1999 RPP Consultation Session - Questions from the Industry

Questions and answers

  1. Minimum Accrual under a DB provision
  2. Refund of employer contributions made in error
  3. Removed
  4. PARs
  5. Removed
  6. Seamless Pension Plans
  7. Quebec's Bill 102
  8. Flex Plans
  9. Removed
  10. Removed
  11. Removed
  12. Demutualization
  13. Removed
  14. Removed
  15. Maximum 2% Accrual Rate
  16. Proportionality Newsletter Issues
  17. Removed
  18. Removed

Question 1 - Minimum Accrual under a DB provision

Paragraph 8506(2)(a) of the Income Tax Act requires that employer contributions to a money purchase plan must be based on a contribution formula that is acceptable. Paragraph 10 of Newsletter 91-4R imposes a requirement that the employer must contribute at least 1% of the total pensionable earnings of active plan members each year.

Is there a similar rule or policy which requires a minimum accrual in respect of a defined benefit provision?

Answer 1

The Income Tax Act does not establish an explicit minimum accrual rate for a defined benefit provision. It should be noted, however, that each plan must meet the primary purpose test in Regulation 8502(a).

Pension plans which are designed with accrual rates so low as to have no or minimal pension adjustments, do not pass the test. Their primary purpose is not to provide a reasonable retirement income that relates to the member's service as an employee.

It is this failure to meet the primary purpose test, and our ability to impose reasonable conditions under subsection 147.1(5) of the Income Tax Act, which provide our authority to refuse to register such arrangements.

At present, we continue to examine the cases on hand with a view to taking a position on a case by case basis.

Question 2 - Refund of employer contributions made in error

Often, an employer may contribute to a defined benefit plan based on an existing valuation report, while a new valuation is being prepared. When this new valuation is finalized, typically six or more months after its effective date, the employer may realize that it has contributed more than what the provincial rules required to fund the plan, as the new valuation discloses an improved funding status for the plan.

If the employer were to apply to the provincial regulator for a refund, would such a refund be a permissible distribution under the Income Tax Act?

Answer 2

Regulation 8502(d) defines all of the permissible distributions which a plan may pay out. As noted, the refund to the employer contemplated in this scenario is not a permissible distribution, as it is not being made to avoid the revocation of plan registration.

Therefore, such a payment would render the plan revocable. Administratively, the Registered Plan Division may, where the facts warrant it, decide not to revoke the plan registration for making such a payment. It is imperative, however, that the plan administrator must not allow for such a refund without first obtaining our written approval to make such a payment.


Budget 2013 proposed amendments to the Act which will allow a return of contributions to either employers or employees which were made as a result of a reasonable error. The return of contributions will have to meet the requirements detailed under new subsection 147.1(19) of the Act.

Returns of contributions made in error that do not meet the conditions under subsection 147.1(19) of the Act will continue to require our approval before such payments are made. This approval would be required for example where the return of contribution is paid after December 31st of the year following the year the contribution was made.

Subsection 147.1(19) of the Act applies in respect of contributions made on or after January 1, 2014. 

Question 4 - PARs

What are the PAR and transfer implications when the application of Ontario's grow-in rule results in an additional value being paid after the basic benefit has been transferred from the plan?

Answer 4a

We spoke with the Financial Services Commission of Ontario (FSCO) and they confirmed that this scenario can occur in two different situations.

Under the first scenario, the employer could be terminating a group of employees over a specified period of time (downsizing). FSCO confirmed that the employer will have to use grow-in when valuing the benefits, however, they can wait until the process is finalized. Under these circumstances, the employer is aware that the individual is still entitled to benefits from the plan.

Under the second scenario, FSCO indicated that there are rare cases where they have determined that there was a partial termination following the original transfer, and as a result, grow-in must now be used to provide an increased value of the individual's benefit that was previously transferred. FSCO did indicate that these cases are few and far between as most employers are aware of their rule.

In order to have a PAR determined for an individual, they must cease to be a "member" as defined in subsection 8300(1) of the Regulations. An individual will not cease to be a member as long as they remain entitled to a benefit under the provision.

Based on this, we can conclude that under scenario one, the individual could still be considered to be a member as there remains an entitlement to a benefit from the plan after the original transfer is made. This would result in the PAR not being reported until the value associated with the grow-in is paid.

Under this scenario, as the additional benefits are not paid as a result of an allocation of actuarial surplus, they would not be permissible under subsection 8501(7) of the Regulations. If a benefit is not paid in accordance with this subsection, subsection 8517(3.1) can not be used to determine the prescribed amount for transfer. The end result is that these additional benefits will not qualify for transfer by themselves.

