Chapter 12 - 8504 – Maximum Benefits

 

12.1 8504(1) – Lifetime Retirement Benefits

Paragraph 8504(1)(a) of the Regulations has a maximum limit on LRBs which may be paid from a DB provision to a member in the year that the member starts receiving his pension. The maximum is the sum of two separate calculations:

  • Subparagraph 8504(1)(a)(i) of the Regulations requires a career average indexed earnings (indexed compensation) calculation for each year in which the member was connected to an employer who participated in the plan in the year.
  • Subparagraph 8504(1)(a)(ii) of the Regulations requires a best average earnings (highest average compensation) calculation for all other years. The highest average compensation is defined in subsection 8504(2).

The maximum under paragraph 8504(1)(a) of the Regulations applies to LRBs at the time of pension commencement payable under a single DB provision. Therefore, it does not apply to:

  • LRBs payable under a combination of provisions of the same plan or under a combination of plans; or
  • To any portion of the pension that will disappear as a result of the plan providing for a reduction in benefits once CPP, QPP or OAS pension benefits become payable. (The portion of the pension that disappears is a bridging benefit by definition, and therefore subject to restrictions on bridging benefits.)

Plan text
When connected persons are participating or have participated after 1990, the maximum clause must be general enough to encompass the connected person’s maximum or must specifically refer to the connected person’s restriction. Plans may incorporate the maximum formula or may refer to it as "the maximum LRB as stated in the Income Tax Act and Regulations" or by referring to section 8504 of the Regulations. We will not accept references to the requirements of the CRA, as the CRA is merely enforcing the requirements of the legislation as prepared by the Department of Finance. The maximum is based only on compensation from an employer “who participated under the provision…for the benefit of the member”. It cannot be based on compensation received from a prior employer who did not participate under the provision. Subsection 8504(2.1) does make an allowance for compensation received from a predecessor employer as defined under subsection 8500(1).

Cross references:
Participating Employer – 147.1(1)
Definition of Bridging Benefit – 8500(1)
Definition of Predecessor Employer – 8500(1)
Connected person – 8500(3)
Pre-1991 Benefits – 8503(3)(e)
Highest Average Compensation – 8504(2)
Retirement Benefits Before Age 65 – 8504(5)
Excluded Benefits – 8504(10)

12.1.1 8504(1)(a)(i) – Maximum for connected persons

The maximum in subparagraph 8504(1)(a)(i) of the Regulations only applies to benefits for a calendar year if:

  • the year is after 1990;
  • the member was connected to the employer at any time in the year; and
  • the employer participated in the plan in the year for the benefit of the member.

The limit imposed on LRBs by this regulation is the aggregate of benefits accrued for each applicable year. The benefits accrued for each applicable year are limited to the lessor of;

  • the DB limit for the year of pension commencement (prorated for partial years of service); and
  • 2% of indexed compensation for the particular year. A member’s indexed compensation for a year is the member’s compensation for the year, defined in subsection 147.1(1) of the Act, adjusted to reflect increases in the average wage to the year the pension starts.

The career average earnings maximum in subparagraph 8504(1)(a)(i) of the Regulations does not apply to benefits for service from a prior employer who did not participate in the year under the provision for the benefit of the member. The best average earnings maximum in subparagraph 8504(1)(a)(ii) would apply to benefits for service with the prior non-participating employer whether or not the member is connected with the prior non-participating employer or with the current participating employer. The highest average compensation maximum will be based on the member’s compensation from the current participating employer(s) and not on the compensation from the prior non-participating employer. Subsection 8504(2.1) does make an allowance for compensation received from a predecessor employer as defined under subsection 8500(1).

Plan text
For a plan in which connected persons, as defined in subsection 8500(3) of the Regulations, participate or have participated after 1990, the reference to the maximum pension payable must be general enough to include the career average (indexed compensation) restriction for connected persons. It is acceptable for the benefit formula for connected persons to be based on highest average compensation, however, the benefit must be capped by the career average restriction in subparagraph 8504(1)(a)(i).

MEPs
The maximum for connected persons does not apply where the plan is a MEP, including SMEPs. The LRBs payable to members who are connected persons under these plans would be limited only by the highest average compensation maximum contained in 8504(1)(a)(ii) of the Regulations. This rule is contained in paragraph 8510(5)(a).

Grandfathered plans
Grandfathered plans are not restricted by this clause until January 1, 1992. Only benefits accrued after 1991 are affected.

