Newsletter no. 91-5, SPECIAL RELEASE: Transitional Rules and Other Administrative Issues for Pension Plans  

November 26, 1991

Part A - Introduction

Part B - Transitional rules and other administrative issues for pension plans

1. Definitions
2. Impact of Bill C-52
3. Bridging benefits
4. Purchase of pre-1990 service
5. Maximum pension rule
6. Connected persons
7. Departmental review criteria
8. Forms

Part A - Introduction

On July 31, 1991 the Minister of Finance released the final details of the proposed regulations on the revised system of tax assistance for retirement savings.

The regulations incorporate recommendations made by the House of Commons Standing Committee on Finance, by pension plan sponsors, and by pension consultants. These changes were detailed in a press release issued by the Department of Finance on November 13, 1990, entitled "Revised regulations on tax assistance for retirement saving published.

In this newsletter, we outline some of the transitional rules that will be in effect until the proposed regulations are promulgated. We also describe other administrative issues that may be of interest.

We have used the references from the July 1991 draft regulations in this newsletter.

Part B - Transitional rules and other administrative issues for pension plans

1. Definitions

The following are definitions of expressions that are used in this newsletter. The section of the regulations in which the definition is found, is indicated at the end of each definition.

Connected person

The proposed regulations 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, directly or indirectly, 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 a specified shareholder of the employer by virtue of paragraph (d) of the definition "specified shareholder" in subsection 248(1) of the Income Tax Act (the Act). [8500(3)]

Defined benefit limit

For years before 1995, the defined benefit limit is $1,722.22. Starting in 1985, the defined benefit limit is 1/9 of the money purchase limit for the year. [8500(1)]

Designated plan

A registered pension plan that contains a defined benefit (DB) provision is generally a designated plan thorough a calendar year when:

• it is not maintained pursuant to a collective bargaining agreement; and
• the total of the pension credits of all specified under all defined benefit provisions of the plan for the year are more than 50% of the total of the pension credits of all individuals under the provisions of the plan for the year. [8515(1)]

(A specified individual is someone who is either connected with a participating employer at any time in the year, or receives earnings from a participating employer (including earnings from an employer who does not deal at arm's length wit a participating employer) that are more than 2.5 times the Year's Maximum Pensionable Earnings for the Year.)

Existing plan

An existing plan is generally a pension plan that was a registered pension plan on March 27, 1988, or for which application for registration was made before March 28, 1988. [8500(1)]

Grandfathered plan

A grandfathered plan is an existing plan that on March 27, 1988 contained 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. [8500(1)]

2. Impact of Bill C-52

Section 147.1 - Registration rules

Section 147.1 of the Act contains the rules that apply to the registration of a pension plan. The Department's administration of some of these rules is described below.

(a) Date of registration

Plans submitted for registration before 1992 may be registered retroactive to the effective date of the plan according to the current practices of the Registered Plans Division.

Starting January 1, 1992 the effective date of registration is either January 1 of the calendar year in which a complete application is made, or if the plan commences at a later date, that later date.

(b) Deemed registration

When a complete application for registration is received by us, the plan will be deemed to be a registered pension plan (except for transfers) from the effective date until the time a final determination is made about the application. [147.1(3)]

For more information about what documents make up a complete application, and where to send the documents, please see guide T4099, Registered Pension Plans or call 1-800-959-5525.

If the application is not complete, the plan is not deemed to be a registered pension plan. However, if the missing documents are submitted to us within 60 days of our initial request for the documents, we will consider the application complete at the time of the first mailing.

If the missing documents are not submitted within 60 days after our initial request, the plan administrator will have to resubmit the application. The plan will be deemed to be a registered pension plan from the date this complete application is received by us.

(c) Plan administrators

The legislation requires that all registered pension plans must have a plan administrator. The administrator has to inform the Registered Plans Division of their name and address within 30 days after becoming the administrator. [147.1(7)] (For more details about the definition and responsibilities of the plan administrator, please see the booklet called Registering Your Pension Plan.)

