be transferred to same-sex (common-law) partners?
Since the addition of the term "common-law partner" applies to the entire Income Tax Act, same-sex couples now have the same transfer rights as couples of the opposite sex. However, these transfer rights are only applicable to the 2001 and subsequent taxation years.
9. The Regulations require that the plan administrator has to report the PAR amount to both CRA as well as to the employee. What are the plan administrator's obligations if the T10 that was mailed to the employee is returned because of an incorrect address?
Subsection 8404(4) of the Regulations state that the plan administrator "shall send the copy to the individual at the individual's latest known address".
The plan administrator still needs to send a copy to CRA. CRA will match the T10 with the employee's Income Tax Return and advise the employee of their increased RRSP room in their notice of assessment.
10. Would a plan amendment that alters the amount of pension being paid to retired members violate the "equal and periodic rule" of paragraph 8503(2)(a) of the Regulations?
No, a plan amendment that alters the benefits being paid to retirees or their beneficiaries would not violate the equal and periodic rule, provided that the payments were equal and periodic before the amendment, and continue to be equal and periodic after the amendment.
Such an amendment will be accepted only if the change in the amounts of benefits is done on a prospective basis, and do not provide benefits in excess of what the Income Tax Act would have permitted at commencement date. Catch up payments will not be accepted.
Built-in plan provisions that would allow pensions in pay to be automatically altered would violate the equal and periodic rule and will not be accepted.
11. There is a new trend where certain Individual Pension Plans are being established primarily to accept a transfer of funds from a prior registered pension plan. What is the CRA's opinion of these plans?
We have noticed a trend in which individuals near normal retirement age leave large employers and establish their own corporation. The individual is hired by the corporation, and the corporation sponsors an individual pension plan (IPP) for the individual that recognizes the prior service under the public sector pension plan. Once the IPP is established, the full commuted value of the individual's prior pension is transferred to the IPP, as the transfer rules of the Income Tax Act do not limit transfers from one defined benefit plan to another. We are concerned that while some of these IPPs may be acceptable, many will not meet the requirements for registration under the Act.
The primary purpose of every registered pension plan must be to provide retirement benefits to individuals in respect of their service as employees. This requirement is reflected in the Act as a condition of registration. If it is determined that a plan is established for a reason other than this primary purpose, it will not qualify for registration under the Act.
The first issue we have with these arrangements is the legitimacy of the employee/employer relationship. Our concern is that the reason the corporation and the pension plan are being established is to avoid the transfer rules of the Act. If there is not a bona-fide relationship that has the employee rendering legitimate services to the employer, the plan will fail the primary purpose test.
Even if this relationship is established and nominal earnings are received, there may still be an issue with the primary purpose test. The Act only permits a pension plan to base retirement benefits on the earnings received from an employer who participates in the plan. In most cases, the earnings with the new corporation are much lower than what was received with the prior employer, and therefore the benefits under the IPP are significantly lower than the benefits that the individual would have received from the prior plan. This creates a large surplus in the IPP.
When an individual foregoes a substantial retirement benefit by transferring the associated funds to a recently established IPP that provides a much smaller retirement benefit, it can be argued that the primary purpose test is not met. In these cases, we may conclude that the primary purpose of establishing the IPP was to facilitate a transfer of funds from a prior plan that would have been limited by the Act had it been transferred to an RRSP. The conclusion that the primary purpose condition is not met is further supported by the fact that following the transfer, the IPP holds significant surplus assets rather than providing retirement benefits of a level comparable to those that would have been paid from the prior plan. As mentioned earlier, if the primary purpose of a plan is for any reason other than providing retirement benefits with respect to the individual's service as an employee, the plan will fail to qualify for registered status.
If it is apparent at the time of registration that the IPP will not meet the primary purpose test, the CRA will refuse to register the pension plan. Unfortunately, in many cases, it will not be apparent until a year or two later that the primary purpose test was not met. This situation can be more problematic for individuals as they may have already transferred funds into the IPP.