Where we have registered a pension plan after March 27, 1988, that provides benefits that do not comply with the conditions, any retirement benefits which have started to be paid before 1992 are not affected. However, the benefits must be acceptable to the Minister.

Pre-October 1968 and 1980 shareholder plans may add the higher dollar limit, only for service after 1991. Benefits for pre-1992 service must continue to be restricted by the old limits in IC72-13R8, Employees’ Pension Plans. This will have particular impact on the 1968 plans, which are restricted by the old $1,143 maximum.

Cross references:
Definition of Compensation – 147.1(1)
Definition of Predecessor Employer – 8500(1)
Connected person – 8500(3)
Special Rules – MEP – 8510(5)

12.1.2 8504(1)(a)(ii) – Maximum for non-connected years

For years in which the member is not connected with a participating employer under the RPP, the maximum LRB payable to the member in the year of pension commencement is determined by the formula F x G.

F is the lessor of:

  • 2% of highest average compensation (calculated in accordance with subsection 8504(2) of the Regulations) , and
  • the DB limit for the year.

G is the total amount of pensionable service (measured in years including fractions of years) under the provision, excluding years of service included in the subparagraph 8504(1)(a)(i) calculation if it applies.

Plan text
A plan has to:

  • incorporate the maximum formula as stated in the Regulations (or similar wording);
  • make a general reference to the "the maximum LRB permitted in the Income Tax Act and Regulations" (or similar wording);
  • refer to section 8504 of the Regulations; or
  • incorporate or continue to include paragraph 9(g), or a modified paragraph 9(g), of IC 72-13R8 (see below).

Paragraph 9(g) of IC72-13R8 - "the 9(g) maximum"
 
Pre-reform service — Regardless of when a plan is or was submitted for registration, the 9(g) maximum continues to apply to LRBs for pre-1990 service, generally, pre-1992 service under a grandfathered plan, with two exceptions. First, the 9(g) maximum doesn't apply to LRBs for service credited before 1992 under a grandfathered plan that was not subject to the 9(g) maximum. Second, the exemption for annual LRBs of less than $300 no longer applies unless the plan is a grandfathered plan.

Post-reform service — Continued use of the 9(g) maximum to LRBs for post-1989 service (or, generally, post-1991 service under a grandfathered plan) is also acceptable for purposes of the maximum under 8504(1) of the Regulations, provided that:

  • no connected persons participate in the plan (they are subject to a "career-average-earnings" maximum);
  • it doesn't apply after 1989 to combined MP and DB benefits under the plan; and
  • MP benefits affected by a DB cap conflict with paragraph 8502(l) which requires PAs to be determinable. Moreover, they appear to conflict with subparagraph 8502(c)(ii) in that the MP benefits are not being paid out of a pure MP provision, that is, a provision under which benefits are determined solely with reference to, and provided by, the amount in the member's account (see definition of an MP provision under subsection 147.1(1) of the Act).
  • the exemption for annual LRBs of less than $300 no longer applies.

Modified 9(g) maximum
The 9(g) maximum can be modified in 5 ways for LRBs for pre-1990 or post-1989 service.

First, the dollar limit in the 9(g) maximum (or a more restrictive dollar limit imposed by the plan), may be increased to the DB limit, under subsection 8500(1) of the Regulations. The increased dollar limit can also apply to the LRBs being paid to retired members, but not retroactively for pre-1990 service.

Second, the remuneration on which LRBs are based in the 9(g) maximum can be replaced with highest average compensation, as described in subsection 8504(2) of the Regulations.

Third, the date the 9(g) maximum applies can be changed from the date of retirement, termination of employment or termination of the plan to the calendar year in which LRBs start to be paid. This change is only beneficial if at least one of the above modifications is made. In other words, without the indexation inherent to the use of the highest average compensation or increased dollar limit, the amount of LRBs a member is entitled to remains the same regardless of when they become payable.

Fourth, the 35-year cap on pensionable service in the 9(g) maximum need only apply to pre-1990 years of service (generally, pre-1992 years under a grandfathered plan).

For example, on July 31, 1989 a member reached 35 years of pensionable service. Those 35 years and service starting on January 1, 1990 may be counted as pensionable service (if they otherwise qualify). But, the 5 months between August 1 and December 31, 1989 can’t be counted as pensionable service.

