Chapter 15 - 8507 & 8508 – Periods of Reduced Pay & Salary Deferral Leave Plan

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• 15 8507 & 8508 – Periods of Reduced Pay & Salary Deferral Leave Plan
• 15.1 8507(1) – Prescribed Compensation
• 15.2 8507(2) – Additional Compensation in Respect of Qualifying Period
• 15.3 8507(3) – Qualifying Periods and Periods of Parenting
• 15.3.1 8507(3)(a) – Qualifying period
• 15.3.2 8507(3)(b) – Period of parenting
• 15.4 8507(4) – Cumulative Additional Compensation Fraction
• 15.5 8507(5) – Additional Compensation Fraction
• 15.6 8507(6) – Exclusion of Subperiods
• 15.7 8507(7) – Complete Period of Reduced Pay
• 15.8 8508 – Salary Deferral Leave Plan

15 8507 & 8508 – Periods of Reduced Pay & Salary Deferral Leave Plan

Section 8507 of the Regulations contains rules that enable DB benefits to be provided, or MP contributions to be made, in respect of a period of disability, a leave of absence, or a period of reduced pay as if it were a regular period of employment without violating the PA limits in subsections 147.1(8) and (9) of the Act.

Subsections 147.1(8) and (9) of the Act require that PAs not exceed specified limits, including limits that depend on compensation. Compensation is defined in subsection 147.1(1) of the Act, and includes prescribed amounts. This is to allow a notional amount of compensation to be included in respect of periods when an individual's compensation is reduced because the individual is disabled, on a leave of absence or is rendering services on less than a regular basis. The inclusion of such amounts in compensation enables benefits to accrue under a DB provision (or contributions to be made under an MP provision) as if the individual had not had a reduction in compensation, thereby ensuring that the PA limits in subsections 147.1(8) and (9) are respected.

15.1 8507(1) – Prescribed Compensation

This subsection prescribes specific amounts that are to be included in the compensation of an individual for a particular year from an employer. They are:

• where the individual has an eligible period of reduced pay or temporary absence in the year with respect to the employer and the period is a qualifying period (as defined in subsection 8507(3) of the Regulations), the amount determined under subsection 8507(2) in respect of the period; and
• where the individual has a period of disability in the year, the amount that is reasonable to expect would have been the individual’s compensation for the period from the employer if the individual had not been disabled less the actual compensation received from the employer, if any.

Plan text

The prescribed compensation rules, other than for the purposes of re-determining PAs under subsections 8308(4) and 8308(5) of the Regulations, restrict current service accruals only. Where a plan permits a member to accrue a benefit or make contributions to a plan during a period of disability, period of reduced pay, or temporary absence, the plan must make reference to respecting the prescribed compensation provisions of the Act and Regulations.

Past service purchases of leaves of absence are restricted only by a PSPA, which would be certifiable, and therefore subject to a member having sufficient RRSP room to support the PSPA.

Cross references:

Pension Adjustment Limits – 147.1(8)
Pension Adjustment Limits – Multi-Employer Plans – 147.1(9)
Period of Reduced Services – Retroactive Benefits – 8308(4)
Period of Reduced Services – Retroactive Contributions – 8308(5)
Definition of Eligible Periods of Reduced Pay – 8500(1)
Definition of Eligible Periods of Temporary Absence – 8500(1)
Definition of Periods of Disability – 8500(1)
Additional Compensation in Respect of Qualifying Period – 8507(2)
Qualifying Periods – 8507(3)

15.2 8507(2) – Additional Compensation in Respect of Qualifying Period

This subsection contains the rules for determining the amount that is prescribed by subsection 8507(1) of the Regulations in respect of a qualifying period of a member in a year with respect to an employer. This amount is the lesser of (a) and (b), where:

• is the amount of compensation the member could reasonably be expected to have earned from the employer during the period had he or she rendered service on a full-time basis minus any compensation received during the period from the employer
• the amount determined by the formula (5 + A + B – C) X D

A is the lesser of 3 and the member’s cumulative additional compensation fraction (as defined in subsection 8507(4) of the Regulations) in respect of the employer, determined to the time that is immediately before the end of the qualifying period and determined with regards only to compensation that has been prescribed in respect of periods of parenting (periods of parenting is defined in paragraph 8507(3)(b)),

B is,

1. if no part of the period is a period of parenting, nil; and
2. otherwise, the lesser of:

(A) the amount, if any, by which 3 exceeds the amount determined for A; and

(B) the ratio of:

(I) the amount that would be determined under paragraph 8507(2)(a) of the Regulations if the compensation referred to in subparagraphs (a)(i) and (ii) were the compensation for such part of the period as is a period of parenting

to

(II) the amount determined for D,

C is the member’s cumulative additional compensation fraction (as defined in subsection 8507(4) of the Regulations) with respect to the employer, determined to the time that is immediately before the end of the qualifying period, and

D is the compensation that the member could reasonably be expected to have received from the employer for the year if the member had rendered services to the employer on a full-time basis throughout the year, and the member had been paid at a rate of pay commensurate with the member’s rate of pay before the commencement of the complete period of reduced pay (as defined in subsection 8507(7) of the Regulations) of which the qualifying period is a part.

Under D, the amount represents a reasonable estimate of the additional compensation that the member would have earned had he or she rendered services to the employer on a regular basis throughout the period. A reasonable amount would be determined based on the conditions of the member’s employment contract immediately before the qualifying period. An amount determined without regard to the services rendered or compensation received by the member before the qualifying period would not meet the reasonableness test under paragraph 8507(2)(a) of the Regulations.

For example, a plan which provides for the deeming of earnings based on the highest paid position that the member could have attained during the qualifying period would not meet the reasonableness test, as it is unlikely that the member's earnings would have been that high had the member rendered services on a regular basis during the period.

The amount determined under subsection 8507(2) of the Regulations is limited to:

• five years of full-time equivalent compensation, plus
• the number of years of full-time equivalent compensation determined under the subsection in respect of periods of parenting, to a maximum of three years of full-time equivalent compensation.

These cumulative limits apply to an individual’s employment with an employer.

If an individual changes employers, a new cumulative limit will apply as long as the new employer deals at arm’s length with the former employer and the new employer does not participate in the same RPP as the former employer.

Cross references:

Complete Period of Reduced Pay – 8507 (7)
Period of Parenting – 8507(3)(b)
Cumulative Additional Compensation Fraction – 8507(4)
IC98-2, Prescribed Compensation for Registered Pension Plans

15.3 8507(3) – Qualifying Periods and Periods of Parenting

15.3.1 8507(3)(a) – Qualifying period

Paragraph 8507(3)(a) of the Regulations defines a period in a year to be a qualifying period of an individual with respect to an employer if :

• The period is an eligible period of reduced pay or temporary absence (neither of which is available to connected persons after 1990);
• Based upon the terms of the plan, contributions are made under an MP provision (other than a SMEP), or LRBs accrue under a DB provision (other than a SMEP), on a current service basis for the period;
• The contributions made under the MP provision, or the LRBs that accrue under the DB provision, for the period exceed those that would have been made/accrued if they had been based on the actual compensation earned and actual service rendered by the member;
• The member's PA for the year includes the amount contributed or the value of the DB accrued for the period;
• No contributions are made, and no benefits are provided, for the period under an RPP or DPSP in which the employer does not participate. For example, if, during a leave of absence, an employee works for another employer, the employee can accrue benefits under one or the other plan, but not both. This condition does not apply to forfeitures, earnings on forfeitures, surplus, or earnings on surplus that were allocated to the member on or before April 5, 1994.
• No part of the period is after the earliest in which either bridging benefits or LRBs have commenced to be paid under the phased retirement provisions under subsections 8503(17) and 8503(19) of the Regulations. These provisions enable a DB RPP to provide for qualifying employees to receive bridging benefits on a stand-alone basis or to receive up to 60% of their accrued pension while continuing to accrue additional benefits. However, compensation can’t be prescribed for individuals who have benefited from these phased retirement provisions.

In the determination of prescribed compensation, a qualifying period is usually in addition to a period of parenting. However, it can also include a period of parenting. This means that if the member uses up the three-year allotment for periods of parenting, additional periods of parenting can be applied against the five-year allotment for qualifying periods.

SMEPs

The prescribed compensation rules do not apply to SMEPs.

Cross references:

Definition of Eligible Periods of Reduced Pay – 8500(1)
Definition of Eligible Periods of Temporary Absence – 8500(1)
Deemed Allocation of Forfeitures and Surplus – 8500(7)
Definition of SMEP – 8510(2)

15.3.2 8507(3)(b) – Period of parenting

This is all or part of the period that starts at the time of the birth or adoption of a child and ends 12 months later. In the determination of prescribed compensation, a period of parenting can be a stand-alone period or can be included in a qualifying period. For more information, see paragraph 8507(3)(a) of the Regulations – Qualifying Periods.