If it is determined that a registered plan does not, and never did, meet the primary purpose test, the plan's registered status can be revoked as of the original effective date. . The consequences to the member could be financially devastating if the CRA was to revoke the registration of the plan upon discovering that the purpose for incorporating a company was simply to establish a pension plan to hold the transferred pension for a specific member. The impact of this action is that all the assets of the plan would become taxable.
It is for this reason that we want to ensure that individuals are made aware of these concerns. We will be asking individuals for evidence of the following:
- the company was established for a reason other than to establish a pension plan for the purpose of transferring benefits from a prior plan;
- there is a bona-fide employer/employee relationship between the plan member and this company; and
- the plan member expects to receive earnings at a level comparable to the earnings they received from the prior employer.
If these facts cannot be confirmed, we will consider that the plan does not meet the primary purpose and it will not be registered.
For more information on Individual Pension Plans, go to the Financial Services Commission of Ontario (FSCO).
12. Under a defined benefit provision, can a guarantee period be attached to a member's pension when a joint survivor option is elected with a dependant as the beneficiary?
Yes, paragraph 8503(2)(c) of the Regulations allows a guarantee to be attached to a member's pension. Clause 8503(2)(c)(i)(B) permits a 15-year guarantee when retirement benefits, permissible under paragraph 8503(2)(d), are not provided under the provision to a spouse or former spouse of the member.
Where retirement benefits, permissible under paragraph 8503(2)(d), are also provided under the provision to a spouse or former spouse of the member, clause 8503(2)(c)(i)(A) limits the guarantee period to 5 years.
Paragraph 8503(2)(k) permits the 5 year guarantee to be increased to 15 years on an actuarial equivalent basis, which means that the member has to forego a portion of their lifetime retirement benefits to get the increased guarantee.
13. What is a multi-employer plan (MEP)?
A MEP is a registered pension plan sponsored by a group of employers. However, not every plan in which more than one employer participates is considered a MEP.
We consider a registered pension plan to be a MEP if, at the beginning of the year, it is reasonable to expect that at no time in the year will more than 95 % of the active plan members be employed by a single participating employer, or by a group of related participating employers at any time during the year. The terms "related persons" and "related group" are defined in subsections 251(2) and 251(4) of the Income Tax Act, respectively. Additional information can also be found in Interpretation Bulletin IT-419R Meaning of Arm's Length.
What is a specified multi-employer plan (SMEP)?
A SMEP is a MEP that meets the following conditions:
- The employers participate in the plan under a collective bargaining agreement or similar agreement.
- All or substantially all (at least 90 %) of the employers who participate in the plan are persons who are not exempt from tax under Part I of the Income Tax Act. Examples of persons exempt from tax are labour organizations, municipalities, corporations owned by the Crown and registered charities. You can find a complete list of exempt persons in subsection 149(1) of the Income Tax Act.
- The employers make contributions according to a negotiated contribution formula negotiated under a collective bargaining or similar agreement that does not provide for any variation in contributions as a result of the financial experience of the plan.
- The administrator is a board of trustees (or similar body) that is not controlled by representatives of the employers. The concept of "control" in the case of a trust, relates to the control a person or persons have over the property and activities of the trust. For more information on the control of a trust, refer to comments in Interpretation Bulletin IT-447 Residence of a Trust or Estate. In the case of a corporation "control" means the right that rests in ownership of the number of shares necessary to provide a majority of the votes in the election of the Board of Directors of the corporation or authorize the wind-up of the corporation. If there is no share capital, a person who has the ability to appoint the Board of Directors of the corporation will be considered to control the corporation.
- The administrator has the power to determine the benefits the plan will provide, whether or not such power is subject to the terms of a collective bargaining agreement or a similar agreement.
- The contributions each employer will make in the year are based, in whole or in part, by referring to the number of hours worked by individual employees of the employer, or some other measure that is specific to each employee for whom contributions are made to the plan.
- For 1991 and subsequent years, it is reasonable to expect that:
- at least 15 employers will contribute to the plan for that year; or
- at least 10 % of the active members of the plan will be employed by more than one participating employer (for this condition, all employers who are related to each other are considered to be a single employer).
