Newsletter no. 91-1, Transitional Registration Rules for Pension Plans
March 28, 1991
Rules for pension plans
- Definitions
- Connected Persons
- Significant shareholders
- Partners and proprietors
- Designated plans
- Miscellaneous
Part A - Introduction
In December 1989, the government tabled Bill C-52 to amend the Income Tax Act to implement a revised system of tax assistance for retirement saving. In conjunction with the tabling of the legislation, the Minister of Finance released proposed regulations (dated December 11, 1989) which set out the rules governing the calculation of pension adjustments (PAs) and past service pension adjustments (PSPAs) and which codified the pension plan registration rules currently set out in the Canada Revenue Agency's Information Circular 72-13R8 ("the Circular").
On February 19, 1990, Bill C-52 was referred to the House of Commons Standing Committee on Finance. The committee proposed a number of second reading amendments to the legislation (set out in the Committee's Seventh Report) and recommended several changes to the December 11, 1989, regulations (set out in the Committee's Eighth Report). On June 27, 1990, Bill C-52 (as amended) received royal assent. The Department of Finance is currently amending the December 11, 1989, proposed regulations to reflect the changes recommended by the Finance Committee. It is anticipated that the revised regulations will be available early this year.
This newsletter will deal primarily with the proposed regulations and existing pension plan registration rules for significant shareholders and persons connected with an employer. Unless otherwise stated, all references in this newsletter are to provisions of the December 11, 1989, proposed regulations.
Part B - Transitional registration rules
For pension plans
1. Definitions
The following are definitions of expressions that are used throughout this newsletter. The section of the regulations in which the definition is found is indicated in the definition.
(a) Existing Plan
An "existing plan", Subsection 8500(1), is a pension plan for which application for registration was made before March 28, 1988.
(b) Grandfathered Plan
A "Grandfathered plan", Subsection 8500(1), is an existing plan which contains a defined benefit provision. A plan established to provide defined benefits in lieu of defined benefits provided under a grandfathered plan is also a grandfathered plan.
(c) New Plan
A "new plan" is a pension plan for which application for registration was made after March 27, 1988.
(d) Pre-reform Service
"Pre-reform service" refers to pre-1991 service for all plans except grandfathered plans. Pre-reform service for grandfathered plans refers to pre-1992 service. All service after those dates is post-reform service.
(e) Connected Person
The proposed regulations, in Subsection 8500(3), introduce the expression "person connected with an employer" (referred to, in this newsletter, as a "connected person"). Generally, a person is considered to be a connected person if the person
- owns (or is deemed to own) at least 10 per cent of the issued shares of any class of the capital stock of the employer (or of a corporation related to the employer);
- does not deal at arm's length with the employer; or
- is considered, by paragraph (d) of the definition of "specified shareholder" in Subsection 248(1) of the Income Tax Act, to be a specified shareholder of the employer.
A connected person is similar to a " significant shareholder" as defined in paragraph 8(d) of the Circular, with the exception that the "connected person" has a broader meaning than "significant shareholder". In particular, a connected person includes a person who owns 10 per cent or more of any class of the shares of the employer while a significant shareholder is a person who owns 10 per cent or more of the voting shares of the employer. Furthermore, a person who does not deal at arm's length with the employer is considered to be a connected person but is not considered, on that basis alone, to be a significant shareholder.
NOTE: Subsection 8503(20) contains a special anti-avoidance rule. Under certain circumstances, an individual who would not otherwise be a connected person is deemed, for limited purposes, to be a connected person.
2. Connected Persons
Special provisions are applicable where a member of a defined benefit registered pension plan (RPP) is a connected person participating in the plan. This section discusses these special provisions.
Under the Circular, such persons have generally been prohibited from participating in a defined benefit RPP if the plan would be primarily for their benefit. After 1990 benefits may accrue on a defined benefit basis to a connected person even if the plan is primarily for the benefit of such persons. The proposed regulations place the following restrictions on the accrual of benefits by a connected persons;
- Benefits relating to pre-1991 service (pre-1992 service for grandfathered plans) must be acceptable to the Minister of National Revenue ("the Minister") (paragraphs 8503(3)(e), 8505(1)(d) and 8505(3)).
- The Minister must be notified when benefits relating to pre-1991 service become provided to connected persons after 1988 (paragraphs 8503(3)(e) and 8505(1)(d)). Please refer to Section 3 (below) for additional information.
- Benefits provided for post-1990 service are subject to a special updated career-average maximum pension rule (paragraph 8503(4)(a)).
