RPP Consultation Session - Questions from the Industry November 21, 2002
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Questions and Answers
- Paying indexing from an RPP after annuity purchase
- Including stock options in compensation for pension plan purposes
- Self-annuitized money purchase plans
- Alberta and British Columbia's pre-retirement death benefit
- Employer contributions in a designated plan
- Industrial aggregate wage index
- Recognition of pre-reform service previously commuted
- Seamless pension plans
Question 2 - Paying indexing from a DB plan after annuity purchase
Does the Income Tax Act (ITA) permit a defined benefit pension plan to provide lifetime retirement benefits (LRBs) by means of an annuity purchased from an insurance company and yet continue to pay to index those benefits from the registered pension plan (RPP)?
When an individual acquires an annuity in satisfaction of the individual's entitlement to benefits under a registered pension plan, the individual then becomes entitled to rights under the annuity contract. The Act allows pension plans to index a member's LRBs up to the change in the federal Consumer Price Index (CPI) in the years following pension commencement.
When a member's LRBs are provided by purchasing an annuity, paragraph 147.4(1)(g) of the Act specifies that these amounts are not considered to be paid from the registered pension plan for purposes of the registration rules. Therefore, there would be no LRBs remaining in the plan following the annuity purchase, so there would be nothing left to index. Furthermore, there is no provision in the Act for an RPP to provide for an individual's benefits to be indexed while they are paid under an annuity contract.
Furthermore, the flat rate 4% indexing provision permitted by paragraph 8503(2)(a) of the Income Tax Regulations (ITR) was specifically introduced by the Department of Finance to simplify the purchase of annuities for those individuals not restricted by the CPI maximum indexing provision as stipulated by paragraph 8504(1)(b) of the ITR.
Question 3 - Including stock options in compensation for pension plan purposes
Does the Income Tax Act (ITA) permit a registered pension plan (RPP) to include stock options in compensation for pension purposes?
We recognize that providing stock options is now a fairly common form of employee compensation. "Compensation" is defined under subsection 147.1(1) of the ITA and includes "the total of all amounts each of which is (a) an amount in respect of (i) the individual's employment with the employer, or (ii) an office in respect of which the individual is remunerated by the employer, that is required (or would be required but for paragraph 81(1)(a) as it applies with respect to the Indian Act) by section 5 or 6 to be included in computing the individual's income for the year..."
Paragraph 6(1)(a) of the ITA includes "benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office of employment" in income. Based on an opinion we have received from the Income Tax Rulings Directorate, a stock option benefit to which subsection 7(1) of the ITA applies would be required by section 6 of the Act to be included in income. Therefore, it would be included in the computation of compensation, as defined in subsection 147.1(1) of the ITA, for purposes of an RPP.
In light of this recent opinion, we are taking a look at how this may affect RPPs in general. If you have any specific concerns or thoughts on the issue, please send them to the Directorate in writing.
Question 4 - Self-annuitized money purchase plans
Paragraph 8506(2)(g) of the Income Tax Regulations (ITR) requires that retirement benefits payable under a money purchase provision of a registered pension plan (RPP) be provided either by means of annuities purchased from a licensed issuer of annuities or under an arrangement acceptable to the Minister. The technical notes to this paragraph state that it is expected that the Minister will accept a self-insured arrangement for paying retirement benefits where the arrangement is, in substance, similar to the purchase of annuities from an issuer of annuities.
The CCRA was to determine the conditions that would be imposed for any money purchase provision to pay for the plan's pensions.
Where does this matter stand?
Our position regarding self-insured money purchase provisions remains the same. Such arrangements are not acceptable, except where they were established prior to March 27, 1988.
One of our main concerns regarding self-insured arrangements is that the Regulations do not permit additional funding for deficits resulting from experience losses. Therefore, we are not in a position to approve any additional funding of these arrangements. We are not aware of any instances in which RPD has approved deficit funding under a money purchase provision.
Currently, we are compiling information for the Department of Finance to assist in their review of self-insured arrangements. We are attempting to determine the number of plans of this kind that are presently registered. In addition, we are maintaining a record of the plans that are requesting additional funding because of the current market downturn. Once compiled, this information will be sent to the Department of Finance for their consideration.
Question 6 - Alberta and British Columbia's pre-retirement death benefit
Alberta's Employment Pension Plans Act and British Columbia's Pension Benefits Standards Act require that pre-retirement death benefits be payable to the beneficiary of a plan member's spouse in the event that both the plan member and the plan member's spouse are deceased. The Income Tax Act and Regulations do not address such payments; however, RPD has recently provided confirmation that the provision for plan members employed in these provinces is acceptable provided the payment to the spouse's beneficiary is a lump sum payment. Can this benefit be extended to plan members employed in other provinces where those other jurisdictions do not require this benefit in their legislation?
As noted, the Regulations do not explicitly address the payment of a death benefit to the beneficiary of a plan member's spouse. However, we will accept a plan provision providing for such a payment provided the payment is made in a lump sum.
We can confirm that such a benefit can be extended to plan members employed in other provinces where the jurisdiction does not require this benefit in their legislation.