A plan will also be a SMEP if:
- we have designated it to be a SMEP in the year; or
- it was a SMEP in the previous calendar year, it still meets the requirements described above and we have not given notice that it no longer qualifies as a SMEP.
We only designate a plan to be a SMEP if it has many of the characteristics described above and the designation is needed to overcome serious pension adjustment (PA) reporting difficulties. Typically, this designation will only be given when it is reasonable to expect that at least 15 employers will contribute to the plan in the year OR at least 10 % of the active members will be employed by more than one participating employer.
14. Is it possible to index a member's accrued benefits on the basis of Consumer Price Index (CPI) during a pre-retirement deferral period?
CPI indexing of benefits during a pre-retirement deferral period is acceptable as long as the application of the maximum pension under section 8504 of the Income Tax Act is applied in every case at benefit commencement date. Both CPI and average wage are acceptable indexation adjustments for pre-retirement deferral periods. They are both subject to the maximum pension test that must be applied at benefit commencement date.
15. When the terms of a registered pension plan (RPP) are amended to incorporate the requirements of Quebec's new additional pension benefit, what does the Registered Plans Directorate require for the amendment to be acceptable?
Retraite Québec introduced a new additional pension benefit that is outlined in section 60.1 of Quebec's Supplemental Pension Plans Act. The purpose of this new additional benefit is to allow workers who participate in more than one RPP during their career to receive similar benefits as workers who are employed by the same employer throughout their career.
The value of the additional pension benefit must equal the difference between:
- the value of the deferred pension based on the plan terms; and
- the value of the deferred pension indexed by ½ of the consumer price index (up to a maximum of 2%) for the period between the date of termination and 10 years before the normal retirement age.
This amount is calculated when the member ceases to be an active member of the plan. The value of this amount is then used to increase the pension benefits and, ideally, would not result in a past service pension adjustment.
In most cases, Quebec's Supplemental Pension Plans Act requires that the value of the additional pension benefit be used to upgrade lifetime retirement benefits.
If the upgrade is made to the accrual rate in the plan (for example, an increase to the percentage of an earnings based plan or an increase to a flat benefit rate), we will require an amendment identifying a definite formula. This position is spelled out in Information Circular 72-13R8, Employees' Pension Plans, and the Income Tax Regulations and applies to both the pre- and post-pension reform periods.
If the upgrade is made to something other than the accrual rate, we will accept plan terms that identify a list of possible upgrades as long as they are permitted under the Income Tax Act. Employees will then be able to choose any of these upgrades without further plan amendment. This is similar to the treatment given to flexible pension plans.
As an alternative, we will accept plan terms that allow this value to be paid out as a lump sum.
We will not accept any amendments that have a general reference to what is acceptable under the Supplemental Pension Plans Act and the Income Tax Act.
If you have questions about the options permitted by Retraite Québec, contact them directly.
16. Can a defined benefit pension plan provide for a series of marginal rates which under most salary ranges and circumstances produce a benefit accrual rate that is less than 2%.
Example: Employee contributions:
7.3% of salary below the YBE
5.5% between the YBE and YMPE
7.3% above the YMPE
Benefit Rate :
30% of contributions
Contributions are limited to 6.67% of salary
Some salary ranges will produce an "equivalent benefit accrual rate" in excess 2%
Salary range above the YMPE : 30% of 7.3% = 2.19%
YBE = Year's Basic Exemption ($3,500)
YMPE = Year's Maximum Pensionable Earnings
As in this example, where the employee contribution rate has a bearing on the annual defined benefit accrual rate, despite the fact that the annual accrual is limited to 2%, we would not accept such a benefit rate. If the plan text is ambiguous or uses the employee contributions as the basis for determining the benefit accrual rate (30% x 7.3%) and the equivalent benefit accrual rate exceeds 2%, we do ask for amendments. Where there is more than one contribution rate, then each equivalent benefit accrual rate can not exceed 2%.
Similarly, in cases where the benefit accrual rate is based on earnings and there is more than one benefit accrual rate, then each benefit accrual rate cannot exceed 2%. For example, a plan formula of 1% of earnings up to YMPE plus 2.2% of earnings above YMPE would not be acceptable even if the benefit was capped at 2% of earnings.