- More stringent minimum service requirements apply for the payment of unreduced bridging benefits (paragraph 8503(2)(b)).
- Disability and pre-retirement survivor benefits may not be calculated on a projected basis (paragraphs 8503(2)(e) and (3)(d)).
- Benefits payable on account of early retirement due to total and permanent disability may not be calculated on an unreduced basis (paragraph 8503(3)(c)).
- Benefits may not accrue in respect of a period of disability or temporary absence (paragraph 8503(3)(a)).
- "Compensation" may not be augmented for a period of reduced services (Section 8510). Reference can be made to the explanatory notes dated December 11, 1989 for more detailed information.
- Benefits that might otherwise be exempt form PSPA certification may be subject to certification (Section 8306).
In addition to the above-noted restrictions on defined benefit accruals, the following rules apply to a plan in which connected persons are participating:
- The plan is prohibited from investing in shares of the capital stock of, an interest in, or a debt of, a person connected with an employer who participates in the plan (paragraph 8512(1)(b)).
- The funding of the plan will be restricted where the plan is primarily for the benefit of connected persons and/or highly paid persons (Section 8513). Please refer to Section 5 (below) for further information.
NOTE: Under Subsection 8506(4), a number of the restrictions relating to connected persons do not apply where the plan in which the connected person is participating is a "multi-employer plan" as defined in Subsection 8500(1) of the proposed regulations.
3. Significant Shareholders - Pre-Reform Service
The regulations require that benefits relating to pre-1991 service (pre-1992 service for grandfathered plans) must be acceptable to the Minister. For this purpose the Minister will apply the provisions of the Circular as modified below.
The Circular defines a significant shareholder in paragraph 8(d) and sets out special rules which apply when a significant shareholder is participating in an RPP. This section discusses these special rules and the way in which they are modified by the new legislation and proposed regulations.
In this section, pre-1991 service (pre-1992 service for grandfathered plans) is referred to as "pre-reform service". All other service is considered post-reform service.
(a) Defined Benefit Accruals
Paragraph 8(d) of the Circular provides that a defined benefit plan must not be "primarily for the benefit of significant shareholders and related persons". A plan is considered to be primarily for the benefit of such persons if the present value of benefits purchased for, or accrued to, such persons is more than 50 per cent of the present value of the total benefits purchased for, or accrued to, active members under all registered pension plans of the employer. This rule is referred to in this newsletter as the "50-50 rule".
The 50-50 rule contains to apply to the accrual of defined benefits relating to pre-reform service. There are, however, a number of changes in the way in which the rule operates.
As announced in the Pension Reform Update 90-1, effective June 27, 1990 the definition of significant shareholder is replaced by the term connected person.
Paragraph 8(d) of the Circular is therefore modified so that the 50/50 rule is based on benefits provided to "connected persons" (as outlined in Subsection 8500(3) of the proposed regulations) rather than "significant shareholders".
While this change applies to all plans submitted for registration on or after June 27, 1990, it applies to plans submitted for registration before June 27, 1990 only if:
- benefits in respect of a period of pre-reform service for a person who is or has been a connected person become provided on a past service basis on or after June 27, 1990; or
- benefits in respect of pre-reform service of a connected person are upgraded on or after June 27, 1990.
Paragraph 8(d) is also modified so that, in determining present value for purposes of the 50-50 rule, benefits provided for post-reform service are ignored as is any remuneration received by the member after December 31, 1990 (after December 31, 1991, for grandfathered plans). In other words, the 50-50 rule looks only at the present value benefits provided for pre-reform service based on pre-reform earnings. This change applies to all plans as of June 27, 1990.
(b) Determination of Present Value for 50-50 Rule Need more information?
Where defined benefits are provided through a trusteed arrangement, a qualified actuary must establish the present value, as at the time of determination, of benefits promised to active members. The actuary must certify to the Minister that the determination of the present value is accurate, and was done according to generally accepted actuarial principles. Where defined benefits are provided through an insured arrangement, the present value must be based on the cost at the time of determination of purchasing all benefits promised to active members.
Where defined benefits are provided under a union sponsored multi-employer pension plan, it may be administratively impractical to establish the present value of benefits. If this is the case, the total contributions to the plan on behalf of active members including associated earnings may be used for purposes of the 50-50 rule. However, it may not be possible to determine the total contributions to the plan for active members. In this case, the employer's total contributions to the plan for active and non-active members, may be included for purposes of the 50-50 rule but the amount may not include associated earnings. Where contributions, rather than the present value of benefits, are used for purposes of the 50-50 rule, the employer must certify to the Minister that the plan in question is a union sponsored multi-employer pension plan.
