Actuarial Bulletin No. 3R1
This bulletin gives guidance to pension plan administrators and actuaries on what information they need to send us when they ask for a waiver under subsection 8503(5) of the Income Tax Regulations.
Along with several wording changes throughout the document, we have made some changes based on comments we received from the pension industry. We are also introducing a simplified calculation method created to streamline calculation requirements and speed up processes. Effective from the date of this publication, if you meet certain conditions, you can start using our new simplified calculation method.
Limit on member contributions
Paragraph 8503(4)(a) of the Regulations sets a limit on member contributions that can be made to a defined benefit provision of a registered pension plan. Generally, the limit on member current service contributions for a calendar year is the lesser of:
i) 9% of a member’s compensation; and
ii) the sum of $1,000 plus 70% of the member’s pension credit for the year.
Under subsection 8503(5) of the Regulations, the Minister may waive the limit in paragraph 8503(4)(a) of the Regulations if member contributions are determined in a way that is acceptable to the Minister. It must also be reasonable to expect that, on a long-term basis, the total regular current service contributions made under the provision by all members (including those contributions under subsection 8501(6.1) of the Regulations if it applies) will not fund more than half of the related benefits.
We also verify that member contributions over the above limit do not result in larger benefits for most of the members because of the minimum employer contribution rule under section 21 of the federal Pension Benefits Standards Act, 1985, or a similar law of a province. We review this to make sure that:
- member contributions are not out of proportion to their promised benefits
- the minimum employer contribution rule does not increase the member’s benefit as no pension adjustment or past service pension adjustment would be reported for such an increase
Subsection 8501(6.1) of the Regulations applies to plans with shared-funding arrangements where members must contribute towards the plan’s unfunded liability.
Deeming member contributions as current service contributions under subsection 8501(6.1) of the Regulations, in combination with any required current service member contributions, may result in member contribution rates over the limit in paragraph 8503(4)(a) of the Regulations. If this is the case, you must apply for a Ministerial waiver under subsection 8503(5) of the Regulations.
When you ask for a waiver under subsection 8503(5) of the Regulations, you must send us:
- a written statement asking the Minister to waive the conditions under paragraph 8503(4)(a) of the Regulations
- an actuarial valuation report which specifies and supports the level of contributions requested (for every member and participating employer)
- an amendment to the plan text, if necessary, that relates to member contributions, along with form T920, Application to Amend a Registered Pension Plan
- the results of the ratio calculation or the simplified calculation
- a written explanation of how member contributions are determined once the waiver is granted
To avoid any undue delays, include a reference to the waiver request in your cover letter or use form T2014, Request for a Priority Review of a Registered Pension Plan. We strongly encourage you to attach your cover letter or form T2014 to the top of your submission so that we can prioritize your request.
Determination of member contributions
Member contributions must be determined in a way that is acceptable to the Minister for the waiver under subsection 8503(5) of the Regulations to be granted.
We noticed that some plan administrators do not apply any limits to the member contributions once they received a waiver under subsection 8503(5) of the Regulations. While this administrative practice may be reasonable for most registered pension plans, it may not be reasonable when there are high income earners Footnote 1 accruing benefits in the plan. In our view, it is not acceptable to calculate the member contributions on the total compensation for high income earners without considering their promised benefit. In the case of high income earners, we consider the resulting member contributions to be out of proportion to their promised benefits due to the section 8504 limits in the Regulations.
The following methods are acceptable in determining member contributions for high income earners:
The member contributions can be calculated on earnings on which a member accrues benefits at age 65.
As an example, for a plan where the benefit formula is 2% of the final average earnings, the maximum earnings on which a member would be allowed to contribute in 2020 would be equal to $154,611. This level of earnings is derived by dividing the defined benefit limit for 2020 ($3,092.22) by the accrual percentage in the benefit formula. The earnings of $154,611 is equal to $3,092.22 divided by 2%.
The member contributions can be calculated on earnings on which members were allowed to contribute based on a contribution rate of 9% if paragraph 8503(4)(a) of the Regulations still applied.
For the same plan above, the 2020 maximum earnings on which a member would be allowed to contribute would be equal to $222,900. In order to derive this amount, we must equate the two limits set out under subparagraph 8503(4)(a)(i) of the Regulations and assume the member accrues the defined benefit limit in 2020 ($3,092.22).