Question 8 - Employer contributions in a designated plan
An employer contribution that is required to fund a solvency deficiency when a plan is a designated plan is not an eligible contribution under subsection 8516(8) of the Income Tax Regulations (ITR). It seems that this potential conflict between the ITR and provincial legislation of Quebec has been resolved but has it been resolved in other provinces? Does the condition in ITR paragraph 8516(8)(d) prohibit employer contributions from being made to a designated plan so that the plan is funded on a going-concern basis (including any deficit)?
A contribution made by an employer to a registered pension plan (RPP) as part of a defined benefit provision is an eligible contribution if it complies with prescribed conditions under Income Tax Act (ITA) subsection 147.2(2) and ITR section 8515 for a designated plan, or if it is a prescribed contribution under ITR section 8516. Therefore, an employer contribution required by pension benefits legislation to fund a designated plan on a going-concern basis and made in accordance with ITA subsection 147.2(2) and ITR section 8515 is an eligible contribution. However, additional employer contributions required by pension benefits legislation (for example, to fund a solvency deficiency) are not eligible contributions under ITR subsection 8516(8) when the plan is a designated plan.
This potential conflict between the ITA and pension benefits legislation was raised before the enactment of ITR subsections 8516(7) and 8516(8). At the time, the position was taken that the contributions prescribed by these regulations would not apply to designated plans. Since then, pension benefits legislation in several jurisdictions was amended to either not legislate designated plans with connected persons or/and to specify that an employer required to make contributions under a designated plan shall not be required to make a payment to the pension fund (or to an insurance company, as applicable) that is not an eligible contribution under the ITA. Therefore, this potential conflict was often avoided before it would occur. For example, conflicts appear to have been resolved by Alberta regulation 48(22), British Columbia regulation 2(2)(c), Ontario regulation 909 subsection 4(2.1) and Quebec section 39.1 of the Supplemental Pension Plans Act.
Whether particular provinces still require funding in excess of what is permitted by the ITA limits should be pursued with the provinces. However, the Minister of National Revenue may revoke the registration of any pension plan that permits or provides for contributions in excess of the maximum limits established under the ITA.
Paragraph 8503(4)(c) of the Regulations requires an RPP with a defined benefit provision, which is not exempted by virtue of subsection 8509(10.1), to include a stipulation permitting contributions under the provision to be returned where the return is necessary to avoid revocation of the plan's registration. The regulations provide that the return of contributions is subject to the approval of the authority administering the pension benefit legislation. Whether or not a plan is required to contain this stipulation, the plan administrator will have to deal with the non-compliance if registration is to be maintained. Note that several pension benefits acts were amended to resolve the conflict between their requirements and those of the Income Tax Act and Regulations respecting return of contributions by providing pension plans with exemptions from specific sections of the pension benefits acts, subject to the satisfaction of identified conditions.
Question 9 - Industrial aggregate wage index
Since Statistics Canada discontinued the Standard Industrial Classification of 1980 (SIC) Industrial Aggregate effective December 31, 2000, how should one calculate the increase in average wage measure from 1984 to 2002?
When calculating the increase in average wage measure from 1984 to 2002, one should first calculate the increase using the SIC Industrial Aggregate up to and including 2001, and then calculate the increase using the North American Industrial Classification System (NAICS) Industrial Aggregate from 2001 onwards.
This method ensures consistency as (1.) previously determined Years Maximum Pensionable Earnings (YMPEs) are unlikely to be re-determined and (2.) the trend for the annual averages at the Canada level for the industrial aggregate from 1991 to 2000 on NAICS System has remained similar to the one previously published on the SIC80 System.
Question 10 - Recognition of pre-reform service previously commuted
When recognizing pre-reform service that was previously commuted, would it be acceptable for the plan sponsor to ask the member to transfer from an RRSP an amount equal to the benefit received, plus accrued interest, in order to fund the benefit?
Pension Reform Update 92-12 requires that, if a member has previously commuted their pre-reform benefits and wishes to buy back that service, the plan must state that the amount necessary to fund the pre-reform benefit must be transferred directly from a registered retirement savings plan (RRSP), a deferred profit sharing plan (DPSP), or another registered pension plan (RPP).
Paragraph 8503(3)(e) of the Income Tax Regulations (ITR) requires that all pre-reform benefits be acceptable to the Minister. Paragraph 8502(j) of the ITR also requires that when assumptions are used to determine amounts under a registered pension plan, the assumptions used must be reasonable and acceptable to the Minister of National Revenue.
Consequently, the amount transferred back into the plan must relate to the cost of the benefit being restored and not linked to the cost of the benefit previously paid out.
Question 13 - Seamless pension plans
Please provide an update on the CCRA's review of using Registered Pension Plan (RPP) surplus to satisfy supplemental (excess over Income Tax Act (ITA) limits) pension liabilities.
This question is an update of a question asked at our previous consultation session on December 6, 2001.
At the time of our response last year, the Registered Plans Directorate was refusing to register such an arrangement. Based on our interpretation of subsection 147.1(2) of the ITA, we felt that there was a requirement 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 CCRA, we would not accept the RPP portion of the larger plan.
Since the industry showed significant interest in pursuing these arrangements, we re-examined our position in consultation with the Department of Justice. We have determined that we may be able to register plans that do not contain the same documents as those registered provincially. As mentioned in our previous response to this issue, we are now drafting conditions under subsection 147.1(5) of the ITA to address our concerns with these arrangements. We are drafting these conditions in consultation with the Department of Finance and the Department of Justice, and we will seek feedback from the industry before finalizing the conditions.
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