As a result of the above, we strongly recommend that when an employer knows that grow-in will have to be used, they ensure that this is paid at the same time as the basic entitlement. This will ensure accurate PAR reporting and possibly permit the additional amounts to be transferred.

In the second scenario, a PAR would have been reported after the first transfer as the administrator was not aware that any benefit remained with respect to the individual. It can be argued that the member was always entitled to the grow-in benefit and therefore never ceased to be a member which would mean that the PAR was reported incorrectly.

We have received advice from FSCO that these situations are rare. However, based on feedback from the Consultation Session, there would appear to be sufficient cases to give this issue further consideration. If these situations arise, the plan administrator should write to us with supporting documentation so we can determine the most appropriate course of action. As this situation may not appear to be adequately dealt with under the current framework of the legislation, we will be in contact with the Department of Finance and FSCO to develop a solution.

b) How is PAR reported when benefits from one plan are offset by those in the plan of another employer?

Answer 4b

This situation is addressed on page 12 of the PAR Guide.

When benefits provided to an individual under a defined benefit provision depend on the benefits being provided under another defined benefit provision, subsection 8300(11) of the Regulations state that the individual will not be considered to be terminated from either provision until he is terminated from both. As a result, no PARs will be reported until the member terminates from both provisions.

Once PARs are to be reported, a PAR is to be determined under each provision. When doing this calculation, any benefits provided or amounts paid to the individual under one of the provisions are also considered to be a benefit or an amount paid from the other provision. This means that specified distributions from one provision are also deemed to be specified distributions from the other provision. As a result, when plans are designed in this manner, there must be some sharing of information between the two employers. In this regard, subsection 8406(4) will require the other employer to provide this information once a written request is made.

It is worth noting that we do have discretion to approve an alternate method of determining a PAR. If the application of the rules produces a PAR lower than that which would have been reported had there only been one provision, you can write to us.

Question 6 - Seamless Pension Plans

If a single plan is submitted that contains both an RPP and a SERP, will RPD register the RPP portion if the province is asked to register the combined plan?

Answer 6

One of the key features of recent RPP/SERP plans that we have received requires the provincial authority to register a plan that is different than the plan we register. They are being asked to register the combined document while we are asked to register only the RPP component.

We will not register this arrangement as subparagraph 147.1(2)(a)(iii) of the Income Tax Act states that "...the Minister shall not register a pension plan unless...where the plan is required to be registered under the Pension Benefits Standards Act, 1985 or a similar law of a province, application for such registration has been made"

For purposes of subsection 147.1(2), reference to "the plan" can only mean a plan that can meet the registration rules as set out in the Income Tax Act. This is supported by the fact that "the plan" must comply with prescribed conditions.

It is our position that, in these cases, an application for registration of "the plan" with the province was not made. The plan being submitted to the province for registration would not meet our prescribed conditions for registration and is therefore a different "plan" than what we are being asked to register. For this reason, we are of the opinion that the condition in subparagraph 147.1(2)(a)(iii) is not met under this proposal.

In support of this position, it is worth looking at how the ITA deals with the fact that "the plan" must be registered under both the ITA and provincial law. The ITA makes certain concessions that will allow benefits or funding in excess of what the ITA would normally permit if the law of a province requires "the plan" to provide those benefits or funding.

The most obvious example of this are the additional benefits that may be provided if a member funds for more than half of their own benefits. Because these additional benefits can be over and above what could otherwise be provided under a registered pension plan, the ITA imposes a member contribution cap that will limit the likelihood of an individual funding more than half their benefits and therefore limiting the chances that they will receive additional benefits from the plan.

It only makes sense that the plan being submitted to the province must be the same plan with the same provisions as the plan we are registering under the ITA. If this were not the case, the effect of the member contribution cap could be diminished.

Question 7 - Quebec's Bill 102

How is RPD responding to Quebec's Bill 102? It is our understanding that the maximum temporary pension of 40% of YMPE is not subject to paragraphs 8503(2)(b) or (l) of the Regulations. Will subsections 8504(5) and 8509(7) apply to the Bill 102 bridge? Will there be legislated change to the ITA to accommodate Bill 102?

Answer 7

Quebec's Bill 102 amended The Supplemental Pension Plans Act (SPPA) in order to provide two new types of benefits.

Section 99.1 allows for the payment of a temporary pension, or bridge benefit, in an amount up to 40% of the YMPE. This payment can replace all or a portion of Lifetime Retirement Benefits (LRBs) and will be done on an actuarially equivalent basis.

As this payment could exceed the amount permitted by the ITA, Finance is proposing amendments to the Regulations. Until the Regulations are amended, the RPD will not require amendments to comply with paragraphs 8503(2)(b) or (l) if it is clear that the benefit is subject to the SPPA and it is being paid in accordance with the limits and requirements of that Act.