9% of earnings = 70% x pension credit + $1,000
Earnings = [70% x (9 x $3,092.22 - 600) + $1,000] ÷ 9%
Earnings = $222,900
We would be pleased to assess any method that differs from the ones outlined in this bulletin. Send us a description of your proposed method, an example, and your rationale, before you send us your waiver request. We will review these requests on a case-by-case basis.
Unless you meet the conditions for the simplified calculation, determine the ratio in the following manner:
The sum of the present value of member contributions (PVFEEC) for each active member
The sum of the present value of future benefits (PVFB) for each active member
The calculation must include all active plan members and cannot be done on an individual basis
- The PVFEEC for each active member should be broken down by:
- the sum of all contributions with interest (actual member contribution balances) at the plan valuation date
- the present value of contributions to be made by the members after the date of valuation
- The future member contributions must reflect the requested contribution rates
- Any member contributions made under subsection 8501(6.1) of the Regulations can be excluded after the first four years for this calculation
- The PVFB is the plan liability for benefits for past and future periods of service
- The PVFB should reflect any expected changes to the plan benefit for future years of service
- The PVFB must specifically leave out any benefits related to the minimum employer contribution rule for future contributions over the limit under paragraph 8503(4)(a) of the Regulations
- The assumptions used to calculate the PVFEEC and the PVFB must be reasonable and consistent with those used for the most recent going-concern valuation
- The relevant data and methods used to calculate the PVFEEC and PVFB must clearly be shown in the actuarial valuation report included with the waiver request
You do not need to include the above ratio calculation if you meet the following conditions:
- Total annual member contributions are less than or equal to 50% of the total annual current service cost for each year covered by the actuarial valuation report
- The result of the simplified calculation is less than or equal to 50% at the plan’s valuation date
The simplified calculation is as follows:
Sum of all contributions with interest (actual member contribution balances) for each active member at the plan valuation date
Sum of plan liabilities for benefits for past periods of service for each active member on a going-concern basis at the plan valuation date
We usually grant the waiver if the result of either ratio is less than or equal to 50%. If the ratio is over 50%, you may include more information for us to make a final determination, such as:
- confirmation that this plan is exempt from the 50% minimum contribution rule
- the assumptions used to determine the minimum employer contribution rule
- any other points you think are relevant
While we would need to review all facts related to the plan, we generally give favourable consideration to a waiver request when employees are not funding more than half of the current service cost.
Generally, waivers are valid for up to four years after the date of the actuarial valuation report. During this period, a new waiver request is only required if benefits are reduced or member contribution rates are increased. However, we will review new waiver requests if the waiver period will expire before the effective date of the next actuarial valuation report.
You must send in a new waiver request, following the steps outlined above in What you need to do, if member contributions rates will still be above the limit set out in paragraph 8503(4)(a) of the Regulations when the waiver period ends.
Member contributions towards an unfunded liability
To speed up our review when plan members contribute towards an unfunded liability, please confirm that:
- member contributions are calculated based on the actuarial liabilities for service accrued before the contribution is required
- the contributions cannot reasonably be considered to be for the member’s own benefits
- the contributions are made under an arrangement approved by the Minister under which all or a significant number of the active members of the plan must make similar contributions
- the main purpose for the arrangement is to make sure that the plan is adequately funded
In limited circumstances, we may grant your waiver request on a conditional basis if you have not sent us the relevant amendment. You may ask for a conditional waiver in a situation where there is a lengthy legislative or collective bargaining process to amend your plan. If you ask for a conditional waiver, please include the reason. The future member contributions included in the ratio calculation described above must reflect the ultimate required contribution rates at the end of the negotiations.
We will give our formal approval once we review and approve the required amendment.
Where to get help
Registered Plans Directorate
You can find more information at Savings and pension plan administration.
Toll-free in Canada and the United States: 1-800-267-3100
If you are calling from outside of Canada or the United States, call us collect at 613-221-3105. The Registered Plans Directorate accepts collect calls.
Registered Plans Directorate
Canada Revenue Agency
Ottawa ON K1A 0L5
Information Holdings Operation Section – Registered Plans
Registered Plans Directorate
Canada Revenue Agency
875 Heron Road, B70
Ottawa ON K1A 1A2
We welcome feedback on this bulletin. Send comments by email to RPD.LPRA2@cra-arc.gc.ca
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