Fifth, the restriction in paragraph 9(g)(vi) of IC72-13R8 that the 9(g) maximum apply to a member's total LRBs paid or payable under more than one RPP or previously registered plan of an employer or a group of related employers need only apply to LRBs for pre-1990 service. While it can legally be argued that one plan cannot be made subject to the terms of another plan, we continue to apply the restriction to LRBs for pre-1990 service because the checks and balances in place for post-1989 years (for example, the PA and PSPA rules) did not exist for pre-1990 years. Where a plan imposes the restriction on total LRBs that include LRBs for post-1989 service, we would only ask for its removal or its limited application to pre-1990 LRBs if we know one of the other plans is an MP plan. As stated earlier, this is because PAs are not determinable and it is questionable that an MP provision exists when MP benefits are affected by a DB maximum.

To summarize, where all 5 modifications are possible, the 9(g) maximum becomes more generous than the maximum under subsection 8504(1) of the Regulations. Where the more restrictive aspects of the 9(g) maximum have to apply, that is, for pre-reform years of service, the 35-year cap and the cap on total LRBs, the remaining 3 modifications bring the 9(g) maximum closer to the maximums in subsection 8504(1). On the other hand, the maximum of subsection 8504(1) is more restrictive to all but grandfathered plans, because it does not exempt annual LRBs of less than $300.

9(g) maximum and DB benefit to MP conversions
Upon conversion of DB benefits to MP benefits, there may exist a surplus that arose from the prior DB provision. As long as the surplus remains unallocated, the terms of the plan have to limit total LRBs payable to the member affected by the conversion for pre-1991 service to the 9(g) maximum or to the modified 9(g) maximum within IC72-13R8. This is to prevent an entitlement to excessive LRBs or payments that the members would not have been entitled to had the conversion not occurred. If the plan is amended to provide for the elimination of the surplus by allocating it to the members' MP account or by a cash refund to the employer or cash payment to the members, the maximum can be removed. See paragraph 9(l) of IC72-13R8 for more information.

The maximum does not apply to LRBs for post-1990 service because after 1990 the PA limits control the amount of surplus that may be allocated to members under an MP provision.

SMEPs
The maximum under subsection 8504(1) of the Regulations does not apply to benefits payable under SMEPs in accordance with paragraph 8510(6)(b).

Grandfathered plans
Grandfathered plans are exempt from subsection 8504(1) of the Regulations, but only for LRBs for pre-1992 service.

Where a grandfathered plan has a step-rate formula and one of the benefit accrual rates is above 2%, the plan can update the earnings base as long as the plan is amended to limit pre-reform benefits to the maximum of paragraph 9(g) of the IC72-13R8.

LRBs under a DB provision, or under DB and MP provisions (excluding LRBs stemming from additional voluntary contributions) of a grandfathered plan for pre-1992 service have to be acceptable to the Minister. They are considered acceptable if:

  • the LRBs comply with the 9(g) maximum; or
  • the LRBs were not subject to the 9(g) maximum.

A grandfathered plan can be amended for most of the modifications to the 9(g) maximum described above for all years of service. The one exception is the 35-year cap on pensionable service. Generally, this cap continues to apply to LRBs for pre-1992 service. However, if the plan is amended to comply in all respects for the legislation earlier than January 1, 1992 (but no earlier than January 1, 1990), the cap need only apply to LRBs for service before the effective date of the amendment. For example, if the plan is amended to comply with the legislation from January 1, 1991, the 35-year cap can be applied to LRBs for pre-1991 service rather than pre-1992 service.

Where a grandfathered plan continues to limit LRBs from the date of retirement or of termination of employment/plan, as opposed to the year LRBs start to be paid, we may administratively allow the plan to provide for a projected maximum. Projected maximum means the maximum can be determined using an assumption for AIW-based indexation from the date the 9(g) maximum is applied to the normal retirement age. However, whereas subsection 8504(1) of the Regulations usually applies to LRBs for post-1991 service only, our acceptance of a projected maximum is subject to subsection 8504(1) applying to all years of service. This condition precludes LRBs from being excessive. LRBs in pay before 1992 under a DB provision of a plan that was submitted for registration after March 27, 1992, (that is, not a grandfathered plan) are permissible if they are acceptable to the Minister. They are acceptable to the Minister if they comply with the 9(g) maximum or the modified 9(g) maximum.