The reason we ask for amendments is to ensure compliance with Regulation 8503(3)(g) and reduce any ambiguity in the benefit accrual formula used in pension plans. This measure ensures that there is some degree of clarity between the employee contribution rate, the benefit accrual rate and their interaction with the maximum pension rules of 8504. Our primary concern is keeping the plan terms understandable for members and administrators with regards to the limits.
17. On February 27, 2004, the Department of Finance released a revised draft amendment to the Income Tax Regulations (the Regulations). This amendment introduced variable benefits that can be paid directly out of a money purchase provision, similar to the minimum amount that is paid out of a registered retirement income fund (RRIF). These amendments were published in Part II of the Canada Gazette on September 21, 2005.
How do these new variable benefits work?
Section 8506 of the Regulations has been amended to allow for payments to be made out of a money purchase provision in the same way that payments may be made out of a RRIF.
Paragraph 8506(1)(e.1) permits funds from a money purchase provision of a registered pension plan (RPP) to directly pay out retirement benefits (referred to as "variable benefits") to a member, and then to the member's beneficiaries after his or her death.
The amount of the variable benefits payable each year to the member must not be less than the minimum amount determined under subsection 8506(5) of the Regulations. The minimum amount is based on the balance of the amount in the member's account at the beginning of each year and the age of the member or the member's spouse or common-law partner. The factors used to calculate the minimum amount are listed in the table in subsection 7308(4) of the Regulations. The rules for calculating the minimum amount under a money purchase provision are similar to the rules for determining the minimum amount payable under a RRIF.
With the introduction of variable benefits, plan administrators will have another option for paying funds from the plan. If they wish to allow for these types of payments, they will have to amend their plan terms to incorporate the changes.
If an employer wants to permit variable benefits to be paid out of a money purchase provision, what amendments are required to the plan terms to make them acceptable to the Registered Plans Directorate?
The Registered Plans Directorate may accept the plan terms of a money purchase provision with regard to variable benefits if the following requirements are met:
- There is a reference to how the minimum amount will be determined and paid, in accordance with clause 8502(e)(i)(B), paragraph 8506(1)(e.1), and subsections 8506(4), 8506(5), 8506(6), and 8506(7) of the Regulations.
- There is a reference to or definition of "specified beneficiary," as contained in subsection 8506(8) of the Regulations.
- As a consequence of this reference to "specified beneficiary," it will be necessary to add to the existing reference to the requirement in paragraph 8506(2)(h) a reference to the new requirement in paragraph 8506(2)(i) of the Regulations (i.e., that lump sum payments will be paid as soon as practical after the death of the member or the specified beneficiary).
Since each money purchase provision can be unique, other plan amendments may be required in order for the amendment(s) to be acceptable to the Registered Plans Directorate.
If we currently have a self-insured plan that was approved by the Registered Plans Directorate, do we have to amend our plan terms to incorporate these proposed changes?
No. There is a grandfathering provision under paragraph 8506(2)(g) of the Regulations for existing self-insured money purchase plans. This provision allows retirement benefits that were provided under an arrangement accepted by the Directorate before February 27, 2004, to continue to be acceptable.
18. Under Part V (2) of Newsletter No. 93-2, Foreign Service Newsletter, the Minister's approval is required for money purchase pension plan contributions made by or for a plan member when the member is employed by an employer outside Canada. Why is the Minister's approval required if the member is a Canadian resident and the remuneration for those contributions is considered income under section 5 or 6 of the Income Tax Act?
Approval of such contributions is consistent with the way the Canada Revenue Agency (CRA) approves defined benefits for members employed outside Canada. Under a defined benefit provision, the CRA limits the amount of pensionable service that can be credited to a member while employed outside Canada. Since benefits provided under a money purchase provision are not related to service, the CRA limits the contributions that can be made for a member.
In accordance with Newsletter No. 00-1, Foreign Service Newsletter Update, the approval of money purchase contributions will be given on a plan-by-plan basis, using criteria like that applied to defined benefits in Part III of Newsletter No. 93-2 (and revised by Newsletter No. 00-1). Such contributions will be acceptable where they meet these criteria, and the plan terms allow contributions to be made for members who are employed outside Canada.
