Chapter 19 - 8515 & 8516 – Special Rules for Designated Plans & Eligible Contributions

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• 19.1 8515(1) – Designated Plan
• 19.2 8515(2) – Designated Plan in Previous Year
• 19.3 8515(3) – Exceptions
• 19.4 8515(3.1) – Exceptions
• 19.5 8515(4) – Specified Individual
• 19.6 8515(5) – Eligible Contributions
• 19.7 8515(6) – Funding Restriction
• 19.8 8515(7) – Maximum Funding Valuation
• 19.9 8515(8) –  Restricted-Funding Members
• 19.10 8515(9) – Member Contributions
• 19.11 8516(1) – Prescribed Contribution
• 19.12 8516(2) – Funding on Termination Basis
• 19.13 8516(3) – Contributions Required by Pension Benefits Legislation

19.1 8515(1) – Designated Plan

An RPP with a DB provision is a designated plan throughout a year if the pension credits of specified individuals (defined in subsection 8515(4) of the Regulations) exceed 50% of all pension credits for the year under the provision. Pension credits, determined in subsection 8301(6), are amounts used in calculating a PA.

Once a plan has designated plan status, it continues to be a designated plan, unless the Minister changes its status under the authority of subsection 8515(2) of the Regulations.

The category of designated plans is intended to apply to certain DB plans that are likely, by their nature, to be generously funded. Plans for executives and for connected persons are plans that would normally tend to be funded on a more generous basis than plans for lower wage earners.

19.2 8515(2) – Designated Plan in Previous Year

The basic rule is that once a plan meets the designated plan definition, it continues to have designated plan status unless the Minister waives its continuing application.

For example, in 2012, 52% of the pension credits under a plan were in respect of specified individuals. In 2013, only 48% of the pension credits were in respect of specified individuals. Subsection 8515(2) of the Regulations specifies that the plan will continue to be a designated plan for 2013 and subsequent years, even though less than half of the pension credits are in respect of specified individuals.

Ministerial waivers for subsequent years will only be given when it is likely that a plan will not meet the designated plan definition based on pension credits in the future. Normally, specific plan circumstances should exist to lead us to this conclusion. Examples would be the addition of a category of employees to plan membership, or the splitting off of the specified individuals into a separate plan. Favourable consideration would also be given when no pension credits have accrued under a DB provision of the RPP for the year and there are no restricted-funding members remaining in the plan. As an example, Pierre, the sole member of a designated plan earns benefits under the plan until his retirement date of June 30, 2019. He starts to receive his lifetime retirement benefits from the plan in July 2019, after which he is no longer a restricted-funding member. Since Pierre earned pension credits for the first six months of 2019, a waiver would only be considered starting in 2020.

Cross references:

Specified Individual – 8515(4)
Eligible Contributions – 8515(5)
Restricted-Funding Members – 8515(8)
Member Contributions – 8515(9)
FAQ No. 25 – Ministerial Waivers Under 8515(2)

19.3 8515(3) – Exceptions

A plan will not become a designated plan if the following conditions are met:

• The plan would not be a designated plan in the year if the reference in paragraph 8515(1)(b) of the Regulations to “50%” were read as “60%”;
• The plan was established before the year; and
• The plan did not meet the condition under subsection 8515(1) of the Regulations to be a designated plan in the immediately preceding year.

This subsection ensures that a slight change in a plan’s circumstances will not cause the plan to become a designated plan as long as the change doesn’t persist for more than a year.

Cross reference:

Definition of Designated Plan – 8500(1)

19.4 8515(3.1) – Exceptions

Before the creation of this subsection, which is applicable after February 19, 2011, subsection 8515(3) of the Regulations provided that the Minister could waive an RPP’s designated plan status for plans with more than 9 active DB members.

Due to the introduction of several Regulations, in particular, the PSPA relief under paragraphs 8303(5)(f.1) and (f.2), phased retirement provisions under subsections 8503(17) and (19), and special provisions for Quebec member-funded pension plans pursuant to subsection 8510(9), this subsection was added to provide the Minister with flexibility to exempt a designated plan from certain provisions under the Regulations.

