Newsletter 21-1, Additional Conditions Applicable to Individual Pension Plans and Designated Plans
March 15, 2021
In this newsletter, we outline conditions that we are applying to individual pension plans (IPPs), designated plans, and similar registered pension plans (RPPs) under the authority of subsection 147.1(5) of the Income Tax Act. The conditions are in addition to those the Act and the Income Tax Regulations impose for a pension plan to qualify for registration under the Act.
These conditions concern plan designs that use a money purchase provision to avoid certain conditions under the Act and Regulations that limit employer contributions to a defined benefit provision of an IPP or designated plan.
Meaning of designated plan and IPP
A designated plan is defined in subsection 8515(1) of the Regulations. In general, an RPP with a defined benefit provision is a designated plan throughout a calendar year if “specified individuals” have more than 50% of the total defined benefit pension credits for the year.
A specified individual is an individual who is connected to a participating employer or who earns more than 2½ times the year’s maximum pensionable earnings (YMPE) for the year from participating employers. The YMPE for 2021 is $61,600.
The designated plan definition also includes a plan that was a designated plan in the previous calendar year unless a waiver has been granted.
An individual pension plan (IPP) is defined in subsection 8300(1) of the Regulations. In general, an RPP that has a defined benefit provision is an IPP if the plan has fewer than four members and at least one of the members is related to an employer participating in the RPP. An RPP is also an IPP if it is a designated plan and it is reasonable to conclude that the rights of one or more members to receive benefits under the plan exist primarily to avoid being categorized as an IPP.
Condition 1 - Excess surplus
Paragraph 147.2(2)(d) of the Act contains a limit (the surplus limit) on actuarial surplus in a defined benefit provision of an RPP, above which the employer cannot make further contributions. This effectively requires the employer to take a contribution holiday and use the excess surplus to cover their current service costs. Some employers who sponsor IPPs and designated plans with excess surplus try to avoid this restriction by amending the plan to suspend defined benefit accruals for members and add a money purchase provision to which the employer would then continue to make contributions to for the members.
The Canada Revenue Agency (CRA) considers this plan design to be a misuse of the RPP provisions of the Act because it allows for continued tax-deductible contributions while preserving or building up the surplus.
In the past, the CRA has imposed a condition under subsection 147.1(5), on a case-by-case basis, to prohibit employers and members from contributing to a money purchase provision of an IPP or to a designated plan if actuarial surplus under the defined benefit provision of the plan is more than the surplus limit. This prohibition on contributions for members of these plans also applies to any other money purchase RPP the employer (or related employer) participates in for the members’ benefit.
As a result of this condition, when an excess surplus exists under the defined benefit provision of a plan, any required contributions to the plan’s money purchase provision are permitted only if they are made from the surplus. Paragraph 8502(k) of the Regulations and subsection 147.3(4.1) of the Act allow this type of transfer. The terms of the plan as registered must permit the transfer. The amounts transferred and allocated to members’ money purchase accounts are subject to the pension adjustment limit in subsection 147.1(8) of the Act.
We are now imposing this condition on all designated plans and IPPs with effect from the date of this newsletter.
Condition 2 - Designated plan funding restrictions
Subsection 147.2(2) of the Act and section 8515 of the Regulations have conditions that limit the amount of contributions that an employer can make to a defined benefit provision of a designated plan. You can find information on the funding restrictions for these plans in Actuarial Bulletin No. 2.
We have seen an increase in the number of applications for registration of pension plans that cover a small number of members and that contain both a defined benefit and a money purchase provision. Under the terms of the plan, past service benefits are provided on a defined benefit basis while current service benefits are provided strictly on a money purchase basis. Members also have the option to convert their money purchase benefits into defined benefits at regular intervals, subject only to certification of the associated past-service pension adjustment, with the employer covering any additional past service costs.
The composition of the membership is such that the plans would be designated plans if the current service benefits were provided on a defined benefit basis. However, since these plans are designed to limit the provision of defined benefits to past service benefits, these plans fall outside of the designated plan definition. As a result, the funding restrictions for a designated plan do not apply.
With this plan design, we have found that the funding assumptions used by the plan actuary generate much higher defined benefit contributions than would otherwise be permitted if the plan was subject to the funding restrictions for a designated plan. We have also found that members typically choose to convert their money purchase benefits into defined benefits so the plan essentially operates as a defined benefit RPP.
The CRA considers this plan design to be contrary to the intent of the RPP provisions of the Act and Regulations. By circumventing the funding restrictions for a designated plan, the design allows for much higher tax-deductible contributions than intended for a defined benefit RPP that is primarily for the benefit of high income earners or connected persons.
We impose the following condition under subsection 147.1(5) of the Act:
An RPP is deemed to be a designated plan throughout a calendar year for the purposes of the conditions in subsection 147.2(2) of the Act and section 8515 of the Regulations, when the plan:
- provides past service benefits under a defined benefit provision in the year or a previous year for members who are specified individuals (within the meaning of subsection 8515(4) of the Regulations)
- would be a designated plan throughout the year if the references in paragraphs 8515(1)(a) and (b) of the Regulations to “a defined benefit provision of the plan” were read as references to “a defined benefit or money purchase provision of the plan”
Because of subsection 8515(2) of the Regulations, such a plan will continue to be deemed to be a designated plan in subsequent calendar years unless waived by the Minister.
This condition applies to member and employer contributions made pursuant to an actuary’s recommendation contained in an actuarial valuation report that is filed with us after the date of this newsletter.
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 newsletter. Send comments by email to RPD.LPRA2@cra-arc.gc.ca.
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