19. Under Ontario's pension legislation, the time when pension benefits commence for an ex-spouse who will be a benefit recipient seems not related to the age of the ex-spouse. The law states that an ex-spouse of a plan member cannot begin receiving pension benefits before whichever date is earlier:
- the normal retirement date that applies to the member under the terms of the plan; or
- the date that benefits commence for the member.
Does the Income Tax Act requirement that periodic pensions commence at age 69 overrule the Ontario law?
The Income Tax Act (Act) has been set up to make sure that pension benefits, whether paid from a plan, an annuity, or another registered vehicle, commence by the end of the year in which a member turns 69. Subsection 8501(5) of the Income Tax Regulations (Regulations) lets an individual become entitled to all or part of the pension benefits of a spouse or common-law partner, or a former spouse or common-law partner when a marriage ends. Depending on the mechanism used to divide family assets, an individual may become a defacto member of a plan in order to receive benefits or may be considered the spouse of a member and the plan administrator will pay part of the benefits to each person.
Where the entitlement is created by a provision of the law of Canada or a province, the individual is treated as a defacto member and is subject to the Act, the Regulations, and the terms of the registered plan. This means the benefits must commence to be paid no later than the end of the year the individual turns 69.
In any other case, the benefits are considered those of the member and the individual has to wait for the member to commence receiving benefits before the individual receives any benefits, even if that individual is over age 69. The Act does not impose penalties on individuals who are past age 69 before they commence receiving part of someone's benefits, since they are not considered plan members.
20. Under many of our company's pension plans, when plan administrators cannot locate plan members at age 69, and they are not sure of their marital status, the plan requires a purchase of single life annuities for them. When such members appear with a partner at a later time, what payment options do the tax rules support?
Subsection 147.4(1) of the Income Tax Act (Act) applies when an individual acquires an interest in an annuity contract as full or partial entitlement under a registered pension plan. Subsection 147.4(2) contains rules for amendments to such annuity contracts. An individual may have an interest in an annuity just before it is amended in such a way that the rights under it are altered. If so, that individual is generally considered to have received an amount equal to the fair market value of that interest. This would be the case if a single life annuity acquired under subsection 147.4(1) of the Act were amended to a joint last survivor annuity. Since an annuity is not a registered pension plan, the Registered Plan Directorate does not have approval authority over it.
21. Where pension assets and liabilities covering employees and former employees of a corporation are transferred to a successor pension plan as a result of a corporation buying all or part of the assets of another corporation, can the buying corporation make contributions to the successor plan for former employees of the predecessor employer?
Yes. Subsection 147.2(8) of the Income Tax Act deems the former employees of the vendor (the predecessor employer) to be former employees of the purchaser (the participating employer), so that the contributions are eligible under section 147.2 of the Act.
22. What is a complete application for registering a pension plan?
A complete application consists of a signed T510 Application for Registration of a Pension Plan and the appropriate documents. All the questions on the T510 must be answered unless you are directed otherwise. If all the questions are not answered, it will be considered an incomplete application and returned to the submitter. For a list of the appropriate documents to complete the application please see Newsletter No 04-2, Registered Pension Plan Applications – Processing an Incomplete Application on the website.
If you are applying to register a Specified Multi Employer Plan (SMEP), the application must include a copy of the collective bargaining agreement or similar agreement.
If you are applying to register a flex plan, the application must include the employee booklet.
23. What is a complete application for amending a registered pension plan?
A complete application consists of a signed T920, Application to Amend a Registered Pension Plan and the appropriate certified documents. All the questions on the T920 must be answered unless you are directed otherwise. If all the questions are not answered or the appropriate documents are not submitted, it will be considered an incomplete application and returned to the submitter.
In accordance with subsection 8512(2) of the Income Tax Regulations, in addition to the T920, the following documents must be sent to CRA for the application to be considered complete:
1) Amendments to the Plan Text:
- A certified copy of the amendment; or
- A certified copy of the revised plan text; or
- A certified board resolution which stipulates the section(s) of the plan text to be amended.