Please note that the deadline for filing this information has been extended to 60 days after the regulations are promulgated in the following situations:

• when the administrator was appointed after 1988 and before June 1, 1990; or
• where the administrator was the administrator on January 1, 1989.

Section 147.2 - Deductibility of employer contributions - DB provision

Valuation reports received after the date of this newsletter must contain a certification stating that the requirements described in subparagraphs 147.2(2)(a)(iii) and (iv) have been complied with. The certification must specifically include those subparagraphs.

In addition, if the plan is a designated plan, the actuary must certify that the valuation report has been prepared according to the designated plan rules in regulation 8515(5). This certification is required for compliance with subparagraph 147.2(2)(a)(v).

Where special payments have been approved under paragraph 20(1)(s) of the Act, and the contribution would have been deductible under that paragraph had it continued in force, employer contributions made in 1991 and 1992 according to the 20(1)(s) approval will qualify as eligible contributions for the purposes of subsection 147.2(1).[8516(3)]

(a) Coming-into-force dates designated plans

• Special coming-into-force provisions are provided in the regulations for designated plans. [8515(5)]
• For plans registered by the Minister before August 1, 1991, the designated plan restrictions in regulation 8515 apply to contributions made after 1991.
• For plans registered by the Minister after July 31, 1991, the designated plan restrictions in regulation 8515 apply to contributions made after 1990. [paragraph 9(8)(c)]

(b) Actuarial surplus

A certain amount of actuarial surplus may be disregarded when determining the amount of the eligible contribution which can be made and deducted by an employer. The amount of surplus which can be disregarded is the lesser of:

• 20% of the actuarial liabilities of the employer; and
• the greater of:
• two times the estimated current service contributions that would be needed to be made by the employer during the 12 months immediately following the effective date of the actuarial valuation if there were no surplus; and
• 10% of the actuarial liabilities of the employer. [147.2(2)]

Actuarial surplus which exceeds this amount is referred to as excess surplus. The excess surplus must be taken into account as plan assets when determining the requirement for employer contributions. [147.2(2)(d)]

A transitional rule permits excess surplus to be taken into account uniformly after 1990 and before 1995. Excess surplus which exists on the later of January 1, 1991 and the effective date of the actuarial valuation report may be taken into account as if it were employer contributions made uniformly throughout the period to December 31, 1994. [8516(2)]

Where the effective date of an actuarial valuation is before 1991, the excess surplus is reduced to the extent that employer and employee contributions made after the effective date of the actuarial valuation and before 1991 were less than the current service contribution requirements of the plan for that period. [8512(2)]

3. Bridging benefits - DB provision

Paragraph 8503(2)(b) describes the level of bridging benefits that a plan can provide. in addition to this paragraph, subsection 8504(5) now describes a further restriction on the amount of lifetime retirement benefits plus bridging benefits that may be paid before age 65. This restriction was limit the bridging benefits that may be paid to high income earners.

In the year in which the benefits start, a member's lifetime retirement benefits plus bridging benefits cannot exceed:

• the defined benefit limit for the year multiplied by the number of years of pensionable service under the provision,
  • plus
• 25% of the three-year average of the Year's Maximum Pensionable Earnings multiplied by the number of years of pensionable service under the provision (maximum 35) divided by 35.

In subsequent years, this amount can be indexed according to increases in the Consumer Price Index.

For a defined benefit plan that was a registered pension plan on June 7, 1990, or submitted for registration before June 8, 1990, this restriction only applies to retirement benefits provided

for periods after 1991, and the years of pensionable service in this calculation are years of pensionable service after 1991. [8509(7)]

4. Purchase of pre-1990 service - DB provision

The Eight Report of the House of Commons Standing Committee on Finance, recommended that the maximum amount of benefits that could be purchased for pre-1990 past service credited after 1989 be limited to $1,150 per year. Once the defined benefit limit is indexed after 1994, the limit for new years of pre-1990 past service would be 2/3 of the indexed defined benefit limit.

The $1,150 limit on the purchase of pre-1990 service applies only where the obligation to credit the service was entered into after June 7, 1990.

