Chapter 20 - 8517 – Transfer – Defined Benefit to Money Purchase
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20.1 8517(1) – Prescribed Amount
The prescribed amount is a maximum that limits the amount that may be transferred to an RRSP, RRIF, or MP provision from a DB provision of an RPP under subsection 147.3(4) of the Act. Paragraph 8502(k) of the Regulations ensures that the limits in subsection 147.3(4), and by extension, section 8517 of the Regulations, also apply when a member’s lump-sum amount is transferred from a DB provision to an MP provision within the same RPP.
When DB benefits are determined for the purpose of a lump sum transfer, paragraphs 8503(2)(m) or 8503(2)(h) of the Regulations must be applied first. Paragraph 8503(2)(m) allows the payment of a single amount not exceeding the present value of a member’s benefits that cease to be provided as a result of the commutation. Paragraph 8503(2)(h) allows the payment of a single amount based upon the balance in the member’s net contribution account, as defined in subsection 8503(1). Alternatively, a larger lump-sum payment can be made, that is equal to the amount that would be the balance in the member’s net contribution account if the account was credited with twice the contributions made by the member to the DB provision.
Whether the terms of an RPP provide for a lump-sum payment under paragraph 8503(2)(h) or (m) of the Regulations, the single amount paid from the RPP must be equal to, or less than, the prescribed amount in order to be transferred on a tax deferred basis under subsection 147.3(4) of the Act. If the single amount is more than the prescribed amount, the portion exceeding the prescribed amount must be paid in cash and brought into taxable income in the year received. It may be possible under subsection 8503(7) to reduce or eliminate the amount that exceeds the prescribed amount; however, the terms of the particular RPP would have to contain such a provision.
Provided that the terms of the RPP allow for it, paragraph 8503(2)(m) of the Regulations permits a full or partial commutation of the member’s LRBs. The prescribed amount is based on the amount of LRB that is actually commuted in connection with the transfer. It is determined by the formula A x B where, the A factor is the amount of LRBs under the provision commuted in connection with the transfer. Further guidance in determining the amount of the LRBs commuted (that is, the A factor) is found in subsection 8517(4) below. The B factor is determined by the table under subsection 8517(1), which is a present value factor that corresponds to the age of the individual at the time of the transfer.
It is possible to commute a pension in pay (provided that that the terms of the RPP permit it), and receive a lump-sum amount instead of further pension payments from the RPP, and transfer the lump-sum to another registered plan. However, due to the age 71 maturity provisions with the Act applicable to RRSPs, a lump-sum amount can’t be transferred to an individual's RRSP or to another RPP after the end of the year in which the individual turns 71. There is, however, a limited exception in the case of an RPP. After age 71, a transfer from a DB provision of an RPP to an MP provision of an RPP that provides the member with variable benefits is possible. Otherwise, the only transfer option from a DB provision to another registered plan for individuals older than 71 is to a RRIF.
Plan text
A plan text should specify that any amounts transferred to RRSPs, RRIFs or to an MP provision will not exceed the prescribed amount. A general reference stating that transfers must be in accordance with the Act is sufficient.
Cross references:
Transfer – Defined Benefit to Money Purchase, RRSP or RRIF – 147.3(4)
Lump Sum Payments on Termination – 8503(2)(h)
Commutation of Benefits – 8503(2)(m)
Commutation of LRBs – 8503(7)
Newsletter No. 94-2, Technical Questions and Answers
20.2 8517(2) – Minimum Prescribed Amount
Subsection 8517(2) of the Regulations allows the greater of the amount determined under subsection 8517(1) and the amount in the member’s net contribution account, as defined in subsection 8503(1), to be transferred on a tax deferred basis.
The net contribution account is used to track member contributions plus interest under a DB provision. It is a bookkeeping account that ensures members retain their rights to their own contributions plus interest, to the extent that this account has not been reduced by benefits paid from the plan. In some cases, members will have contributed or transferred amounts to the plan which exceed the amount obtained using the A x B formula. In that case, the net contribution account becomes the prescribed amount and may be transferred to an RRSP, RRIF or an MP provision under subsection 147.3(4) of the Act. This only applies where the member is transferring the full entitlement under the provision.
Plan text
It is not necessary for a plan text to refer specifically to net contribution accounts, or to provide specifically that such amounts may be transferred. The plan text must, however, provide for transfers in a general way if it intends to allow them and state that they are subject to the requirements of the Act.
