RPP Consultation Session - Questions from the Industry December 6, 2001
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Questions and Answers
Question 2 - Employer flex contributions
What is the CRA's position on employer funding of ancillary benefits elected by plan members? Can flexible pension plans that provide for such employer funding be registered?
Although Newsletter 96-3 was primarily intended to allow plan members to contribute to enhancing their own optional ancillary benefits under the plan, neither the CRA nor the Department of Finance objects to the concept of employer contributions for flexible ancillary benefits. The challenge has been to ensure that employer flexible contributions and allocation of plan surplus fit defined benefit rules. We are working on additional conditions under which employer contributions for flexible ancillary benefits would be allowed, and we hope to publish them before the end of March 2003.
Regarding the registration of flexible pension plans that provide for employer flexible contributions, the flexible pension plan rules outlined in Newsletter 96-3 were imposed under the authority of subsection 147.1(5) of the Income Tax Act. These rules currently provide no opportunity for employer flexible contributions because optional ancillary benefits can only be provided "as a consequence of the member having made optional contributions under the plan." This means that we currently cannot register plans that provide for any contributions other than "optional contributions" as defined in Newsletter 96-3.
Question 3 - Elimination of excess surplus after valuation
Suppose an actuary is in the process of preparing a triennial valuation at December 31, 2000, that showed an excess surplus leading to a mandatory contribution holiday. Suppose also that bad investment performance since the start of the year has caused a decline in assets so that, if the valuation were performed today, there would be no excess surplus.
The CIA standards on pension plan valuations would allow the actuary, before finalizing a valuation, to classify the stock market decline as a "Type 2 subsequent event" which must be disclosed and may lead to adjusted results if they are in accordance with applicable legislation. Would the CRA accept the valuation if the actuary adjusted the assets in a reasonable way to allow for some or all of the subsequent asset decline and thus eliminate all or part of the excess surplus? If so, do you have examples of what would be acceptable in advance?
No, we would not accept an adjustment in the asset value (e.g., market value) at the valuation date to reflect a subsequent event. If the asset valuation method at December 31, 2000, is different from that used in the previous valuation, the recommendation for contributions will only be accepted if the conditions in subsection 147.2(2) of the Income Tax Act and generally accepted actuarial practice are satisfied. However, we will accept a revised recommendation effective after the date of occurrence of the "Type 2 subsequent event" reflecting the decline in asset value.
We invite you to write to us regarding other situations.
Question 6 - New provincial requirements for parental leave
Is there a conflict between section 48 of Ontario's Employment Standards Act (ESA) and the Income Tax Act (ITA) in relation to periods of parenting and prescribed compensation?
Although it is not our normal role to review employment standards legislation, we read section 48 of the ESA as stating that an employee is entitled to a leave of absence without pay following the birth of a child and this leave may begin no later than 52 weeks after the child is born. In addition to this, subsection 51(1) of the ESA requires that pension coverage continue throughout this period.
Based on the prescribed compensation rules set out in Regulation 8507 of the Income Tax Regulations, an individual can generally accrue pension benefits in respect of five years of leave of absence and another three years of periods of parenting. As defined in paragraph 8507(3)(b) of the Income Tax Regulations, a period of parenting ends 12 months after the birth or adoption of a child.
If an individual has already had compensation prescribed for five years of leave (other than periods of parenting) and decides to delay the start of his or her period of parenting for six months as permitted under section 48 of the ESA, the individual would only be able to prescribe compensation for the six remaining months in the period of parenting.
Section 48 of the ESA is permissive and would allow the individual to begin the period of parenting in the above scenario early enough to have compensation prescribed for the full period of parenting. However, if the employee chooses to delay the start of the period of parenting, it would appear that subsection 51(1) of the ESA would require that pension benefits continue to accrue whereas the prescribed compensation rules of the Income Tax Regulations would not allow these benefits to be provided from the registered pension plan. We have drawn this situation to the attention of the Department of Finance. At this time, we are not aware of any amendments to the prescribed compensation rules being considered.
Question 7 - Periods of layoff in excess of five years
Is there a conflict between section 56 of Ontario's ESA and the ITA in relation to periods of temporary layoff and prescribed compensation?
The question seems to imply that the ESA requires, in certain circumstances, that benefits must accrue and employer contributions be made during periods of temporary layoff. It is believed that this may be in conflict with the ITA in situations where the individual has exhausted his or her five years' worth of prescribed compensation.
Although it is not our normal role to review employment standards legislation, we do not read subsections 56(1) and 56(2) to require that contributions be made during these periods of layoff.
Subsection 56(1) defines what will constitute a termination. Paragraph 56(1)(c) states that employment will be terminated if the employer lays the employee off for a period longer than a period of temporary layoff.
Subsection 56(2) defines what a period of "temporary lay-off" is. According to paragraph 56(2)(b)(ii), if the employer contributes to an RPP during the period, that period will qualify as a period of temporary layoff.
Based on our reading of the ESA, if an employer does contribute to an RPP during such a period, that period will qualify as a period of temporary layoff and not be considered a termination. We do not see where in the ESA an employer is required to make contributions to an RPP during such periods and therefore do not see a conflict between the ESA and the ITA.
Question 8 - Seamless pension plans
Can you please provide an update on your review of the SERP issue?
To access RPP surplus to pay for supplemental benefits in excess of the Income Tax Act (ITA) maximums, a plan design has been proposed that would see a combined RCA and RPP document being submitted to the province for registration, whereas the CRA would be asked to register only the RPP component of the plan.
The Registered Plans Directorate is still refusing to register such an arrangement. Based on our interpretation of subsection 147.1(2) of the ITA, we require that the same plan be registered both federally and provincially. As the province would be registering a more extensive and therefore different document than the CRA, we will not accept the RPP portion of the larger plan.
Our main concerns surrounding these types of arrangements are:
- We do not want benefits in excess of the ITA limits to be funded through an RPP.
- If RCA benefits are in fact being funded, the appropriate RCA tax treatment should be applied.
- As the RCA will be regulated provincially as part of the combined plan document, we want to ensure that any resulting additional benefits, contributions, or distributions are not provided from, contributed to, or distributed from the RPP.
As there is significant interest in the industry in pursuing these arrangements, we are re-examining our current position in consultation with the Department of Justice. If it is determined that subsection 147.1(2) can be read to permit the registration of these arrangements, we will consider imposing a series of conditions under the authority of subsection 147.1(5) of the ITA to address the concerns mentioned above.
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