Cross references:
Prescribed Conditions Applicable Before 1992 to Grandfathered Plans – 8509(1)
Additional Prescribed Conditions for Grandfathered Plans After 1991 – 8509(3)
Exemption for Grandfathered Plans for Pre-1992 – 8509(2)(b) & (c)
Benefits Under Plan Other Than Grandfathered Plan – 8509(9)
Special Rules – SMEPs – 8510(6)
Newsletter No. 92-11, Maximum Pension Limits

12.1.3 8504(1)(b) – Indexing

After LRBs start to be paid, paragraph 8504(1)(b) of the Regulations provides that the LRB in subsequent years is limited to the maximum pension (paragraph 8504(1)(a)) in the year of commencement, adjusted from that time to reflect increases in the average consumer price index (CPI).

Only those forms of indexation which are permitted under paragraph 8503(2)(a) of the Regulations may be provided under the plan. In applying paragraph 8504(1)(b) of the Regulations, however, a plan that pays the maximum benefits under paragraph 8504(1)(a) (that is, 2%) may not pay greater indexing in years after pension commencement than what is warranted by increases in the average CPI.

Where the LRBs payable under the plan are lower than 2%, that is, lower than the rate allowed under paragraph 8504(1)(a) of the Regulations, it is possible that indexation could be greater than warranted by CPI. This is because there is no requirement for the indexing to be treated separately. The entire package of LRBs plus indexing as promised under the plan is restricted as a whole to the maximum pension plus CPI indexing.

If no indexation is provided under the plan, the restriction in the amount of LRBs in the year of pension commencement, set out in paragraph 8504(1)(a) of the Regulations, applies for all years.

Plan text
Plans that provide for indexing must restrict the LRBs payable in years after the year of commencement to the maximum stated in paragraph 8504(1)(b) of the Regulations.

There are several possible ways for plans to impose this restriction. Where the indexing provision in the plan is based on a percentage of CPI (up to 100%), no additional restriction is required.

Where indexing is not directly related to CPI (for example, where it is 4% flat indexing or based on excess earnings), the plan may cap the indexation at CPI. If it does not, the maximum pension clause reference in the plan must be worded so that the maximum pension rule for years after the year of commencement is included. General references to the maximum LRB as stated in the Income Tax Act and Regulations or to section 8504 of the Regulations would be acceptable for this purpose.

SMEPs
The maximum under 8504(1) of the Regulations does not apply to benefits payable under SMEPs in accordance with paragraph 8510(6)(b).

Grandfathered plans
Grandfathered plans that did not contain these restrictions in the past are not restricted until January 1, 1992. Only benefits accrued after 1991 are affected.

Where we have registered a pension plan after March 27, 1988, which provides for indexing which does not comply with these conditions, any retirement benefits that started to be paid before 1992 are not affected, as long as they are acceptable to the Minister.

Paragraph 8504(1)(b) of the Regulations will replace paragraph 9(i) of IC72-13R8 for all years of service, except if the plan is a pre-1968 or a 1980 shareholder plan, or a designated plan.

Cross references:
Average Consumer Price Index – 8500(1)
Special Rules – SMEP – 8510(6)

12.2 8504(2) – Highest Average Compensation

Compensation is defined in subsection 147.1(1) of the Act and includes compensation that is prescribed by section 8507 of the Regulations.

The maximum pension rule in section 8504 of the Regulations is not based on highest average compensation of 3 consecutive years, but rather on 3 periods (not necessarily consecutive) of 12 consecutive months. For this purpose, earnings may be indexed based on AIW increases from 1986 onward. Where a member has not worked for 3 periods of 12 consecutive months, paragraph 8504(2)(b) of the Regulations provides that the highest average compensation equals the annualized amount of the member’s average indexed monthly earnings over the period of employment.

Highest average compensation only includes compensation from an employer “who participated under the provision for the benefit of the member”. It does not include compensation received from a prior employer who did not participate under the provision. Highest average compensation, may, however, include compensation received from a predecessor employer. For further commentary, see below on subsection 8504(2.1) of the Regulations.

Subsection 8504(2) of the Regulations was amended as a result of the introduction of subsection 8503(17), which allows an RPP to provide for the payment of bridging benefits on a stand-alone basis (that is, without the simultaneous payment of LRBs) to qualifying employees. Bridging benefits are considered to be retirement benefits. The amendment to subsection 8504(2) replaces the expression "retirement benefits" with the expression "lifetime retirement benefits". This ensures that, in computing the highest average compensation of a member who has received stand-alone bridging benefits, the member's compensation can be indexed to the year in which the member's LRBs start to be paid, rather than the possibly earlier year in which the bridging benefits started to be paid.

This amendment applies to the 2008 and subsequent calendar years.