20.3 8517(3), (3.001), (3.01), (3.02) – Underfunded Pension
When a plan is underfunded and/or the participating employer is insolvent, plan members often receive less than their promised benefits that have accrued under the plan. Although members may retain rights under the plan after an initial settlement, pending the outcome of the insolvency proceedings, they often never receive their full benefits.
In these scenarios, subsection 8517(3.01) of the Regulations allows for the value of the A factor in the prescribed amount calculation to be determined without taking into account the fact that a reduction has occurred to a member’s LRB. This allows non-IPP members that have received a reduced DB lump-sum amount from their plan, due to the underfunding of the plan and the insolvency of the employer, with a greater opportunity to transfer the amount received on a tax deferred basis to an RRSP, RRIF, or MP provision under subsection 147.3(4) of the Act. The following conditions must be satisfied for a plan administrator to receive favourable consideration from the CRA:
- the member is an employee or former employee of the employer;
- the employer was a participating employer, and is undergoing insolvency proceedings under the Bankruptcy and Insolvency Act or Companies' Creditors Arrangement Act, and has ceased making contributions to the plan;
- LRBs have been reduced due to the plan’s underfunded status;
- the plan is not a designated plan; and
- the Minister has approved the application of subsection 8517(3.01) of the Regulations.
Following an initial transfer, subsection 8517(3.02) of the Regulations contains a rule that ensures that, if any subsequent transfers are made to a member, that the total of all amounts transferred, cannot exceed the total prescribed amount calculated at the time of the initial transfer.
Subsection 8517(3.001) of the Regulations allows the prescribed amount to be based upon a member’s unreduced LRB when a particular RPP (other than an IPP as defined in subsection 8300(1)) is underfunded and a benefit reduction has been approved by the plan’s regulator under either the PBSA or similar law of a province and the CRA. In the case of an underfunded IPP, similar consideration may be provided as long as the lump-sum amount transferred from the plan represents the final payment from the IPP.
Cross references:
Newsletter No. 16-3, Transfers from Underfunded Individual Pension Plans
20.4 8517(3.1) – Benefits Provided with Surplus on Wind-up
Subsection 8517(3.1) of the Regulations provides a special transfer limit that applies when a member commutes stand-alone ancillary benefits provided in accordance with subsection 8501(7). It applies to amounts transferred in respect of stand-alone ancillary benefits that are provided after 1996 (second-stage transfers). A member can use the unused section 8517 transfer room from the prior transfer in order to permit the transfer of some or the entire lump-sum amount representing a commuted value of ancillary benefits to an RRSP, RRIF or an MP provision under subsection 147.3(4) of the Act.
If surplus is used to upgrade benefits after LRB’s have been commuted:
- the additional LRB’s and their associated ancillary benefits can be transferred to an RRSP, RRIF, or MP provision, subject to the normal prescribed amount test (paragraph 8517(3.1)(a) of the Regulations)
- the part which are stand-alone ancillary benefits* can be transferred to an RRSP, RRIF, or MP provision subject to the limit prescribed by paragraph 8517(3.1)(b), which is the lesser of:
- the present value of the stand-alone ancillary benefits and
- the unused part of the first-stage transfer limit
Amounts under paragraph 8517(3.1)(b) of the Regulations must be approved by the Minister.
* Stand-alone ancillary benefits are ancillary benefits based on LRB’s that were previously commuted.
Conditions applicable to the approval of the Minister
Where we receive an amendment that upgrades benefits on plan windup that would be considered stand-alone ancillary benefits, we require the following information from the administrator, in order to approve the stand-alone ancillary benefits under subsection 8501(7) of the Regulations, as well as to calculate the prescribed amount under subsection 8517(3.1), for the purpose of a transfer under subsection 147.3(4) of the Act:
- Member’s name
- Member’s date of birth
- Date of first transfer
- Commuted value previously transferred (including excess contributions transferred)
- 8517 – Prescribed amount as at date of first transfer
- Unused prescribed amount from the first transfer
- Commuted value of new LRBs and their associated ancillary benefits and/or commuted value of new stand-alone ancillary benefits provided with respect to the previously commuted amount. If the member was entitled to a PAR (that is, terminated after 1996), the commuted value of stand-alone ancillary benefits provided must be broken down by:
- Commuted value of post-1989 benefits
- Commuted value of pre-1990 benefits
Cross references:
Transfer – Defined Benefit to Money Purchase, RRSP or RRIF – 147.3(4)
Benefits Provided with Surplus on Plan Wind-up – 8501(7)
20.5 8517(4) – Amounts of Lifetime Retirement Benefits Commuted
Subsection 8517(4) of the Regulations is used to determine the A factor in the A x B formula described in subsection 8517(1). That is the amount by which LRBs are reduced as a result of the commutation and transfer.
