Newsletter no. 95-5, Conversion of a Defined Benefit Provision to a Money Purchase Provision

October 24, 1995

This newsletter is to advise that you do not have to send a conversion valuation report to the Canada Revenue Agency (subject to our comments following the heading "Request for a conversion valuation report") on a partial or full replacement of a defined benefit provision of a registered pension plan with a money purchase provision of a registered pension plan.

In addition, we provide information on transferring surplus on plan conversion. We also provide some guidelines on the assumptions that are acceptable to us when computing the present value of benefits in connection with the conversion of defined pension benefits to a money purchase arrangement where there is no termination of plan membership.

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.

Request for a conversion valuation report

Section 8410 of the Regulations allows the Canada Revenue Agency to request, at any time, that a plan administrator file a report prepared by an actuary on the defined benefit provisions of a plan.

When a defined benefit provision is partially or fully replaced by a money purchase provision, we may ask the plan administrator to file a conversion valuation report prepared by an actuary. The information provided in the report will help us verify that the plan assets have been paid or transferred in accordance with the terms of the plan as registered, and with the Act and Regulations.

In our requests for a conversion report, we will set out a reasonable time limit for filing the report, and the information the report has to contain. The information we need is basically the same information that most provincial pension authorities require on a plan conversion. We will also require the prescribed amount for each member (calculated as set out in section 8517 of the Regulations) at the time the benefits were transferred to the replacement money purchase provision.

Transfer of surplus on conversion

When a defined benefit plan is replaced by a separate money purchase plan, all or a portion of an actuarial surplus can be transferred directly to the replacement money purchase plan in accordance with subsection 147.3(8) of the Act. Similarly, on conversion of an RPP, surplus can be transferred from the defined benefit provision to the replacement money purchase provision. By virtue of paragraph 8502(k) of the Regulations, such "transfers", and any other "transfers" within the same plan, are required to respect the limits in section 147.3 of the Act, as if the amounts were transferred from one plan to another.

In either case, the transferred surplus must be used to satisfy the employer's contribution obligations under the money purchase provision. In addition, the Canada Revenue Agency has to approve, in writing, the transfer of surplus.

You can request our approval as soon as practicable after the surplus has been transferred to the money purchase provision. We will also consider requests for approval that are made before the actual transfer date. For example, you could request our approval to transfer the surplus when you send in the amendment to provide for the money purchase provision. When you request our approval, please provide:

• the Canada Revenue Agency registration number of the transferee plan, if different from the transferor plan
• the amount of surplus transferred (if not available, the amount of surplus determined by the plan's actuary, e.g., the surplus identified in a conversion valuation report)
• the date the surplus was transferred (if not available, the anticipated transfer date)

Actuarial surplus may also be transferred from a defined benefit plan to a money purchase plan in accordance with subsection 147.3(4.1) of the Act, provided the surplus is credited to the members' money purchase accounts. We remind you that, except for subsection 147.3(8), you do not need our approval to transfer funds under any of the provisions of section 147.3 of the Act.

Acceptable assumptions

Paragraph 8502(j) of the Regulations requires that when you use assumptions to determine amounts under an RPP, the assumptions must be reasonable and acceptable to the Canada Revenue Agency.

The assumptions described below, if they are reasonable at the time they are used, are acceptable to the Canada Revenue Agency when computing the present value of benefits in connection with the conversion of defined pension benefits to a money purchase arrangement where there is no termination of plan membership. The acceptance of these assumptions applies to computations made on or after September 1, 1993.

The determination of whether an assumption or a set of assumptions is reasonable can only be made on the specific circumstances of each case.

A. We accept the assumptions set out in the Canadian Institute of Actuaries standards of practice that apply to the calculation of transfer values from RPPs (CIA standards). This acceptance applies only if the retirement age assumption:

• reflects that pension coverage and employment are continuing
• is indicative of the group's retirement experience which it is reasonable to consider would have occurred had the plan provisions not changed

Where the present value is to include a value related to future salary increases, we accept the use of any assumptions for the rate of increase in salaries that do not exceed the assumed rate of increase in the average wage determined in accordance with the CIA standards.

B. We accept other assumptions that produce present values not exceeding the present values produced using the assumptions referred to in A.

C. Where the assumptions referred to in A conflict with pension benefits legislation, we accept assumptions that are required to be used by reason of the federal Pension Benefits Standards Act, 1985 or a similar law of a province.

We recognize that, because the CIA standards do not apply to conversions, an actuary cannot state that the conversion values have been calculated in accordance with these standards. Once the CIA produces standards for conversions, we will re-examine this newsletter.

Accepting the use of other assumptions

If you want to use assumptions that are not specifically accepted in this newsletter, we recommend you write to get our acceptance. You should provide the actuarial reasoning to justify the use of your assumptions. For example, if you want to use a reasonable salary projection assumption that exceeds the assumed rate of increase in the average wage, we suggest you contact us. You should note, however, that what we accept in one case may not be acceptable for a similar case at another time.

If you wish to discuss the use of your assumptions before writing to us, you can contact the Pension Advice Section of the Office of the Superintendent of Financial Institutions (OSFI). We caution that the advice provided by telephone is not binding on the Canada Revenue Agency, and we recommend that after you call OSFI, you write to us to get our acceptance.

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.