It is also worth noting that because this benefit is paid on an actuarial equivalent basis in lieu of LRBs, paragraph 8504(11)(b) of the Regulations will exempt this payment from subsection 8504(5).

Section 69.1 allows a member to receive an early benefit during phased-in retirement to compensate for a reduction in remuneration. This benefit is paid in a lump sum at the request of the member.

As these amounts are not paid on a periodic basis, it has been determined that this early benefit is not a retirement benefit as defined under subsection 8500(1) of the Regulations but rather, a partial commutation under paragraph 8503(2)(m). As Quebec's legislation requires the assumption that the member's benefit will commence at NRA, neither the written word or the intent of paragraph 8503(3)(b) is violated and as a result, the Act does not need any amendments to accommodate such a payment.

Question 8 - Flex Plans

a) If contributions are made to a flex plan and the flex element is later refused by the province for registration, can those member contributions be returned or would this violate condition number 3 of the Flex Plan Newsletter?

Answer 8a

If contributions are being returned under these circumstances, we can confirm that the OACs can be refunded in accordance with subparagraph 8502(d)(iii).

We will require a plan amendment removing the flex element from it's inception and a letter from the province indicating their refusal to register the flex component of the plan.

b) Is there anything else new with Flex Plans?

Answer 8b

We are currently working on two revisions to the Flex Plan Newsletter:

Question 12 - Demutualization

How will the impact of Demutualization on registered pension plans be addressed?

Will there be communication on the issue, relative to the Registered Plans Division's mandate?

Answer 12

Some insurance companies are currently in the process of demutualization as a result of changes to the Federal Insurance Companies Act and a similar piece of legislation in Quebec.

Demutualization is the process of converting a mutual company to a share company. Where a mutual company is owned by its voting policyholders, a share company is owned by its shareholders. Through the process of Demutualization, eligible policyholders will receive shares in the company, or cash, in exchange for the value of their ownership rights in the company. A number of these eligible policyholders are employers who hold group annuity contracts, an insurance product which is often used to provide retirement benefits under the terms of a registered pension plan.

Demutualization may impact on several issues affecting registered pension plans including:

The list may go on...

The main issues for Registered Plans Division seem to relate to the entitlement to Demutualization payments between employers and members (or annuitants) of registered pension plans and the impact on funding, actuarial surplus and its ownership. Some questions may require an in-depth analysis of the plan text and trust agreement.

The Division will publish information on this subject as soon as it becomes available, either through the Newsletter approach or in combination with the 'Commonly asked Questions and Answers' portion of our Internet Website. Please contact us if you have any specific questions concerning Demutualization and its impact on registered plans.

Question 15 - Maximum 2% Accrual Rate

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

Answer 15

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.

Question 16 - Proportionality Newsletter Issues

Concerns have been raised over the application of the proportionality condition of Newsletter 99-1. We will clarify for you the application of the Newsletter and our revised administrative position for the following issues:

a) Retroactively of the new rules

Answer 16a

We will provide relief to situations where the plan terms were submitted to us before

March 31, 1999 and provide equal benefits for pre-1990 and post 1989 service in order to exempt them from having to meet the present value test of the Newsletter 99-1.

We will also provide relief to situations where plan terms were submitted before May 15, 1998 but have not yet been accepted for registration and the plan cannot be amended to meet the prescribed conditions for registration without being considered a new submission, subject to the proportionality condition of 99-1.

b) Funding of lifetime retirement benefits

Answer 16b

Lifetime retirement benefits that are accepted may be funded without additional restrictions as provided through an acceptable funding media (8502 (g) of the ITA). If the plan is a Designated Plan it would also be subject to the special rules for Designated Plans under 8515.

c) Authority for imposing the conditions

Answer 16c

The authority for imposing the conditions is found under 8503(3)(e), which states that pre-1991 benefits must be acceptable to the Minister. Regulation 8503(3)(e) also expresses the additional condition concerning connected persons and clarifies what is clearly unacceptable. Newsletter 99-1 clarifies situations that are acceptable to the Minister and is by no means exhaustive.

d) Past service only plans

Answer 16d

Other than the changes stated above, plans that provide for pre-1990 pension benefits must meet the requirements of the Newsletter 99-1 (the proportionality Newsletter). The proportionality condition in the Newsletter generally requires that the value of the pre-1990 LRBs does not exceed the value of post-1989 LRBs accrued on a current-service basis. The condition generally does not apply to certain larger plans or plans that are not primarily for the benefit of key employees if we have waived the application of the condition. Past service only plans that do not provide for pre-1990 service would be acceptable. We will accept a terminally funded plan that provides post-1989 benefits only. A terminally funded plan that provides for pre -1990 benefits will have to meet the requirements of the Newsletter.

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