Proposed 8517(3) Amendment – Underfunded Pension Plan Transfer Limit Comfort Letter

Measure for Members of Underfunded Registered Pension Plans (RPP).

The Department of Finance issued a comfort letter dated August 23, 2013 proposing to increase the transfer limit under the Income Tax Regulations, retroactive to January 1, 2013, for defined benefit RPP members whose pension entitlements have been permanently reduced due to plan underfunding.

The following questions and answers are provided to help plan members and plan administrators understand this proposed change and how CRA will administer it.



1. What is the proposed change?

The Regulations prescribe a limit on amounts that may be transferred tax-free from a defined benefit provision of an RPP to a registered retirement savings plan (RRSP). The Department of Finance will propose an amendment to the transfer limit calculation so that the amount will be based on a member's unreduced pension entitlement, if certain conditions are met at the time of the transfer. As committed to in the Registered Plans Directorate’s Compliance Bulletin 8, the following is to provide guidance in the case of transfers made from underfunded defined benefit RPPs.

2. Why change the transfer limit?

When an RPP is underfunded, the promised benefit entitlements under the RPP are sometimes reduced due to the inability of the participating employer to fund the promised benefits. When affected plan members choose to commute the value of their reduced pension entitlements and transfer the amount received to an RRSP, the transfer limit is generally prorated based on the reduced amount received. The effect of the prorated transfer limit is that plan members who opt for transfers may lose some of the tax-sheltering ability that would otherwise have been available if the plan was fully funded.

3. What is the current status of this change?

A comfort letter was issued by the Department of Finance on August 23, 2013 proposing this new measure for transfers that occur after 2012. It is anticipated that draft legislation relating to the new measure will be prepared by the Department of Finance and will be issued for public consultation. CRA will commence administering this change on the basis of the comfort letter prior to the date the legislation is amended.

4. What are the conditions that must be met to take advantage of the proposed change?

The following conditions must be met in order to take advantage of the proposed change:

  • the benefits promised under the RPP have been reduced due to plan underfunding;
  • where the plan is an RPP other than an "individual pension plan" (IPP, as defined in subsection 8300(1) of the Regulations), a permanent benefit reduction is approved pursuant to the applicable pension benefits standards legislation;
  • where the plan is an IPP, the transfer of the commuted value of the member's benefit entitlements is the last payment made from the IPP; and
  • the use of this special rule for a particular pension plan is approved in writing by the Minister of National Revenue.

In order to obtain CRA’s written approval to apply this special rule, a plan’s wind-up actuarial valuation report (in the case of an IPP) should be provided to the CRA at the time of the request.

5. What will be the result of this change?

  • Where the commuted value of a member's reduced annual pension is less than or equal to the transfer limit that would have applied to the unreduced pension amount, the member will be entitled to a tax-free transfer of that commuted value; and
  • Where the commuted value of the reduced annual pension exceeds the transfer limit that would have applied to the unreduced pension, the excess portion of the commuted value above that limit will be required to be paid to the member and included in his or her income.

6. Will relief be provided to plan members who transferred a reduced commuted value from the RPP to an RRSP, and a portion of the commuted value was paid to the member in cash?

Relief will be provided to plan members where the conditions in question 4 are met and a reduced commuted value was transferred from an RPP in 2013, and an amount in excess of the pro-rated prescribed amount was paid in cash.

The use of this special rule is approved on an administrative basis for any particular plan where the plan is an IPP and the transfer of the commuted value of the member's benefit entitlement is the last payment made from the IPP. The use of this special rule is also approved on an administrative basis where the plan is an RPP and the benefits payable have been permanently reduced and the reduction is approved by the regulator of the applicable pension benefits standards legislation.

Affected members who received taxable lump-sum payments during the above-mentioned period that were based upon the prorated transfer limit will be permitted to make an additional RRSP contribution in the manner described below, by applying the revised transfer limit. The taxable lump-sum payment to a plan member in 2013 must be reported on a T4A slip and reported on the member’s 2013 T1 return. This income inclusion may be offset by a deduction for an additional RRSP contribution.

To generate the additional RRSP room needed to deduct the RRSP contribution, the plan’s administrator should issue a T10 slip for the affected member reporting a pension adjustment reversal (PAR) on an administrative basis equal to the lesser of:

  • the difference between the revised transfer limit and the original transfer limit; and
  • the amount of the taxable cash payment.

For clarity, the PAR mechanism is being used by the CRA to provide this additional RRSP room for administrative reasons only and it is not a PAR in the usual sense. That is, the amount of additional RRSP contribution room is not associated with any calculation related to the amount by which the pension adjustments reported for a member may have exceeded the member’s termination benefits.

Plan administrators who issue a T10 on an administrative basis will be required to inform the Registered Plans Directorate of the CRA that they have made use of this administrative relief.

Example 1:

An IPP was wound up and a final distribution of the plan’s assets took place on January 15, 2013.

  • The member is 63 years old at the time of transfer
  • LRB = $59,300
  • Commuted value of RB = $830,000
  • Plan assets disbursed = $747,000
  • Funded ratio = 90%
  • Original 8517 prorated = $59,300 x 12.2 x .9 = $651,114
  • Comfort letter revised 8517 = $59,300 x 12.2 = $723,460
  • Distribution on January 15, 2013 = $651,114 transfer to RRSP and $95,886 taxable cash payment

In this scenario, the plan administrator can issue a PAR equal to the lesser of:

  • $723,460 – $651,114 = $72,346; and
  • Cash payment of $95,886

The amount of PAR which may be reported is $72,346, allowing a $72,346 deductible RRSP contribution for 2013, leaving a net income inclusion of $95,886 - $72,346 = $23,540. $23,540 is the amount by which the disbursal of plan assets ($747,000) exceeds the revised 8517 limit ($723,460).

Example 2:

Same scenario as example 1, but the plan’s funded ratio is 50%.

  • The member is 63 years old at the time of transfer
  • LRB = $59,300
  • Commuted value of RB = $830,000
  • Plan assets disbursed = $415,000
  • Original 8517 prorated = $59,300 x 12.2 x .5 = $361,730
  • Comfort letter revised 8517 = $59,300 x 12.2 = $723,460
  • Distribution on January 15, 2013 = $361,730 transfer to RRSP and $53,270 taxable cash payment

In this scenario, the plan administrator can issue a PAR equal to the lesser of:

  • $723,460 – $361,730 = $361,730; and
  • Cash payment of $53,720

The PAR will therefore be $53,270, allowing a $53,270 deductible RRSP contribution for 2013 which may be used to offset the income inclusion for the original cash payment. The entire disbursal of plan assets ($415,000) is within the revised transfer limit ($723,460).

7. My pension plan is currently underfunded. As a result, my pension plan provided me with a reduced commuted value which I transferred to my RRSP. Under provincial pension benefits standards legislation, my pension plan is required to pay me the balance of my commuted value, plus interest, within five years after the date of the initial transfer. Do I qualify for the relief measures noted above?

No. The preceding relief measure only applies where the conditions in question 4 are met. Relief is only provided to broad based plans where the permanent benefit reduction is approved pursuant to the applicable pension benefits standards legislation.

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