Newsletter no. 94-2, Technical Questions and Answers
November 10, 1994
This update provides the Registered Plans Division's answers to specific technical questions that pension benefit consultants have asked. It is the first of a series that we hope to publish periodically to help pension consultants, pension plan administrators and employers who sponsor pension plans understand the provisions of the Income Tax Act and Regulations.
If you have a situation that is generally similar to, but not exactly the same as one presented in this update, please contact us to obtain information about your particular situation. Our address and telephone numbers are at the end of this update.
References to "the Act" mean the Income Tax Act, and references to "the Regulations" mean the Income Tax Regulations. The acronym RPP means registered pension plan.
Question 1 -Specified individuals and a designated RPP
An RPP member's remuneration from an employer participating in an RPP may be greater than the earnings on which the pension benefits are based (pensionable earnings). For example, a member's remuneration may include overtime or bonuses, but according to the RPP, pensionable earnings exclude overtime and bonuses. Do you have to use actual remuneration to determine if the member is a specified individual under subsection 8515(4) of the Regulations, or can you use pensionable earnings?
The reason for this question is that if you can use the lesser amount (pensionable earnings) to determine if a member is a specified individual, an RPP may not be a designated plan. If it is not a designated plan, then it is not subject to the special funding rules of Section 8515 of the Regulations.
Paragraph 8515(4)(b) of the Regulations refers to "the aggregate of all amounts each of which is the remuneration of the individual for the year from an employer who participates in the plan, or from an employer who does not deal at arm's length with a participating employer." We interpret this to mean you have to use actual remuneration from the participating employer (or a non-arm's-length employer) to determine if the member is a specified individual.
Also note that remuneration includes any amount that must be included in income, or that would have to be included in income if the individual were resident in Canada, under sections 5 and 6 of the Act.
Question 2 - Money purchase provision - bridging benefit
Subject to the condition of paragraph 8506(1)(b) of the Regulations, an RPP can allow a member to forego a proportionate amount of lifetime retirement benefits to receive a bridging benefit under a money purchase provision. Paragraph 8506(1)(b), however, does not limit the amount of bridging benefit that the RPP can pay. To what extent can a member forego lifetime retirement benefits to receive a bridging benefit? In other words, what amount of lifetime retirement benefits must remain payable when the member ceases to receive the bridging benefit?
So long as the RPP's main purpose is to provide lifetime retirement benefits as required by paragraph 8502(a) of the Regulations, it is possible for any one member to exchange all of his or her lifetime retirement benefits under a money purchase provision for a bridging benefit.
Question 3 - Defined benefit provision - additional bridging benefit dependent on basic bridging benefit
Does an RPP have to provide for "basic" bridging benefits to be able to provide "additional" bridging benefits in accordance with paragraph 8503(2)(l) of the Regulations?
To provide additional bridging benefits in accordance with paragraph 8503(2)(l), an RPP has to provide or permit basic bridging benefits that are in accordance with paragraph 8503(2)(b) of the Regulations. This is because paragraph 8503(2)(l) of the Regulations permits the payment of bridging benefits only to the extent that they are in
excess of bridging benefits permissible under paragraph 8503(2)(b).
Question 4 - Defined Benefit provision - bridging benefits under a general options clause
Does a defined benefit RPP explicitly have to provide bridging benefits? Or, can the RPP provide bridging benefits implicitly under a general options clause that allows members to select any form of pension acceptable for RPPs under the Act and Regulations?
A defined benefit RPP can provide basic bridging benefits or both basic bridging benefits and additional bridging benefits implicitly under a general options clause whereby the member foregoes an actuarial equivalent value of lifetime retirement benefits under the RPP. [Basic bridging benefits and additional bridging benefits are benefits that are permissible under paragraphs 8503(2)(b) and (l) of the Regulations respectively.]
Note that paragraph 8503(2)(b) requires that payment of a basic bridging benefit begin no earlier than the start of payment of lifetime retirement benefits. This means that, unlike a money purchase provision, the member cannot forego all of the lifetime retirement benefits to receive a bridging benefit or benefits. Rather, the RPP must start, or must have started, to pay some amount of lifetime retirement benefits, however nominal, under the provision when payment of a bridging benefit starts.
Question 5 - Excess contributions to a Deferred Profit Sharing Plan (DPSP)
There are cases when an employer is required to make a contribution to the DPSP for an employee at a time when the employer can only estimate the employee's earnings for the year. If the actual earnings fall short of the estimated earnings (for example, because of an unexpected period of reduced pay or temporary absence in the year), the contributions may exceed the limits of Section 147(5.1) of the Act. The result is that registration of the DPSP is revocable. What action will the Department take, or what action will the Department require the employer to take, when the employer has made excess contributions in these circumstances?