Please Note: We will accept photocopies of the certified documents.
2) Amendments to the Name of the Plan Sponsor, Participating Employer, Administrator or Financial Institution
- A copy of the Letters Patent; or
- A copy of the Supplementary Letters Patent; or
- A copy of the Certificate of Amendment; or
- A copy of the Certificate of Amalgamation; or
- A certified copy of an amendment to the plan text and/or funding document as applicable
3) Amendments to Funding Media [Section 2 (f ) of T920]
- A copy of the signed trust agreement;
- A copy of a signed insurance contract; or
- A certified copy of an amendment to the funding document;
If the new funding media is a trust and the new trustees are a group of individuals we require:
i) The names and addresses of the new trustees (please note that at least three of the trustees must be resident in Canada); and
ii) The name of the trustee responsible for correspondence.
If the funding media is a trust with individual trustees and one of the individuals is replaced or a new individual is added, we require:
i) The name and address of the new trustee(s); and
ii) A copy of the Acceptance of Trust or Amendment of Trust.
4) Amendments to a Flex Plan [Section 2 (k) of T920]
In addition to the document required in part 1, a copy of the employee information booklet is also required when a plan is amended to add a flex provision.
5) Amendments to a SMEP [Section 2 (o) or (q) of T920]
- In addition to the document required in part 1, if applicable, a copy of the collective bargaining agreement or similar agreement is required when a pension plan is designated to be a SMEP or when the contribution rates change through the signing of a new collective agreement.
6) Amendments to a Plan based on a Specimen Plan [Section 2(r) of the T920]
- If the plan is no longer based on an approved specimen, a copy of the customized plan text and/or funding document, as applicable, is required.
- For further information regarding the use of specimens, please refer to Newsletter 95-6R, Specimen Pension Plans – Speeding Up the Process, on the website.
24. What is a complete application for requesting the revocation (termination) of a registered pension plan (includes the cessation of the accrual of benefits or contributions) [Sections 2 (s), (t) or (u) of the T920]
A completed T920 is sufficient to inform us of this change. However, we will also accept:
- a letter from the plan administrator; or
- the submission of the T244, Annual Information Return; or - a certified amendment to the plan text.
25. Where specified individuals of a designated plan, as defined in subsection 8515(4) of the Income Tax Regulations, have no further pension credits under a defined benefit provision of the plan, determined under subsection 8301(6) of the Regulations and for the purposes of subsection 8515(1), would the Minister view this condition alone in waiving the plan's designated status under subsection 8515(2)?
The purpose of subsection 8515(2) of the Regulations is to prevent a plan from moving in and out of the category of designated plan. A registered pension plan (RPP) that is a designated plan in 1991 or in any year after will keep its designated status unless the Minister waives the application of subsection 8515(2) for the RPP.
The Minister of National Revenue may grant an exemption of the application of subsection 8515(2) of the Regulations when it is determined that the RPP is unlikely to become a designated plan in the future under subsection 8515(1). We have determined that this requirement is considered to be met for a year in which no more pension credits accrue under a defined benefit provision of the RPP and there are no more restricted-funding members under the provision, as per subsection 8515(8).
There may, however, be other circumstances where it is unlikely that the RPP would become a designated plan in the future. These other circumstances will be considered on a case-by-case basis and are not available to individual pension plans, as defined in subsection 8300(1). A formal request, explaining the circumstances leading to the request, should be provided to the Registered Plans Directorate for our consideration.
26. Phased retirement
What is phased retirement?
The Income Tax Regulations currently prohibit employees from accruing further benefits under a defined benefit provision of a pension plan if they are currently receiving retirement benefits under a defined benefit provision of the plan or from another defined benefit plan of the employer or a related employer. Subject to certain requirements, the Regulations allow employees to receive pension benefits from a defined benefit plan and to simultaneously accrue further benefits.
Who can qualify for phased retirement benefits?
To qualify for phased retirement benefits, employees must be:
- at least 60 years of age; or
- at least 55 years of age and eligible for a pension that is not reduced because of their age, pensionable service, or a combination of both their age and pensionable service.