Therefore, the Minister no longer waives a plan’s designated status, but may instead waive the application of any provision within Part LXXXIII or LXXXV of the Regulations that would otherwise apply to a designated plan. For example, the Minister may waive the additional conditions for employer contributions, as set out in subsection 8515(5), while the remaining provisions applicable to designated plans remain in force.

Cross references:

Definition of Designated Plan – 8500(1)
Designated Plan in a Previous Year – 8515(2)

19.5 8515(4) – Specified Individual

An individual is a specified individual in a calendar year if the individual is connected at any time with a participating employer under the plan or the individual’s total remuneration for the year exceeds 2½ times the YMPE for the year.

Cross references:

Connected Person – 8500(3)
Newsletter No. 94-2, Technical Questions and Answers

19.6 8515(5) – Eligible Contributions

This subsection prescribes, for the purpose of subsection 147.2(2) of the Act, an additional condition to be satisfied so that an employer contribution made to a designated plan is an eligible contribution. The additional condition, under paragraph 8515(5)(a) of the Regulations, is that the contribution satisfies the condition under subsection 8515(6).

Paragraph 8515(5)(b) of the Regulations provides for an alternative rule for the funding of benefits that became provided before 1991 (these exclude pre-91 benefits granted after 1990 on a past service basis) under a designated plan that includes generous early retirement benefits and indexing at full CPI. More specifically paragraph 8515(5)(b) entails that contributions in respect of these benefits either satisfy subsection 8515(6) or would still satisfy it even if paragraphs 8515(6)(b) & (c) and subparagraph 8515(7)(c)(i) are disregarded at the same time.

19.7 8515(6) – Funding Restriction

This subsection provides that the maximum contributions to a designated plan are the contributions that would be required if:

• certain benefits were provided under the plan instead of benefits actually provided, as set out in 8515(6)(a.1) to (c) of the Regulations;
• assets and liabilities are apportioned in a reasonable manner for plans with multiple participating employers, as set out in paragraph 8515(6)(d);
• the maximum surplus rule in paragraph 147.2(2)(d) of the Act was applicable, as set out in paragraph 8515(6)(e);
• the contributions were determined on the basis of a maximum funding valuation, as outlined in subsection 8515(7) of the Regulations.

Paragraph 8515(6)(a.1) of the Regulations requires that retirement benefits are payable monthly in advance for members whose pensions have not commenced to be paid.

Paragraph 8515(6)(b) of the Regulations permits retirement benefits provided to a restricted funded member to be adjusted after they have commenced to be paid at a rate equal to the annual rate of increase in the CPI minus 1%.

Paragraph 8515(6)(c) of the Regulations provides that the form of pension payable to a restricted-funding member would be assumed to be guaranteed for 5 years, and that thereafter a 66 2/3% survivor benefit be payable to the member’s spouse.

Paragraph 8515(6)(d) of the Regulations specifies that for plans with more than one employer participating in the plan, the assets and liabilities must be allocated in a reasonable manner among the employers, in respect of their employees and former employees.

Paragraph 8515(6)(e) of the Regulations permits a certain portion of a surplus to be disregarded when determining required contributions to a designated plan. The rule is identical to the basic surplus test in paragraph 147.2(2)(d) of the Act. If the actuarial report contains a regular valuation and a maximum funding valuation, and the contributions determined under the regular valuation are larger than the amounts provided in the maximum funding valuation, the actuary's recommendation has to be based on the maximum funding valuation.

Example 1

The following are results from the balance sheets of an AVR effective December 31, 2012:

Under the going-concern valuation, the excess surplus of $50,000 is applied to reduce the current service contributions by $22,000 for the first year, $23,000 for the second year, and $5,000 for the third year. The remaining current service contribution to be funded in the third year is $19,000.