(c) Waiver of 50-50 rule
Prior to June 27, 1990 paragraph 8(d) of the Circular permitted the 50-50 rule to be waived under certain circumstances. Requests to waive the rule were considered where it could be determined that those plan members who were significant shareholders and related persons did not control the employer.
As of June 27, 1990, a waiver will only be given under paragraph 8(d) of the Circular if the plan is a multi-employer plan in which the benefits provided are subject to a collective bargaining or a similar agreement and the connected persons who are participating in the plan are obliged to do so as a condition of union membership and union membership is a condition of employment.
(d) Pre-October 1968 and 1980 Shareholder Plans
Pension plans established prior to October 1968 or during 1980 were not subject to the 50-50 rule. Paragraph 8(d) of the Circular provides that such plans continue to be exempt from the 50-50 rule. Those plans which were registered prior to October 1968 or during 1980 and which would fail to satisfy the 50-50 rule, are referred to in this section as pre-October 1968 shareholder plans and 1980 shareholder plans.
Paragraph 8(d) of the Circular states that pre-October 1968 and 1980 shareholder plans may not be amended to increase the benefits provided to significant shareholders or related persons, except as provided for in the modifications to the December 29, 1980, "Supplementary Rules Regarding Shareholder Pension Plans" which are also referenced in paragraph 8(d) of the Circular. The Circular also prohibits any amendment to a 1980 shareholder plan which would add participating employers to the plan or permit additional significant shareholders or related persons to become members of the plan.
Benefits in respect of pre-1992 service are grandfathered in these plans provided that such plans are not amended prior to 1992.
For these plans the new registration requirements apply for benefits provided for post-1991 service.
(e) Paragraph 8(e)(vii) - Restrictions on Eligible Service
Paragraph 8(e)(vii) of the Circular places restrictions on periods of service that may be included as eligible service of a controlling shareholder under an RPP.
These restrictions continue to apply to pre-reform service and paragraph 8(e)(vii) is changed to apply to connected persons rather than controlling shareholders. This change applies to all plans submitted for registration on or after June 27, 1990. It also applies to plans submitted for registration before June 27, 1990 if:
- benefits in respect of a period of pre-reform service for a person who is or has been a connected person become provided on a past service basis on or after June 27, 1990; or
- benefits in respect of pre-reform service of a connected person are upgraded on or after June 27, 1990.
(f) Paragraph 11(a)(iii) - Money Purchase Contribution Limits
Paragraph 11(a)(iii) of the Circular places limits on the contributions that may be made to a money purchase RPP that is primarily for the benefit of significant shareholders.
Basically, these limits continue to apply until the end of 1990. However, in the case of plans submitted for registration on or after June 27, 1990, the limits apply to a money purchase RPP that is primarily for the benefit of connected persons rather than plans which are primarily for the benefit of significant shareholders.
NOTE: Contributions made in January and February 1991 will be treated as 1990 contributions if made in respect of 1990.
Since money purchase contributions made after 1990 will be subject to the restrictions set out in Section 147.2 of the Income Tax Act and the proposed regulations, the limits set out in paragraph 11(a)(iii) of the Circular will no longer apply.
(g) Paragraphs 22(b) and 26(d) - Remuneration and 20(1)(s) Approvals
Paragraph 22(b) of the Circular places restrictions on the projection of remuneration for significant shareholders for the purposes of a special payment approval under paragraph 20(1)(s) of the Income Tax Act.
Paragraph 26(d) of the Circular requires that a statement of significant shareholder remuneration be submitted to the Canada Revenue Agency (CRA) in support of a request for a special payment approval. As of June 27, 1990, these paragraphs are changed for all plans to refer to connected persons rather than significant shareholders.
4. Partners and proprietors
This section discusses the effect of Sections 147.1 to 147.3 of the Income Tax Act and the proposed regulations on defined benefits provided to partners and proprietors under an RPP relating to periods of past service.
Since a partner or proprietor is not an employee, such a person cannot accrue benefits on a current service basis under an RPP. However, defined benefits may be provided on a past service basis to such a person provided certain conditions are met. These conditions, which are set out in paragraph 8(b)(ii) of the Circular, are as follows:
- The plan must not be primarily for the benefit of partners or the proprietor and related persons;
- The benefits must relate to periods of service during which the partner or proprietor had been an employee of an employer who is participating in the plan;
- During the period of past service, the partner or proprietor must not have been a member of any pension plan in which their employer participated; and
- Benefits must be based on actual remuneration received during the period of past service.