Plan text
For maximum pension purposes, there is no requirement that compensation be limited to the plan's pensionable earnings. Compensation may include any form of compensation described under subsection 147.1(1) of the Act. As a result, the definition of pensionable earnings for benefit purposes may be more restrictive than the definition of compensation for maximum purposes.

Indexed compensation may be used for purposes of the plan benefit formula as well as for the maximum. For purposes of calculating the maximum, though, the indexation may be no greater than that permitted under paragraph 8504(2) of the Regulations. Greater indexation for purposes of the plan benefit formula, while not prohibited, would lead to increased annual PAs. A PSPA would result if a rate of indexation in excess of AIW was increased on a past service basis. See paragraphs 8302(3)(h) and 8303(5)(d) for more information.

General references to the maximum LRB as stated in the Income Tax Act and Regulations would be acceptable for this purpose. Otherwise it must be specifically stated or referred to.

If it is clear that indexed earnings will not be used in the plan for any purpose, there will be no need to refer to the limitations on the indexing.

Grandfathered plans
LRBs that start to be paid from a grandfathered plan after January 1, 1992, may be based on highest average indexed compensation for all years of service, if the plan provides.

Pre-October 1968 and 1980 shareholder plans and benefits for partners are not eligible for this option. Connected person members of other plans may have highest average compensation apply to their benefits for pre-reform service as long as the 50/50 value test continues to be met as at December 31, 1990 for new plans and December 31, 1991 for grandfathered plans.

Benefits may continue to be calculated on the best 3 or best 5 years of service, as provided in IC72-13R8, subject to the maximums of subsection 8504(1) of the Regulations.

Cross references:
Average Wage – 147.1(1)
Participating Employer – 147.1(1)
Lifetime Retirement Benefits – 8504(1)(a)(i)
IC72-13R8, Employees’ Pension Plans (paragraph 8(d) – 50/50 demonstration)

12.3 8504(2.1) – Predecessor Employer

Subsection 8504(2.1) of the Regulations allows compensation received by a member for periods of service with a predecessor employer to be used for purposes of determining the highest average compensation and therefore the maximum LRB payable to the member.

This subsection, part of Bill C-48 which received royal assent on June 26, 2013, is deemed to have come into force on January 1, 1991.

Cross reference:
Predecessor Employer – 8500(1)

12.4 8504(3) – Alternative Compensation Rules

For benefit and maximum pension determination, DB plans must be based upon compensation actually received by the member in each year, as well as any compensation prescribed for the year under section 8507 of the Regulations. However, for the purpose of the maximum pension limit in subsection 8504(1), subsection 8504(3) permits amounts received in a subsequent year, such as bonuses and back-pay, to be treated as if they had been received in the years for which they are paid.

Also, since highest average compensation is based on months, compensation may be apportioned uniformly over a year even if not actually paid uniformly.

12.5 8504(4) – Part-Time Employees

12.5.1 8504(4)(a), (b), (c) – Compensation

Under the general maximum pension rule, actual earnings are used to calculate the pension, and there is no requirement to actualize service. In other words, a full year of service could be counted for a member who works part-time, as long as the actual earnings paid to the member for the part-time work are also used in the calculation.

Paragraph 8504(4)(a) of the Regulations provides an exception to this rule. Instead of using actual earnings, annualized earnings may be used, but only if service is actualized. Therefore, for a member who works part-time and earns $20,000, annualized earnings of $40,000 may be used in the calculation of the maximum, as long as service is actualized. In this case, the member's actualized service would be 0.5 of a year. Because of paragraph 8503(3)(i), the exception provided by paragraph 8504(4)(a) must be used for final average and best average earnings plans.

Full-time is whatever is considered normal full-time employment with the particular employer.

Where an employee works for more than one employer in the year on a part-time basis, the employers are treated as one. The result is that no employee should be credited with more than one year of service per calendar year for maximum pension purposes.

Grandfathered plans
These restrictions do not apply to grandfathered plans until 1992.

Where we have registered a pension plan after March 27, 1988, that provides benefits that do not comply with these conditions, any retirement benefits which have started to be paid before 1992 are not affected. However, they must be acceptable to the Minister.

Cross reference:
Increase in Accrued Benefits – 8503(3)(i)

12.5.2 8504(4)(d) – Eligible periods

Paragraph 8504(4)(d) of the Regulations provides rules for the treatment of part-time workers who accrue benefits during an eligible period of reduced pay, a period of temporary absence, or a period of disability for the application of subsection 8504(4).