Likewise, under the maximum funding valuation (MFV), the excess surplus of $43,750 is applied to reduce the current service contributions by $18,000 for the first year, $19,000 for the second year, and $6,750 for the third year. The remaining current service contribution to be funded in the third year is $13,250.

The current service contributions less the excess surplus, under the MFV, represents the eligible contributions, because the total contributions, as of the date of valuation, determined under the MFV ($13,250 in year 3) are less than those determined under the going-concern valuation ($19,000 in year 3).

Cross reference:

Actuarial Bulletin No. 2.

19.8 8515(7) – Maximum Funding Valuation

This subsection outlines the assumptions that are to be used in preparing a maximum funding valuation for the purpose of determining the permissible contributions to a designated plan.

Paragraph 8515(7)(a) of the Regulations requires that the projected accrued benefit method be used for determining the actuarial liabilities and current service costs.

Paragraph 8515(7)(b) of the Regulations stipulates a valuation rate of interest of 7.5% per annum.

Subparagraph 8515(7)(c)(i) of the Regulations requires the assumption as to the rate at which a member’s salary or wages will increase to be 5.5% per annum and subparagraph 8515(7)(c)(ii) specifies an assumption of 4% per annum for the rate of increase in the CPI.

Paragraph 8515(7)(d) of the Regulations requires that each assumption made with respect to economic factors, other than those referred to in paragraph 8515(7)(c), be consistent with the assumptions imposed by that paragraph.

Paragraph 8515(7)(e) of the Regulations outlines the following assumption requirements for restricted-funding members:

• the retirement benefits are to commence to be paid no earlier than the member's 65th birthday, as per subparagraph 8515(7)(e)(i),
• the members will survive, as per subparagraph 8515(7)(e)(ii), and if employed, will continue in employment, until the commencement of the member’s pension, as per subparagraph 8515(7)(e)(iii), and
• the member will be married to a person of the same age when the member’s pension commences to be paid, as per subparagraph 8515(7)(e)(iv).

Paragraph 8515(7)(f) of the Regulations requires that the assumption for the mortality rate be determined using the Group Annuity Mortality (GAM) Table. More specifically, under subparagraph 8515(7)(f)(i), for restricted-funding members, the assumption for mortality after retirement for both the member and the spouse must be based on 80% of the average of the rates from the 1983 GAM Table (that is unisex). Under subparagraph 8515(7)(f)(ii), for all other members, for example pensioners, the mortality assumption is based on 80% of the rates from the 1983 GAM Table, based on the sex of the member. This amended subsection applies to valuation reports that are received by the RPD on or after June 6, 1994.

Paragraph 8515(7)(g) of the Regulations provides that where a member has a choice between a pension and lump sum payment, it must be assumed that the member elects a pension. This rule is relevant, for example, where a deferred vested member can choose to cash out his entitlement from the plan, but has not made such a choice.

Paragraph 8515(7)(h) of the Regulations stipulates that the plan’s assets be assumed to equal their fair market value as at the effective date of the valuation.

19.9 8515(8) – Restricted-Funding Members

For the purposes of subsections 8515(6) and (7) of the Regulations, subsection 8515(8) provides that a member is a restricted-funding member if, at the time at which the maximum funding valuation is prepared, the member is entitled to a pension (vested or not) that has not started to be paid.

A member will also be a restricted-funding member if the member’s pension had started to be paid and has then been suspended.

Examples of individuals who are not restricted-funding members include a member whose pension is in payment and a member who has terminated employment and whose only entitlement is to a lump-sum payment that has yet to be paid.

The following factors should be noted when valuing actuarial liabilities of members who are not restricted funding members for the purposes of the maximum funding valuation:

• the actual age difference between the plan member and his or her spouse (if applicable);
• the actual form of pension paid and frequency (that is monthly or annually in advance);
• the actual post-retirement indexing as provided by the plan terms; and
• the mortality rates specified under subparagraph 8515(7)(f)(ii) of the Regulations apply.