Cross reference:

IC98-2, Prescribed Compensation for Registered Pension Plans

15.4 8507(4) – Cumulative Additional Compensation Fraction

This subsection, along with paragraph 8507(2)(b) of the Regulations, limits the total of the amounts that will be prescribed in respect of an individual's qualifying periods.

Subsection 8507(4) of the Regulations defines cumulative additional compensation fraction of an individual to any time in respect of an employer to be the sum of the additional compensation fractions (see subsection 8507(5) below) associated with periods ending at or before that time that are qualifying periods of the individual in calendar years after 1990 with respect to:

• the employer,
• any other employer who does not deal at arm’s length with the employer, or
• any other employer who participates in an RPP in which the employer participates for the benefit of the individual.

The fact that compensation may be prescribed after 1990 means that it is possible for members to have accrued pensionable service for leaves of absence or reduced pay before 1991 and still be entitled to 5 years (plus 3 for parenting) of prescribed compensation after 1990.

Grandfathered plans

The prescribed compensation rules exist to allow unpaid service to accrue without causing the PA limits to be exceeded. As a result, the prescribed compensation rules will take effect in the same year as the PA limits. For those plans that are not affected by the PA limits until 1992, the prescribed compensation rules will only apply starting in 1992.

Cross reference:

Additional Compensation Fraction – 8507(5)

15.5 8507(5) – Additional Compensation Fraction

Subsection 8507(5) of the Regulations permits a special calculation of the additional compensation fraction to ensure that the 5-year limit on prescribed compensation is not used up by a period of loan under certain circumstances. For example:

• If the employer and the prescribed employer deal with each other at arm’s length, and such has been certified, in writing, by the plan administrator, the 5-year limit on prescribed compensation is not used up by the period of loan;
• If the employer and prescribed employer are related, the period of loan would count towards the member’s 5-year allotment of prescribed compensation.

Cross reference:

Loaned Employees – 8308(7)

15.6 8507(6) – Exclusion of Subperiods

Subsection 8507(6) of the Regulations specifies that qualifying periods in a year under section 8507 do not include subperiods of those qualifying periods. For example, if a leave of absence from January 1, 2013, to December 31, 2013, is considered to be a qualifying period, any subperiod, such as November 1, 2013 to November 30, 2013, would not be considered a qualifying period.

Subsection 8507(6) of the Regulations also contains a similar rule for periods of disability.

15.7 8507(7) – Complete Period of Reduced Pay

For the purposes of subsection 8507(2) of the Regulations, subsection 8507(7) defines a complete period of reduced pay of an individual with respect to an employer to be a period that consists of one or more of the following periods:

• Periods of disability of the member, and
• Eligible periods of reduced pay or temporary absence with respect to the employer.

Cross references:

Definition of Eligible Periods of Reduced Pay – 8500(1)
Definition of Eligible Periods of Temporary Absence – 8500(1)
Definition of Periods of Disability – 8500(1)

15.8 8508 – Salary Deferral Leave Plan

Section 8508 of the Regulations contains special rules applicable to salary deferral leave plans, as described in paragraphs 6801(a) or (b). By participating in a salary deferral leave plan, an employee is able to defer receipt of salary for tax purposes. Such plans may be used by employees (in cooperation with their employers) to self-fund sabbaticals and other leaves of absence.

Paragraph 8508(a) of the Regulations provides that, where an employee defers salary pursuant to a salary deferral plan, the period throughout which salary is deferred is an eligible period of reduced pay. This ensures the application of all rules applicable with respect to eligible periods of reduced pay and, in particular, the rules in section 8507 (prescribed compensation).

Paragraph 8508(b) of the Regulations provides that, for the purpose of section 8507, the employee’s regular rate of pay is the rate that would apply if the employee was not participating in the salary deferral leave plan. Therefore, during the deferral period while the employee is still at work, the deferred salary will be regarded as part of the employee’s compensation. While the employee is on a leave of absence and receives the deferred salary, the employee’s compensation will be considered to be the amount that would have been paid had the employee not taken the leave.

Section 8508 of the Regulations is mainly intended to ensure that section 8507 applies where an employee participates in a salary deferral plan.

Cross reference:

Salary Deferral Leave Plan – 6801(a) or (b)