Phased retirement benefits are not permitted under a designated plan, or to an employee who was at any time connected with a participating employer.
What phased retirement benefits can employers offer their employees?
Employers will be allowed to offer qualifying employees up to 60% of their accrued defined benefit pension while they continue to accrue additional benefits under the plan. The 60% limit will be based on the amount of pension benefits (including bridging benefits) that would be paid from the plan if the employee were fully retired.
Employers may also offer stand-alone bridge benefits to qualifying employees while they continue to be employed by a participating employer. When the employee ceases employment, the employer may continue paying stand-alone bridge benefits if payment of the lifetime retirement benefits has started.
Unlike bridge benefits, which are retirement benefits that are payable for a predetermined period and generally after payment of the lifetime retirement benefits has started, stand-alone bridge benefits are payable, subject to certain conditions, even when payment of lifetime retirement benefits has not started.
As well, current rules allowing employees to accrue benefits for periods of absence or reduced pay will not apply to employees who receive phased retirement benefits and who continue to accrue further benefits under the plan.
Will employees be required to reduce work time while receiving phased retirement benefits?
There will be no requirement that the partial pension be based on a reduction in work time, or that there be a corresponding reduction in salary. As a result, qualifying employees will be able to receive up to 60% of their accrued pension benefits while continuing to work, part-time or full-time, as well as continuing to accrue benefits for that work.
How will other pension rules be affected by phased retirement benefits?
There will be no restrictions on when, or how often, an employee's accrued pension amount can be recalculated to take into account the employee's additional pensionable service and increased annualized earnings (if any) during a period of simultaneous benefit accrual and pension payment. Employers will not be prevented from limiting participation to specific employees under the plan terms. The prohibition against the payment of bridging benefits on a stand-alone basis will not apply for qualifying employees.
The prohibition on accruing additional benefits while receiving pension payments will continue to apply to designated plans as well as to persons who were at any time connected with their employer.
When will employers be able to offer phased retirement benefits to their employees?
To provide for an appropriate period of consultation on the technical aspects of this measure, 2008 is the first year of service for which an employee will be permitted to accrue benefits under a defined benefit plan while in receipt of a partial pension.
Will all employees be able to benefit from phased retirement programs?
Since this tax measure is not mandatory, it will be up to employers to decide whether to amend the defined benefit pension plan to provide this benefit to all or some of their employees.
27. As of what date should an employer reflect the 2010 defined benefit limit of $2,494.44 in preparing an actuarial valuation report (AVR)?
For plans that provide for the defined benefit as per the Income Tax Act and its Regulations, the 2010 defined benefit limit of $2,494.44 must be reflected when determining the current service costs and the actuarial liabilities in AVRs with an effective date of December 31, 2009 or later. In carrying out a maximum funding valuation for a member in an individual pension plan where the assumed retirement date is beyond 2010, the defined benefit limit will be $2,494.44 indexed at an annual rate of 5.5% after 2010.
28. Included in the pension reform measures announced by the Minister of Finance on October 27, 2009, is an increase in the surplus threshold under the Income Tax Act from 10 per cent to 25 per cent. When can this new proposed limit be reflected in AVRs? Will it be necessary to wait to incorporate the proposed changes until they receive Royal Assent?
The Government intends to increase the pension surplus threshold under the Income Tax Act, which applies to both federally and provincially regulated defined benefit plans, from 10 per cent to 25 per cent.
While some of the proposed changes can be simply introduced by changes to regulation, others will be implemented by legislation, for which they would have to be introduced in Parliament.
Paragraph 147.2(2)(d) of the Income Tax Act sets out the calculation for the amount of actuarial surplus that may be disregarded in the determination of eligible contributions to a defined benefit pension plan. Changes to the legislation propose to repeal subparagraph 147.2(2)(d)(iii). As a result, the proposed increase is then effected under subparagraph 147.2(2)(d)(ii), allowing a surplus threshold of the lesser of the actuarial surplus and 25 per cent of actuarial liabilities, up from 20 per cent under said subparagraph.
The new threshold will apply in respect of employer contributions relating to current service costs for 2010 and subsequent years.
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