Paragraph 8(b)(iii) of the Circular places restrictions on the spouse of a partner or proprietor becoming a member of an RPP.
The conditions of paragraphs 8(b)(ii) and (iii) continue to apply but only for benefits provided for pre-1991 service (pre-1992 service, for grandfathered plans).
Benefits provided under post-reform service will be regulated by the Income Tax Act.
For the purposes of paragraph 8(b)(ii), an individual is considered to have been a member of a pension plan if the individual is or has been, entitled to benefits from that plan relating to that period, even if those benefits have subsequently been commuted. An individual is considered to have been entitled to benefits from a pension plan relating to a period if:
- benefits accrued under the plan on a defined benefit basis; or
- money purchase contributions were made to the plan for any period either by the employer or by the individual (while as an employee, partner or proprietor, either on a required or voluntary basis, and for either current or past service), except where the contributions were past service AVCs made before October 9, 1986 which the individual has been unable to deduct and has withdrawn from the plan.
5. Designated Plans
Section 2 of this newsletter indicated that the funding of a defined benefit RPP will be restricted where the plan is primarily for the benefit of connected persons and/or highly paid persons (Section 8513). Such plans are referred to in this section as "designated plans". Later this year the Minister of Finance will be providing further information on how to determine whether a plan is a designated plan and the manner in which funding for such a plan is to be restricted.
Actuarial Valuations for designated plans submitted to the CRA, Taxation after December 31, 1990 must be based on the restrictions that will be announced by the Minister of Finance.
6. Miscellaneous
(a) Connected Persons - RRSP Deduction Room
One of the amendments made by Parliament to Bill C-52 was to the definition of the RRSP deduction limit in paragraph 146(1)(g.1) of the Income Tax Act. Bill C-52 originally provided that RRSP room in a given year (after 1990) was 18 per cent of earned income from the previous year (to a dollar maximum) less any pension adjustments for that previous year. The amendment provides that prescribed amounts are to be deducted from the 18 per cent of earned income (to a dollar maximum).
In the year a connected person joins an RPP an amount will be prescribed. The amount will be equal to the RRSP dollar limit for the year and would thereby ensure that no additional RRSP room becomes available to the individual in the year. The amendment was intended to prevent connected persons from temporarily doubling up on their entitlement to tax assistance.
A prescribed form, to be used by employers, to report instances where a connected person becomes a member of an RPP after 1990 will be provided by the Department. This form is to be filed within 60 days of the date the connected person becomes a plan member and will result in that individual's RRSP deduction limit being reduced by the RRSP dollar limit for the year in question. The forms will be available in 1991 at the district taxation offices.
(b) Registered Plans Division
The Registered Pension and Deferred Income Plans Division of Revenue Canada, Taxation was renamed the Registered Plans Division in 1990.
(c) Interpretation Bulletins on Pension Reform
Existing or new interpretation bulletins will reflect the pension reform legislation for the 1991 and subsequent taxation years. However, pension reform changes for years before 1991 will be covered in the Pension and RRSP Guide.
The following Interpretation Bulletins will be revised:
- IT-124R5 - Contributions to Registered Retirement Savings Plans
- IT-167R5 - Registered Pension Funds or Plans- Employee's Contributions
- IT-307R2 - Registered Retirement Savings Plan for Taxpayer's Spouse
- IT-363R - Deferred Profit Sharing Plans - Deductibility of Contributions and Taxation of Amounts Received or Allocated
- IT-415R - Deregistration of Registration Retirement Savings Plans.
(d) Pension Reform Information
Additional information is available from the following sources.
Departmental Guides
- Employers Pension Adjustment Calculation Guide
- Pension and RRSP Guide
- Employers Guide to Source Deductions
Where to get help
Registered Plans Directorate
You can find more information at Savings and pension plan administration.
By telephone
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.
By mail and courier
Due to a building refit spanning multiple years, the Registered Plans Directorate’s mailing address has been temporarily changed. Please use the following address for all correspondence until further notice:
Registered Plans Directorate
Canada Revenue Agency
2215 Gladwin Cres
Ottawa ON K1B 4K9
We welcome feedback on this bulletin. Send comments by email to RPD.LPRA2@cra-arc.gc.ca.
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