For the purpose of subsection 8504(4) of the Regulations, part-time workers are deemed to have rendered service to the employer throughout the period on the part-time basis rendered before the period. The member’s rate of remuneration during the period is deemed to be what the member’s rate of remuneration was before the period.

The effect of paragraph 8504(4)(d) of the Regulations is that a part-time worker’s pensionable service and compensation are the same for subsection 8504(4) whether the member was working on a part-time basis, was working on a part-time basis during a period of reduced pay, or was on a period of temporary absence or disability subsequent to working on a part-time basis. The pensionable service and compensation for these periods can therefore be actualized and annualized in the same manner for the purpose of subsection 8504(1).

Cross references:
Definition of Eligible Period of Reduced Pay – 8500(1)
Definition of Eligible Period of Temporary Absence – 8500(1)
Definition of Disability – 8500(1)
Prescribed Compensation – 8507

12.6 8504(5) – Retirement Benefits Before Age 65

Subsection 8504(1) of the Regulations applies only to the LRBs payable under a DB provision. Subsection 8504(5) restricts retirement benefits as opposed to LRBs. Retirement benefits include both LRBs and bridging benefits. As subsection 8504(1) is more restrictive than subsection 8504(5), subsection 8504(5) ends up applying only to plans that provide a bridging benefit.

It is structured so that the bridging benefit of a member who had accrued less than the DB limit times years of service will be less restricted than the bridging benefit for someone who had accrued the maximum LRBs. While the limit on bridging benefits under paragraph 8503(2)(b) of the Regulations is tied to both the maximum CPP and OAS benefits payable, in the formula under paragraph 8504(5)(a), (0.25 x C) represents only the maximum CPP for the year. The maximum CPP is 1/4 of the average YMPE for the year and 2 immediately preceding years. The maximum CPP is prorated in the formula if the member has less than 35 years of pensionable service.

The retirement benefit restriction contained in subsection 8504(5) of the Regulations is in addition to the restrictions imposed by paragraph 8503(2)(b) on bridging benefits. The lesser of the bridging benefit permitted under paragraph 8503(2)(b) and the amount of bridging benefit permissible under 8504(5), taking into account the members LRBs, may be paid.

Subsection 8504(5) of the Regulations does not apply to additional bridging benefits that are provided in lieu of LRBs, under paragraph 8503(2)(l), as set out in paragraph 8504(11)(b) of the Regulations.

Plan text
This limit applies only to plans that provide some form of bridging benefit.

Bridging benefits are defined as all retirement benefits that are payable on a temporary basis. In a plan where benefits are reduced when public pension benefits (CPP/QPP, OAS) become payable, the portion of the benefit, which will disappear when the public pension benefits are paid, is a bridging benefit by definition.

It is not necessary for plans to specifically refer to this restriction if it is clear that the bridging benefits provided under the plan would never exceed it. Where the bridging benefit is based on CPP/QPP only and is accrued over 35 years or more, there is no need to ask for this limitation.

Where this is not the case, an acceptable reference to the maximum benefits will suffice, as long as it is general enough to include subsection 8504(5) of the Regulations. If the wording of the maximum pension clause refers only to LRBs, it is not acceptable for this purpose.

SMEPs
This rule applies to SMEPs.

Grandfathered plans
If the plan was already registered on June 7, 1990, or was submitted for registration by June 8, 1990, the restriction will only apply to the portion of the member's benefits which relate to post-1991 years of service, regardless of when a bridging benefit is added to the plan. Benefits that relate to years of service before 1992 can be paid even if they exceed the restriction in subsection 8504(5) of the Regulations. See 8509(7) of the Regulations for more information.

Where we have registered a pension plan after March 27, 1988, but before June 7, 1990, any retirement benefits which started to be paid before 1992 are not affected. See 8509(9) of the Regulations for more information.

Cross reference:
Excluded Benefits – 8504(11)

12.7 8504(6) – Pre-1990 Benefits

Subsection 8504(6) of the Regulations imposes a maximum on LRBs for periods of pensionable service before 1990 which is more restrictive than the maximum in subsection 8504(1).

The pre-1990 LRBs, in any year of payment, can’t exceed the amount determined by the formula:

2/3 x A x B x C

Variable A is the greater of $1,725 and the DB limit in the year that the pension payments begin. The limit for pre-1990 LRBs which started before 2004 was equal to $1,150 (2/3 of $1,725) in the year of commencement because the DB limit had been frozen at $1,722.22. In 2004 the DB limit exceeded $1,725 for the first time and is now increased annually based on indexation of the average wage measure. Pre-1990 LRBs which start after 2003 are now limited to 2/3 the DB limit in the year of commencement.