Paragraph 8517(4)(a) of the Regulations applies where the pension (LRB) is in pay, and the member decides to have part or all of it commuted (assuming the plan terms so permit) and transferred to an RRSP, RRIF, or MP provision. Where that is the case, the amount used for the A factor in the A x B formula is the annual amount by which the LRB (i.e. the annual pension the member is currently receiving) is reduced as a result of the commutation and transfer.
Paragraph 8517(4)(b) of the Regulations applies where the amount is commuted and transferred before pension (LRB) payments begin (for example, on plan termination or termination of employment). The amount of LRBs commuted is the amount by which the normalized pension computed using the assumptions of subsection 8517(5) is reduced as a result of the transfer.
Paragraph 8517(4)(c) of the Regulations applies where, in conjunction with a transfer from an RPP on behalf of an individual, another payment is also made from the plan on behalf of the individual. This paragraph provides that the reduction in the individual’s LRBs or normalized pension, as a result of that other payment, is taken into account in determining the LRBs commuted in connection with the transfer.
Paragraph 8517(4)(c) of the Regulations does not apply, however, with respect to a payment made in settlement of rights on the breakdown of a marriage or common-law partnership if the payment is transferred to an RRSP, RRIF, or RPP in accordance with subsection 147.3(5) of the Act. In other words, the individual’s normalized pension is determined only on the individual’s remaining entitlement (original entitlement less the spousal entitlement) to benefits under the plan.
For example, assume that following marriage breakdown, a spouse or common-law partner is entitled to half of the member’s accrued DB benefits. The spouse or common-law partner can transfer his/her entitlement, in a lump-sum, from the particular RPP to an RRSP for their own benefit, on a tax deferred basis, under subsection 147.3(5) of the Act. Note that there is no prescribed amount limit for transfers made under subsection 147.3(5). If, however, the member wants to transfer the remainder of his or her benefits from the DB RPP to an RRSP, RRIF, or MP provision under subsection 147.3(4), the prescribed amount must be calculated as if he/she had always been entitled to only half of the benefits within the plan, in accordance with paragraph 8517(4)(c) of the Regulations.
DB to DB transfers under subsection 147.3(3) of the Act are also excluded under paragraph 8517(4)(c) of the Regulations because the member’s remaining rights to benefits under the plan become provided under the transferee plan.
20.6 8517(5) – Normalized Pension
As set out in paragraph 8517(4)(b) of the Regulations, if the member has not yet commenced receiving an LRB at the time of a transfer, the normalized pension assumptions in subsection 8517(5) are used to calculate the A factor (the amount of LRBs reduced as a result of the transfer) in subsection 8517(1). This would apply, for example, if an active member were to receive a commuted value from the plan due to termination of employment and therefore his/her termination from the particular plan. The normalized pension assumptions used in subsection 8517(5) are essentially the same assumptions used for calculating a DB PA, as set out in subsection 8302(3), with a few exceptions.
8517(5)(e)
When lifetime retirement benefits under the DB provision are dependent on the amount of benefits provided under another provision of the plan or another RPP, paragraph 8517(5)(e) requires a reasonable estimate to be made in respect of the amount provided under the other provision.
For example, if the plan is a DB plan offset by a MP provision, the normalized pension for an individual under subsection 8517(5) of the Regulations must first be determined without regard to paragraph 8517(5)(e).
Although other methods may be considered to be reasonable, the following is an example of a reasonable method to determine the estimate of the MP offset:
MP offset = MP account / Factor
MP account = value of the individual's MP account at the time of transfer
and
Factor = (B x C) / D
Where
B = applicable present value factor at the time of transfer
C = the lump sum value of the individual's total lifetime retirement benefit entitlements before MP offset
D = prescribed amount of the individual's total lifetime retirement benefit entitlements before MP offset
Other methods will be considered on a case by case basis.
8517(5)(f)
Paragraph 8517(5)(f) of the Regulations excludes any additional benefits that might become payable as a consequence of the requirements under the PBSA, or similar law of a province.
As a result, such additional benefits may not be transferred on a stand-alone basis from a DB provision of an RPP to an RRSP, RRIF, or MP provision of an RPP under subsection 147.3(4) of the Act. An exception is available, however, under subsection 147.3(6), where the lump-sum amount may be transferred if it represents a return of member DB contributions made to the plan for periods prior to 1991.
Cross reference:
Designated Laws – 8513
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