It does not apply if the member was restricted to the lower RRSP contribution deduction limit in the year being credited as a result of membership in a registered pension plan, or deferred profit sharing plan. It also does not apply if the year has previously been credited as past service in any RPP, as long as that crediting occurred before June 8 1990. [8504(7)]

All plans that already provide for the purchase of past service must be administered as if this restriction were in the plan. Amendments that are submitted to us of approval to provide for the purchase of past service, must incorporate this limit.

Actuarial valuation reports and certificates must apply the $1,150 limit when it applies. If the limit does not apply to any member, the actuary should include a statement to that effect.

In subsequent years, the pension relating to the purchase of pre-1990 service can be indexed according to increases in the Consumer Price Index.

5. Maximum pension rule

The legislation provides that benefits for pre-1991 service (pre-1992 service for grandfathered plans) must be acceptable to the Minister. This provision allows the Minister to continue to apply Information Circular 72-13R8 (the Circular) to those benefits. [8503(3)e), 8509(3)]

The maximum pension rule set out in paragraph 9(g) of the Circular will continue to apply, although the rule is modified once the regulations are promulgated . The $1,715 limit will be increased to $1,722.22 (indexed after 1994) and the 35-year pensionable service limit will be removed with respect to post-1989 pensionable service.

A plan can be amended effective as early as January 1, 1990 to provide for the increased maximum benefit of $1,722.22 for all years of service and to provide for the accrual of the 36^th and subsequent years of pensionable service. In such case the plan must be amended for all of the requirements of the legislation.

6. Connected persons

Section 6(a) of Pension Reform Update contained information about the requirements for filing a prescribed form within 60 days of the date a connected person joins an RPP after 1990. The form will also be required within 60 days of the date a connected person starts to accrue benefits under an RPP after 1990 following a period in which no benefits accrued. [8403]

Due to the delay in the promulgation of the regulations, the first filing of this prescribed form (Form T1007, Connected person Information Return) is now required within 60 days after promulgation of the regulations.

The effect of this form is that the connected person's RRSP deduction limit for the year in which they join an RPP after 1990, (or start to accrue benefits under an RPP after 1990 following a period in which no benefits accrued) may be reduced by a prescribed amount. The prescribed amount, for any year, will be equal to the lesser of:

• 18% of the connected person's 1990 earned income for RRSP purposes; and
• $11,500. [8308(2)]

The prescribed amount will be zero if the person's 1990 PA is more than zero, or if their RRSP deduction limit has ever been

reduced by a prescribed amount. Please see the Pension and RRSP Tax Guide for more information.

The T1007, Connected Person Information Return is now available. More detailed information concerning connected persons and the filing of this prescribed form will be included in the Employers' Pension Adjustment Calculation Guide for 1991.

7. Departmental review criteria

Effective from the date of this newsletter, submissions will be accepted and reviewed according to the following criteria.

• If the submission is sent to us before promulgation and is not designed to comply with the regulations, it will be reviewed according to the Circular and any additional transitional rules in force. The transitional rules include those rules described paragraph 1 of Part B in Pension Reform Update 89-1, and the modifications to paragraph 8(d) of the Circular which were described in section 3 of part B of pension Reform Update 91-1.
• If the submission is sent to us after July 31, 1991, and it is intended to comply with those regulations, it will be reviewed according to the regulations.
• All submissions sent to us after promulgation will be reviewed for compliance with the regulations.
• Money purchase provisions must be administered according to the regulations with effect from the date of promulgation.
• Defined benefit provisions in existing plans must be administered according to the regulations with effect from the later of January 1, 1992 and the date of promulgation. Defined benefit provisions in other plans must be administered according to the regulations with effect from the date of promulgation.

8. Forms

The references to the sections of the regulations that appear in the checklist on Forms T510, Application for registration and T920, Application for acceptance of an amendment are to the regulations that were release on December 11, 1989. The T510 and T920 are being amended to reflect the references in the July 31, 1991 regulations. For your convenience we have included an updated checklist.