Variable B is the amount of pre-1990 pensionable service credited to the member.

Variable C is an indexation factor which allows increases based only on CPI in years subsequent to the year of commencement.

The pre-1990 benefits limit under subsection 8504(6) of the Regulations does not apply where any of the exceptions listed in subsection 8504(7) apply.

Plan text
If it is clear that pre-1990 benefits can’t be purchased (for example, the eligibility section excludes pre-reform service), there is no need for the plan to specify the maximum under subsection 8504(6) of the Regulations. In any other case, the subsection 8504(6) limit should be contained in the plan text. A plan's reference to the maximum benefit rules, if otherwise acceptable will also suffice, as long as the reference is general enough to include subsection 8504(6).

SMEPs
Subsection 8504(6) of the Regulations applies to SMEPs.

Grandfathered plans
This limit does not apply to pre-1990 benefits paid out of a grandfathered plan before 1992. However, if such offside benefits have not been fully paid out before 1992, they must be restricted by the limit under subsection 8504(6) of the Regulations. Otherwise, the plan is revocable. Purchase of an annuity or lump sum settlement (usually for transfer to an RRSP) qualifies as full payment. Payment out of the plan itself does not.

Where we have registered a plan after March 27, 1988, that doesn't comply with this limit, retirement benefits which started to be paid before 1992 are not affected. However, the benefits must be acceptable to the Minister.

Please note that the limit under subsection 8504(6) of the Regulations can’t be indexed to CPI before the date of commencement of the pension. Some plans have included the limit in the benefit formula of the plan. The plan is then restricted to the 9(g) maximum for all years. Another section of the plan provides that the benefits may be increased with CPI as long as it does not exceed the 9(g) maximum. In effect this would entitle the member to an increase in the subsection 8504(6) limit that is not allowed under the Regulations until the commencement of the pension. The maximum pension clause in this case must be amended to include the subsection 8504(6) limit for pre-1990 years.

Cross references:
Limit Not Applicable – 8504(7)
Exemption of grandfathered plans from regular DB rules for pre-1992 benefits – 8509(1)(b)
Exemption of non-grandfathered plans from regular DB rules when payment of benefits started before 1992 – 8509(9)

12.8 8504(7) – Limit Not Applicable

 The limit in subsection 8504(6) of the Regulations, further explained in the preceding section, does not apply if:

  • at any time before June 8, 1990, any part of the pre-1990 year was pensionable service under any DB provision of any employer's RPP;
  • on June 7, 1990, there existed a written agreement to treat any part of the pre-1990 year as pensionable service under any DB provision of any employer's RPP, whether or not the treatment was conditional on the member making contributions;
  • the individual:
    • was a member of an RPP in the pre-1990 year and the previous year;
    • accrued DB benefits under the RPP for the previous year; and
    • did not accrue DB benefits under the RPP for the pre-1990 year because of a disability or leave of absence;
  • before June 8, 1990, contributions were made for the pre-1990 year by or for the member under an MP provision of any RPP for any employer (contributions include AVCs and allocations of forfeitures or surplus, plus related earnings); or
  • contributions were made by or for the member to any DPSP in the particular year.

Plan text
We don't require these exceptions to be stated in the plan text. However, where we believe that the limit under subsection 8504(6) of the Regulations should apply (for example, when reviewing an executive plan termination and it appears that pre-1990 service was credited after June 7, 1990), we will ask the submitter to provide details and documentation demonstrating that an exception applies. Relevant details could include:

  • the name and registration number of the RPP under which DB benefits accrued for the pre-1990 year (or for the previous year, in the case of a member who didn't accrue DB benefits in the pre-1990 year because of disability or leave of absence);
  • the name and registration number of the RPP to which MP contributions were made for the pre-1990 year;
  • the name of the employer for whom the individual worked in the pre-1990 year;
  • a certified copy of the agreement in existence on June 7, 1990, which recognized the pre-1990 year(s) as pensionable service;
  • the name and registration number of the DPSP to which contributions were made in the pre-1990 year.

Cross reference:
Deems allocation of forfeitures or surplus under MP provision to be contributions – 8500(7)

12.9 8504(8) – Cross-Plan Restrictions

When an individual is entitled to benefits under 2 or more RPPs with associated DB provisions (as determined under subsection 8504(9) of the Regulations), the limits on pre-65 benefits set out in subsection 8504(5), and the limit set out in subsection 8504(6) , apply to the combined benefits payable to the member under the associated provisions.