19.10 8515(9) – Member Contributions

This is essentially an anti-avoidance rule designed to require the application of the designated plan funding assumptions for both employer and employee past service contributions. Employee past service contributions must therefore be based on an actuarial valuation report, approved by the CRA, using the designated plan funding assumptions.

Plan text

Where a designated plan provides that a member may contribute to purchase past service, we will require that the plan wording reflect the fact that such contributions are subject to the approval of the CRA.

19.11 8516(1) – Prescribed Contribution

This section provides that certain contributions made by an employer to an RPP are prescribed contributions for the purposes of being eligible contributions as defined in subsection 147.2(2) of the Act. Therefore, where an employer contribution is a prescribed contribution as described with this section of the Regulations, it is eligible under subsection 147.2(2), deductible as set out in subsection 147.2(1), and a permissible contribution under subparagraph 8502(b)(vi) of the Regulations.

19.12 8516(2) – Funding on Termination Basis

This rule allows an employer to make a contribution on a termination basis, sometimes called a "wind-up basis". Contributions made on a termination basis are prescribed contributions and are eligible contributions for the purpose of subsection 147.2(2) of the Act and permissible contributions for the purpose of paragraph 8502(b) of the Regulations.

The conditions set out in paragraphs 8516(2)(a) through (d) of the Regulations have to be satisfied before the contributions can be considered eligible contributions. The condition in paragraph 8516(2)(d) stipulates that at the time the contribution was made, the plan is not a designated plan.

A termination basis is different from a solvency basis. Contributions made on a solvency basis are contributions that are required to be made under the PBSA or a similar law of a province. Subsection 8516(3) of the Regulation sets out the conditions for solvency based prescribed contributions.

Contributions required to fund promised benefits can be determined on a termination basis for past and future service (annual incremental cost). Contributions can also be made on a termination basis for past service and on a going-concern basis for future service. The contributions in each case must be required to fully fund the plan on one or the other of the bases used.

Example 1

An AVR is submitted that values the past and future service liabilities on a going-concern basis and on a termination basis for a plan that is not a designated plan. The assets are valued at their fair market value as at the date of the AVR. On the going-concern basis there is an excess surplus; however, on the termination basis there is no excess surplus. We would accept the termination basis and approve employer contributions on this basis while disregarding the excess surplus that exists on the going-concern basis.

Example 2

An actuary can use a termination basis to determine the past service contributions and a going-concern basis to determine the future service contributions. Contributions made on each actuarial funding basis will only be considered eligible contributions if they are required to be made having regard for the contributions previously made.

19.13 8516(3) – Contributions Required by Pension Benefits Legislation

Employer contributions are prescribed contributions if determined on a solvency basis mandated under the PBSA or similar law of a province. The PBSA or similar law of a province must clearly mandate that certain retirement benefits must be assumed to be provided or certain assumptions must be used before the contributions can be considered eligible contributions. Also the conditions set out in paragraphs 8516(3)(a) through (d) of the Regulations have to be satisfied before the contributions can be considered eligible contributions. As with subsection 8516(2), the plan can’t be a designated plan at the time the contribution is made.

Generally, a solvency basis assumes that a plan is terminating or winding-up as at the effective date of the AVR. However, unlike a termination basis, a solvency basis requires that certain retirement benefits are assumed to be provided (for example, growing-in for early retirement) and that certain assumptions are used (for example, salary projection or pre-retirement indexing) in determining the required contributions to be made. The retirement benefits that are assumed to be provided and the assumptions that must be used to determine the required contributions must be mandated under the PBSA or similar law of a province. These mandated funding requirements can vary between the various pension benefits legislations. Only the pension benefits legislation requirements that govern a particular plan can be used for the purpose of the solvency basis. Also it must be clear that the solvency basis is mandated under the pension benefits legislation and not simply a general guideline of the pension supervisory authority.

For example, a plan that is registered under the Alberta pension benefits legislation can’t use the mandated contribution requirements set out under Quebec's pension benefits legislation. Only those conditions mandated by the Alberta legislation can be used or applied in determining the contribution.