Newsletter no. 92-6, Pre-Reform Disability and Bridging Benefits

August 18, 1992

The Income Tax Regulations require that all pre-reform benefits provided under a defined benefit provision of a registered pension plan be acceptable to the Minister of National Revenue. This permits the Department to continue to apply a number of restrictions in Information Circular 72-13R8 that have not been included in the Regulations or that differ from the restrictions in the Regulations.

This is the second newsletter that explains how to apply the new pension legislation to benefits provided for pre-reform service under a defined benefit provision of a registered pension plan. It also explains which administrative rules outlined in the Circular continue to apply.

This newsletter refers to "pre-reform" and "post-reform" service and benefits. Pre-reform service means pre-1991 service for all plans except grandfathered plans.

A grandfathered plan is a plan which contains a defined benefit provision and which was registered on March 27, 1988 or for which an application for registration was made before March 28, 1988. Pre-reform service for grandfathered plans means all service prior to the earlier of January 1, 1992 and the effective date of the amendment made to the plan to comply with the requirements of the Income Tax Regulations. All service after those dates is post-reform service. Pre-reform benefits are benefits that accrue in respect of a period of pre-reform service. All other benefits are post-reform benefits.

This newsletter does not apply to benefits provided to connected persons as defined in subsection 8500(3) of the Regulations, or to partners and proprietors and their spouses unless specifically stated otherwise. The rules for these individuals are outlined in Pension Reform Update 91-1.

We wish to remind you that the Regulations cannot be applied to pre-reform benefits in pre-October 1968 and 1980 shareholder plans if doing so will increase the benefits or the costs under the plans.

Disability benefits

Effective January 1, 1989, the provisions of the Income Tax Regulations affecting disability benefits, particularly paragraphs 8503(3)(b), prohibiting the continued accrual of benefits after a member's pension has begun to be paid, and 8503(3)(d), providing increased benefits to disabled members, apply to all defined benefit pension plans regardless of their registration date. Specifically, the above rules apply to benefits promised under a grandfathered plan to a member who became disabled before 1992, even though the benefits were previously acceptable for registration purposes. Paragraph 8503(3)(b), does not, however, apply to pre-1992 accruals under a grandfathered plan.

As announced on February 14, 1992, the Department of Finance intends to exempt from the above disability requirements benefits provided under grandfathered plans to members who became disabled before 1992. Instead, a new requirement will be added requiring that these benefits be acceptable to the Minister. This requirement is intended to ensure that improvements to these benefits are limited.

Pension plans must comply with the Regulations' existing requirements for disability benefits until the proposed amendments are in force.

If a member who is totally and permanently disabled, as defined in subsection 8500(1) of the Regulations, when the pension begins, recovers and returns to work, subsection 8503(9) allows benefits to be credited for the period of disability even though a pension was paid during the period.

Under all plans, the provisions of subsection 8503(9) that allow benefits to be credited for a period of disability may be applied to the total period of disability, including any pre-reform portion, if the plan's terms allow for it.

Bridging benefits

Bridging benefits allowed under the Circular could be based on the maximum benefits available under the Canada Pension Plan/Quebec Pension Plan. On the other hand, paragraph 8503(2)(b) of the Regulations requires that the bridging benefit not exceed the amount, or a reasonable estimate, of the public pension benefits the particular individual would be entitled to if he or she were 65 years of age.

Pre-reform bridging benefits which exceed the above requirement of the Regulations may not be provided unless exempted by Ministerial waiver under paragraph 8509(4)(b). Sponsors of grandfathered plans who would like to have their excess pre-reform bridging benefits exempted from the condition of paragraph 8503(2)(b) must send a written request to the Registered Plans Division for a waiver. Unless a waiver is granted, the plan will have to be amended effective January 1, 1992, to specify that the bridging benefit does not exceed the member's public pension benefits for all years of service.

The request for a waiver should be sent to:

Registered Plans Directorate, Canada Revenue Agency, 875 Heron Rd, Ottawa ON  K1A 0L5

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