MEPs
If the plan is a MEP, including SMEPs, the pre-65 benefits and the limit under subsection 8504(6) of the Regulations apply within the plan itself only due to the application of subsection 8510(5)(c). There is no need to include any other plans in the limits.

Cross reference:
Associated DB Provisions – 8504(9)

12.10 8504(9) – Associated Defined Benefit Provisions

Subsection 8504(9) of the Regulations holds the rules for determining whether DB provisions are “associated DB provisions” for the purpose of the cross plan restrictions rule under subsection 8504(8).

Where a plan has more than one DB provision and there is a possibility that pre-1990 service will be purchased after June 7, 1990, it must be clear that subsection 8504(5) of the Regulations applies to the combined benefits payable under both provisions. If the plan provides for the payment of bridging benefits, it must be clear that subsection 8504(7) applies to the combined benefits payable under both provisions.

In accordance with paragraph 8503(3)(k) of the Regulations, the cross-plan bridging restriction, the plans should make it clear that each member is entitled to a bridging benefit under only one provision. However, the Minister may have waived this requirement. If that is the case, then the plan must clearly state that subsection 8504(5) applies to the combined benefits payable under both provisions.

Also, if there is a possibility that pre-1990 service will be purchased after June 7, 1990, under both plans, it must be clear that subsection 8504(6) of the Regulations applies to the combined benefits payable under both plans.

12.11 8504(10) – Excluded Benefits

This subsection excludes certain LRBs from the application of the maximum pension rule in subsection 8504(1) of the Regulations.

Paragraph 8504(10)(a) of the Regulations excludes additional benefits payable when a member is totally and permanently disabled at the time retirement benefits start to be paid.

Paragraph 8504(10)(b) of the Regulations applies on the receipt of LRBs after age 65. It lets one calculate the maximum pension without including any actuarial increases due to the postponement of the pension past age 65. See Actuarial Bulletin No. 1 for more information.

The exclusion of the actuarial increase from the maximum applies to all years of service. The exclusion for pre-reform service does not apply to pre-October, 1968 and 1980 Shareholder plans.

The SPPA of Quebec requires that a pension be actuarially increased from the normal retirement date to the actual retirement date. In comparison to Quebec's revalorization, paragraph 8504(10)(b) of the Regulations only allows an exclusion of actuarial increases past the age of 65. Any actuarial increases before age 65 must be within the limits of section 8504.

Plan text
Some plans registered in Quebec will use the wording such as “actuarially equivalent” or “actuarially increased” to provide for actuarial increases to pensions postponed beyond the normal retirement date. These provisions are acceptable.

The terminology in plans that take the extra step to detail how the actuarial increase is calculated should be clear that subsection 8504(10) of the Regulations is respected. If the increase is based on the pension that can be purchased with the value of a notional account which includes missed payments including interest from normal retirement date to postponed retirement date, the results must not be more favourable than the actuarial equivalent pension as permitted under paragraph 8504(10)(b).

12.12 8504(11) – [Idem] – Excluded Benefits

Subsection 8504(5) of the Regulations restricts the amount of retirement benefits that can be paid from a DB provision before members reach the age of 65. Subsection 8504(11) exempts certain benefits from being subject to the limits of subsection 8504(5). Specifically, additional LRBs payable to a member because the member is totally and permanently disabled at the time the retirement benefits start to be paid are exempt. Also, bridging benefits that are paid instead of LRBs and associated survivor benefits, provided on a basis not more favourable than an actuarially equivalent one, are also exempt from the limit of subsection 8504(5).

12.13 8504(12) – [Idem] – Excluded Benefits

Subsection 8504(12) of the Regulations excludes actuarially increased LRBs payable due the postponement of the LRB payment after the age of 65, from being subject to the restriction in subsection 8504(6) on LRBs for pre-1990 service.

12.14 8504(13)-(15) – Alternative CPI Indexing

Under paragraph 8504(1)(b) of the Regulations, the maximum pension limit that applies in years after pension commencement, is dependent on the average CPI, which is defined in subsection 8500(1) as the average monthly CPI's for the 12 months ending on September 30 of the previous year. Subsection 8504(13) permits the use of a similar ratio for paragraph 8504(1)(b); such as using November rather than September for the CPI determination.

Subsections 8504(14) and (15) of the Regulations provide similar flexibility with respect to the measurement of inflation, for the limits in paragraph 8504(5)(b) and subsection 8504(6) respectively.

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