Newsletter no. 92-9, Downsizing Programs
August 18, 1992
This replaces Canada Revenue Agency, Taxation's industry-wide letter dated October 22, 1991, and establishes our policy on the eligibility criteria for an approved downsizing program under section 8505 of the Income Tax Regulations. This policy applies to programs established on or after the date of this Newsletter. The effective date of this policy does not affect programs the Department has already approved.
Certain eligibility criteria must be satisfied before the Minister of National Revenue will approve enhanced benefits under a downsizing program. The following information will help you determine if the criteria for a downsizing program have been met:
The program must be associated with a specific downsizing event that results in a "net reduction" of the employer's entire workforce, including part-time employees, in a "locality" of at least the greater of:
- 50 employees, and
- 10% of employees.
"Net reduction" means the number of employees terminated minus the number of employees hired, if any.
"Locality" generally means a region that may include a metropolitan area, a municipality that is not part of a metropolitan area, a remote work site, or an area that may be as large as a province or the country. The localities do not need to be adjacent to each other.
The definition of locality is not merely geographic, but may include distinct operations of an organization such as plants, factories, and divisions which can operate independently of the rest of the organization.
If the program is voluntary, the number of employees who choose to participate may not be sufficient to meet the net reduction test. In this case, the employer must provide information stating how this test will be met.
The downsizing must be broadly applicable to employees in the qualifying locality. No more than 35% of the "terminable employees" in the locality can be in the "top earnings quartile" for the locality. If the downsizing is targeted to a specific age group, this test may be modified so that it applies only to the top earnings quartile for that age group.
"Terminable employee" means an employee whose employment could be terminated because of downsizing. This would include employees involved in both a voluntary or involuntary program.
"Top earnings quartile" means the 25% of all employees in the locality with the highest remuneration.
A downsizing program must be non-discriminatory. Non- discriminatory means the "value of benefits" being taken into account for the terminable employees within a given age and service profile is not in favour of higher-paid employees or employees participating in a registered pension plan.
The "value of benefits" means additional pension plan benefits, provided either within the regular registered pension plan rules or as enhanced benefits available under section 8505 of the Regulations, and any cash termination payments, expressed as a percentage of the employee's remuneration.
For example, consider a registered pension plan with a 2% benefit rate. Under a proposed downsizing program, terminating employees who are between 55 and 64 years of age will be given additional benefits as though they had two more years of service. As the additional benefits are determined in the same way for each employee in the given age/service profile, the benefits are considered to be non-discriminatory.
To review a downsizing program, the Department needs:
- a demonstration that the above-noted criteria will be met, and
- the proposed amendments to the plan limiting the enhanced benefits.
Approval in principle will be given subsequent to the review.
Formal approval will be given after the following is received:
- form T920, Application for Acceptance of an Amendment to a Registered Pension Plan,
- an amendment to the plan allowing the employer to establish a downsizing program that has been approved by the Minister,
- an amendment in the form of an appendix, if possible, describing the benefits being provided, and
- a signed resolution from the employer approving these documents.
If the downsizing program does not meet the eligibility requirements described above, the pension plan can be amended to increase benefits to the extent possible under other sections of the Regulations. For example, benefits can be increased by amending the benefit formula, providing an indexing feature, or adding bridging benefits.
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