We have discussed this issue with officials of the Department of Finance who will consider whether or not the law should be amended. In the meantime, employers who encounter this problem should write to us for assistance. Depending on the reason for the excessive contributions, we may administratively allow payment of the excess
amount out of the DPSP in cash and, under the authority of Section 8310 of the Regulations, allow appropriate reduction of the employee's pension adjustment.
Question 6 - Acceptable use of the commuted value of a pension that exceeds the prescribed amount
Subsection 147.3(4) of the Act limits the amount, representing the value of benefits foregone under a defined benefit provision of an RPP, that a member can transfer on a tax-free basis to an RRSP, RRIF, or a money purchase provision. The limit is a prescribed amount set out in Section 8517 of the Regulations. When the commuted value of benefits exceeds the prescribed amount, can the excess amount:
- be used to provide a bridging benefit;
- be paid in instalments over a period of years; or
- be used as indexation on a notional pension, that is, a pension that the member would have received had he or she not commuted the retirement benefits?
Alternatively, can payment of the excess amount, plus interest, be deferred to a later date?
Any portion of the commuted value of benefits that a member cannot transfer because it exceeds the prescribed amount has to be paid to the member. The excess amount cannot be reconfigured to provide additional benefits, be paid periodically in one form or another, or be paid at a later date as described in the question. This is because, to be acceptable as a permissible benefit under paragraph 8503(2)(m) of the Regulations, commutation requires payment out of the provision of a single amount, in lieu of defined benefits.
However, if retirement benefits under an RPP can commence before age 65, it may be possible to avoid creating an excess amount, or to minimize the excess amount that is created for the member. To explain, the factors that determine the prescribed amount depend on the value of a pension that commences at age 65. This means that if the member commutes only the post-age 64 benefits or the post-age 64 benefits and some of the pre-age 65 benefits, the value of the commuted benefits may be within the prescribed amount and, therefore, be transferable. Subsection 8503(7) of the Regulations enables the RPP to pay the non- commuted benefits according to the RPP's terms that usually apply for pre-65 retirement. (The non-commuted benefits could also be provided by the purchase of an annuity. However, the duration and amount of the annuity payments cannot be more than the duration and amount of the payments that the RPP would have paid.)
For example, an RPP may allow the member to commute lifetime retirement benefits to the extent that the value of the commuted benefits does not exceed the prescribed amount say the post-age 64 benefits and to leave the remaining pre-age 65 lifetime retirement benefits to be paid out of the RPP.
It is also possible to avoid creating an excess amount, or to minimize the excess amount that is created for the member when the RPP provides for a bridging benefit. To elaborate, subsection 8503(7) enables the RPP to allow the member to:
- fully commute the lifetime retirement benefits, leaving the bridging benefit to be paid out of the RPP;
- fully commute the lifetime retirement benefits, partially commute the bridging benefit, and leave the remaining bridging benefit to be paid out of the RPP; or
- partially commute the lifetime retirement benefits again say the post-age 64 benefits fully commute the bridging benefit, if any, and leave the remaining pre-age 65 lifetime retirement benefits to be paid out of the RPP.
Note that if the value of commuted benefits exceeds the prescribed amount, even when the member commuted only post- age 64 benefits, the RPP must pay the excess to the member in cash. Also, commuting only a portion of the post-age 64 benefits will not result in the member being able to transfer a greater amount. This is because the prescribed amount is not based on benefits that are not commuted, but is based on benefits that are commuted. Therefore, the prescribed amount is greater when the member has commuted all, rather than a portion, of the post-age 64 benefits.
Question 7 - Effect on employer contributions of surplus on conversion of defined benefit provision
When a defined benefit provision is converted to a money purchase provision and, as of the date of conversion, there is a surplus that exceeds twice the employer's current service cost, can the employer make contributions to the replacement money purchase provision?
Regulation 8506(2)(c) does not permit employer contributions to a money purchase provision when a surplus exists under the provision. This means any amount of surplus, including a surplus of less than twice the employer's current service cost.
Question 8 - Rehabilitative part-time employment and benefit accrual under a defined benefit provision
While away on disability, a member's pension benefits accrue based on earnings that the member received immediately prior to becoming disabled. When the employee returns to work, but only part-time while continuing to recuperate, can benefits accrue on the same basis that applied while the member was away on disability?
Subject to paragraph 8503(4)(f) of the Regulations, on return to part-time work while a member remains partially impaired, benefits can continue to accrue based on earnings the member received immediately prior to becoming disabled.
Paragraph 8503(4)(f) requires that the administrator be satisfied, based on a written report by a medical doctor, that the member is unable to perform the duties of employment in which the member was engaged prior to becoming disabled, or can perform such duties only to a lesser degree.
Report a problem or mistake on this page
- Date modified: