Chapter 8 - 8502 – Conditions Applicable to all Pension Plans
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- 8.1 8502(a) – Primary Purpose
- 8.2 8502(b) – Permissible Contributions
- 8.3 8502(c) – Permissible Benefits
- 8.4 8502(d) – Permissible Distributions
- 8.5 8502(e) – Payment of Pension
- 8.6 8502(f) – Assignment of Rights
- 8.7 8502(g) – Funding Media
- 8.8 8502(h) – Investments
- 8.9 8502(i) – Borrowing
- 8.10 8502(j) – Determination of Amounts
- 8.11 8502(k) – Transfer of Property Between Provisions
- 8.12 8502(l) – Appropriate Pension Adjustments
- 8.13 8502(m) – Participants in GSRAs
8.1 8502(a) – Primary Purpose
The main purpose of a pension plan is to provide periodic payments to members after retirement and until death in respect of their service as employees. A pension plan won’t be registered, or continue to be a registered, if it doesn’t meet this prescribed condition for registration under the Act. As an example, the CRA could not accept an amendment to an RPP that changes the sponsorship of the plan if the incoming sponsor does not employ the members of the plan. In this case, the incoming sponsor could not be a participating employer and thus could not make the required contributions to the RPP so that members would receive a lifetime retirement benefit as required under paragraph 8502(a).
Some plans contain a general "purpose of the plan" clause, which is helpful in meeting this requirement. A plan may provide for the commutation of LRBs and still pass the primary purpose test.
We will not register a plan whose main purpose is something other than to provide LRBs. For example, a DB plan that provides a maximum bridging benefit and minimal LRBs, say $1 per month per year of service, would fail the primary purpose test and therefore would be refused registration. In such cases the minimum amount of LRBs provided must be reasonable so that the plan satisfies the primary purpose rule.
We will not register a plan if we know that it will be terminated shortly afterwards, unless the members are about to retire or terminate employment or have already retired or terminated employment.
A plan that provides past-service benefits solely to an individual who has terminated employment can be registered if the following requirements are met:
- 8502(a) – Primary purpose
- 8501(1)(a) – Prescribed condition for registration
- 8502(b)(iii) – Permissible contributions
- 8503(3)(a)(i) – Eligible service
- 147.1(1) – Definitions of member and participating employer
- 147.2(2) – References to former employees
- 147.1(10) – Past-service benefits acceptable to the Minister
8.2 8502(b) – Permissible Contributions
Paragraph 8502(b) of the Regulations outlines those contributions, made after 1990, that are permissible contributions to a pension plan.
As per subparagraph 8502(b)(i) of the Regulations, members may contribute in accordance with the plan as registered. Paragraph 8503(4)(a) limits the member contributions to a DB provision. Member contributions to an MP provision are limited by the PA limits in subsection 147.1(8) of the Act. Section 147.2(4) provides for the deduction from income of member contributions to an RPP.
Subparagraph 8502(b)(ii) of the Regulations permits employer contributions to be made to an MP provision, per the terms of the plan as registered, where the contributions are made on behalf of the employer’s employees or former employees. The contributions must be credited to members’ MP accounts. The aggregate employer and member contributions to an MP provision are limited to the PA limits in subsection 147.1(8) of the Act.
Subparagraph 8502(b)(iii) of the Regulations specifies that employers may make eligible contributions to a DB provision. Subparagraph 8502(b)(vi) states that eligible contributions are as defined in subsection 147.2(2) of the Act.
Subparagraph 8502(b)(iv) of the Regulations permits an RPP to receive RRSP property transferred under subsection 146(16) of the Act, as well as DPSP property transferred under subsection 147(19). An RPP can also receive property from another RPP, when the transfer is done under any of subsections 147.3(1) to (8). RRIF property can be transferred into an MP provision of an RPP, when done under subsection 146.3(14.1). Effective December 14, 2012, an RPP can receive property from a pooled registered pension plan (PRPP), when the transfer is in accordance with subsection 147.5(21) of the Act.
If a plan allows transfers from a foreign pension plan, as per subparagraph 8502(b)(v) of the Regulations, it must state that the amount transferred is, in every case, subject to Ministerial approval.
Applicable after 2008, subparagraph 8502(b)(v.1) of the Regulations will permit pension contributions by the Air Canada trust and Fraser Papers trust described in paragraph 6802(h).
Contributions coming from a provincial guarantee fund, such as the Ontario Pension Benefits Guarantee Fund, satisfy the condition under subparagraph 8502(b)(vii) of the Regulations if the fund forms part of the provincial pension body which in turn is a part of Her Majesty in the right of the province or an agent of Her Majesty in the right of the province.
Although legislated plans typically use the term "contributions" to describe employer funding, in practice some plans hold their funds in consolidated revenue accounts, and contributions are in fact journal voucher entries rather than actual contributions. This means that for plans where there is a consolidated revenue account, the question of eligible contributions does not arise and our approval of contributions is therefore not necessary.
Employer contributions are deemed to be eligible contributions under paragraph 8510(6)(a) of the Regulations, if made in accordance with the plan as registered.
Flexible pension plans
Following the release of the Flexible Pension Plans Newsletter, interest in allowing employer funded optional ancillary benefits became apparent. In response, the Directorate undertook to evaluate how these changes might be achieved within the current defined benefit rules. While much analysis and discussion occurred, our effort was halted in 2005 until such time as a solution is proposed that can be accommodated by all jurisdictions. To date, there has been little progress on this issue.
Consequently, the Directorate confirms that the terms of Newsletter 96-3R1 remain valid and in force. Newsletter 96-3R1 will continue to be applied to flexible plans providing Optional Ancillary Benefits to a member.
Where on a case-by-case review, instances of non-compliance are found, plan amendments, employer certifications, and/or withdrawal of contributions to avoid revocation of the plan will be necessary.
The Directorate continues to work with pension regulators as issues arise. We will continue accepting suggestions by all stakeholders and encourage interested groups to actively seek assurance from provincial regulators that employer funded flexible benefits will be accommodated under their legislation. We remain open to addressing the topic of Flexible Pension Plans.
Plan as Registered – 147.1(14)
Employer Contributions – DB Provisions – 147.2(2)
Description of Trusts – 6802(h)
8.3 8502(c) – Permissible Benefits
Paragraph 8502(c) of the Regulations restricts the benefits that an RPP may provide to, or in respect of, plan members. Specifically, the benefits are limited to:
- Benefits that are provided under one or more DB provisions in accordance with subsection 8503(2), paragraphs 8503(3)(c), (e), (f), (g), (h), (i) and section 8504.
- Benefits that are provided under one or more MP provisions in accordance with subsection 8506(l).
- Benefits required under a law of Canada or a province.
- Benefits to a spouse, common-law partner, former spouse or former common-law partner due to the breakdown of their marriage or partnership.
Often times, an employer sponsors an RPP as well as a retirement compensation arrangement (RCA) or “RCA-like” plan. The purpose of an RCA is to provide high-income earners with retirement benefits that are in excess of the limits within the Act and Regulations that apply to RPPs. The CRA can’t register an RPP that contains both provisions, and so the RPP plan terms and funding documents should refer only to the RPP.
50% employer contribution rule
Benefits referred to under subparagraph 8502(c)(iii) of the Regulations are benefits required to be provided to satisfy the 50% rule of the PBSA or similar law of a province. Basically, when a member's contributions fund more than 50% of his or her benefits, the excess contributions are a benefit entitlement of the member. Under the Quebec Supplemental Pension Plans Act, member-funded pension plans (MFPPs) are not subject to the 50% rule, nor can they voluntarily submit to the rule. See special rules for MFPPs under subsection 8510(9) of the Regulations.
The Act permits payment of the excess contributions in the form of cash, or new/improved benefits. Such new/improved benefits are not subject to the conditions and limits that apply to other permissible benefits. Also, 50% rule benefits are excluded from the calculation of a PSPA and the prescribed amount.
On the one hand, this means that excess contributions in the form of new/improved benefits do not generate a PSPA for the member. On the other hand, since the new/improved benefits are not included in the normalized pension, they do not increase the individual's prescribed amount. The member can only transfer the portion of the excess contributions (representing a refund or the commuted value of new/improved benefits) that is within the prescribed amount (including the commuted value of LRBs) to an MP provision, RRSP or RRIF on a tax-free basis under subsection 147.3(4) of the Act. Pre-1991 excess contributions can also be transferred to an RRSP, under paragraph 147.3(6) of the Act, and therefore are not subject to the prescribed amount limits under section 8517 of the Regulations (since section 8517 only applies for transfers done under subsection 147.3(4)).
We can only accept a single document that relates to an RPP, therefore the plan terms should be read without reference to an RCA. Similarly, RPP funds and RCA funds must be accounted for separately.
Paragraph 8502(c) of the Regulations does not apply to grandfathered plans until 1992.
Transfer – DB to MP, RRSP or RRIF – 147.3(4)
Calculation of PA Excludes Benefits Resulting from 50% Rule – 8302(3)(m)
Provisional PSPA – 8303(3)
Special Rules – Member-funded Pension Plans – 8510(9)
Designated Laws – 8513
Benefits Excluded from Calculation of Prescribed Amount – 8517(5)(f)
Newsletter No. 98-2, Treating Excess Member Contributions under a Registered Pension Plan
Newsletter No. 91-4R, Registration Rules for Money Purchase Provisions
8.4 8502(d) – Permissible Distributions
Paragraph 8502(d) of the Regulations restricts the distributions that can be made from an RPP. Specifically, the distributions are limited to:
- A payment of benefits based on the plan as registered.
- A transfer of property from the plan under subsections 147.3(3), (4.1), (7.1) or (8) of the Act.
- A return of contributions (either to the member or participating employer) where required to avoid revocation of the plan’s registration.
- A return of all or a portion of members’ DB contributions (plus reasonable interest) made to the provision in connection with a plan amendment that also reduces future member required contributions to the DB provision.
- A payment of actuarial surplus from a DB provision to those who have an interest in the surplus. Typically, the plan terms would state who would have such an interest (like the participating employer and plan members).
- The payment of MP property (such as forfeitures) to an employer.
- The payment of MP property, approved by the Minister, in connection with a waiver provided under subsection 8506(2.1) of the Regulations.
- A payment of a single amount (other than a payment of benefits) where required under the PBSA or similar law of a province and the single amount is not transferred to another RPP, an RRSP, or a RRIF.
- An IPP minimum amount that exceeds the retirement benefits provided under the plan.
In addition, an RPP may provide for the payment of all reasonable administrative, investment, and similar expenses incurred in connection with the plan. For MP provisions, payment of expenses with forfeited amounts is further endorsed by paragraphs 8506(2)(f) and 8506(3)(b) of the Regulations.
A return of contributions is allowed in order to avoid the revocation of the plan as per subparagraph 8502(d)(iii) or paragraph 8503(4)(c) of the Regulations. A return of contributions, as a result of a reasonable error, is also permitted as set out in subsection 147.1(19) of the Act.
Plans may state that surplus will be paid to employees or employers or both. Plans should not provide that the surplus would be paid to a trust. Subparagraph 8502(d)(vi) of the Regulations allows the surplus to be paid at any time to any person who has an interest in it. Person, as defined in subsection 248(1) of the Act, is a very broad term and could include both employees and employers, and potentially other parties.
The surplus may not be paid out as a periodic retirement benefit. The surplus may only be paid out as a single lump sum taxable payment.
We will not revoke a grandfathered plan for the sole reason that distributions before 1992 were not in accordance with paragraph 8502(d) of the Regulations.
Reasonable error – 147.1(19)
Transfer – Pre-1991 Contributions – 147.3(6)
Net Contribution Accounts – 8503(l)
Return of Contributions – 8503(4)(c)
IPP – Minimum Withdrawal – 8503(26)
Payment or Reallocation of Forfeited Amounts – 8506(2)(f)
Extension of Reallocation of Forfeitures – 8506(3)(b)
Special Rules – Member-Funded Pension Plans – 8510(9)
Conditions Applicable to Amendments – Return of Contributions – 8511(2)
8.5 8502(e) – Payment of Pension
A plan has to provide that the member's LRBs will commence no later than the end of the year in which the member turns 71 years old.
Clause 8502(e)(i)(A) of the Regulations provides that benefits under a DB provision can commence to be paid after age 71st if the Minister gives approval. We have the discretion to allow benefits to commence at a later date under a plan; however, there can be no accrual of benefits beyond the 71st year and no increases in pension due to the delay of the payment. It is not intended that the discretion be applied to allow estate planning. Where the approval is given, the pension payments can’t increase as a result of the deferral.
Where variable benefits are provided under an MP provision in accordance with paragraph 8506(1)(e.1) of the Regulations, clause 8502(e)(i)(B) permits benefits to begin no later than the end of the calendar year in which the member turns 72 years old.
The plan must also provide that pensions will be paid no less frequently than annually.
Paragraph 8502(e) of the Regulations does not apply in grandfathered plans until 1992.
Pre-Retirement Survivor Benefits – Alternate Rule – 8503(2)(f)
Pre-Retirement Survivor Benefits – MP – 8506(1)(e)
Variable Benefits – 8506(1)(e.1)
8.6 8502(f) – Assignment of Rights
The plan must stipulate that no right of a person under the plan is capable of being assigned, charged, anticipated, given as security or surrendered. These words must be used in the plan text.
Assignment does not include the splitting of benefits on the breakdown of the marriage or partnership pursuant to a court order or written agreement, payment from the plan because of an order for support or maintenance (before or after retirement) or assignment to the individual's legal representative on death.
Some provincial pension legislation excludes from their assignment clause the garnishment of pension benefits pursuant to a garnishing order. Since the non-assignment clause is pursuant a garnishing order to enforce a maintenance order against a member of a pension plan, we will accept it.
Some provincial pension legislation excludes AVCs from their non-assignment clause. Since the assignment of any right would not comply with the requirements of paragraph 8502(f) of the Regulations, we can’t accept a plan provision that permits assignment except as specifically required or permitted under pension legislation.
Paragraph 8502(f) of the Regulations does not apply to grandfathered plans until 1992.
8.7 8502(g) – Funding Media
Paragraph 6(e) of IC72-13R8, Employees’ Pension Plan, describes the acceptable funding media, with two exceptions:
- We no longer require one of three individual trustees to be independent as noted in paragraph 6(e)(ii).
- We no longer require that non-insured plans established in Quebec, British Columbia, Newfoundland and Labrador, and Saskatchewan provide evidence of a written trust agreement or contractual arrangement between the employer or union and persons acting as trustees. This is due to the fact that the Pension Benefits Acts for these provinces create a statutory trust for non-insured registered plans under which the members of the pension committee are trustees without having to accept their designation and responsibilities in writing.
These types of funding are acceptable for an MP provision although retirement benefits have to be provided through the purchase of an annuity. MP provisions can provide retirement benefits from the plan, similar to benefits provided from a RRIF.
The CRA will permit a bank or credit union to act as fund custodian. The individual trustees will remain ultimately responsible to ensure that all areas of the trust agreement are respected. The individual trustees are responsible for the filing of returns.
The CRA will also permit that the trustees of a pension plan contract out to a payroll company the responsibility for producing payments to plan members. The fund will remit payments out of the plan to the payroll company, who then processes the payments. The trustees will remain ultimately responsible to ensure that all areas of the trust agreement are respected.
IC72-13R8, Employees’ Pension Plan
Newsletter No. 91-4R, Registration Rules for Money Purchase Provisions
Newsletter No. 04-2R, Registered Pension Plan Applications – Processing an Incomplete Application
8.8 8502(h) – Investments
Plans may be silent on investments. Those plans that are subject to pension benefits standards legislation will probably already contain wording restricting investments to what is acceptable under the applicable legislation. No changes would be required to a plan with such restrictions.
8.9 8502(i) – Borrowing
There are two allowable situations for borrowing. Plans may provide for one or the other or both. Whenever one of the situations is provided for, the applicable restrictions must also be stated. In the first situation:
- the borrowing term must be for less than 90 days;
- the borrowing can’t be part of a series of loans or other transactions or repayments; and
- the plan property may not be held as loan security except to avoid the distressed sale of plan property.
The above stipulations must appear whenever a plan provides for borrowing unless the second situation applies.
The second situation is where money is borrowed to buy real estate to produce rental income. If the plan states that money will be borrowed for that purpose, it must also state that:
- the loan will not exceed the cost of the property; and
- no plan property (other than the real estate itself) will be used as security for the borrowed money.
Not all plans permit borrowing. If the plan is silent on this issue, then it is not permitted. If it is permitted, often the clause will be in the trust agreement; it must meet the restrictions contained in this paragraph.
8.10 8502(j) – Determination of Amounts
Subsection 8502(j) of the Regulations requires that, where assumptions are used to determine amounts under an RPP, the assumptions must be reasonable. It is up to the actuary to justify whether the assumptions being used are reasonable.
The requirement to use reasonable assumptions applies at any time amounts are being determined under an RPP. It is expected that the use of reasonable assumptions will apply primarily to determining amounts under a DB provision.
The second and equally important aspect of this subsection is that, where reasonable assumptions are used, they must also be acceptable to the Minister and therefore in accordance with generally accepted actuarial principles. The assumptions that are acceptable to the Minister are set out below under the sub-headings "commutation of benefits" and "eligible employer contributions".
Commutation of benefits
The assumptions set out below are reasonable and are acceptable to the Minister for the purposes of determining the commuted value of benefits under a DB provision.
- The assumptions set out in the Standards of Practice issued by the Canadian Institute of Actuaries (CIA) for the Computation of Transfer Values from Registered Pension Plans as amended from time to time (applicable CIA’s Standards of Practice);
- Where reasonable assumptions other than those set out in the most recent version of the CIA’s Standard of Practice for the Computation of Transfer Values are used to compute the commuted value of benefits, we will only accept the use of these other reasonable assumptions if the values produced would not exceed the present values produced using the assumptions set out in the applicable CIA’s Standards of Practice unless mandated under the PBSA or similar law of a province.
- Although the CIA has advised that the Standards of Practice for the Computations of transfer values do not apply to the conversions where a DB provision is replaced by an MP provision, we will consider the standards to be reasonable and acceptable for computing the present value of benefits on conversions. Please refer to Newsletter No. 95-5, Conversion of a Defined Benefit Provision to a Money Purchase Provision, for additional guidelines on the conversion of a DB to an MP provision.
As mentioned above, the use of assumptions and actuarial methods will primarily apply to the determination of amounts under a DB provision.
Eligible employer contributions
The assumptions set out in paragraphs 22 and 23 of IC72-13R8 are reasonable and acceptable to the CRA.
Designated plans are subjected to the maximum funding restrictions set out in section 8515 of the Regulations.
The use of solvency assumptions as mandated under the PBSA or a similar law of a province is acceptable for funding purposes. We will not accept the use of solvency assumptions that are not mandated to be used. For example, the valuation of a plan registered under the Newfoundland and Labrador Pension Benefits Act using the solvency assumptions mandated under the Ontario Pension Benefits Act would not be acceptable. Where a plan has members who are employed in different jurisdictions, the funding of the plan must comply with the administrative procedures respecting multi-jurisdictional plans, which are available on the Canadian Association of Pension Supervisory Authorities (CAPSA) web site.
The terms of a DB provision or plan can be silent on the use of assumptions. However, if the plan does stipulate what assumptions or methods are to be used, or gives the plan administrator the authority to select the assumptions or method to be used, then the plan terms must indicate that the assumptions and methods used will be those that are acceptable under the Act.
Employer Contributions – DB Provisions – 147.2(2)
Payment of Commuted Value – Pre-Retirement Death – 8503(2)(i)
Commutation of Benefits – 8503(2)(m)
Commutation of Benefits – Death of the Member – 8503(2)(n)
Specified Individual – 8515(4)
Eligible Contributions –8515(5)
IC72-13R8, Employees’ Pension Plan
Newsletter No. 95-5, Conversion of a Defined Benefit Provision to a Money Purchase Provision
Newsletter No. 94-3R, Using Assumptions to Compute the Present Value of Benefits
8.11 8502(k) – Transfer of Property Between Provisions
When an RPP has more than one provision, it should not permit the property within one provision to be transferred to another unless, if the provisions were in separate plans, the transfer would comply with subsections 147.3(1) to (4.1), (6), (7.1) or (8) of the Act. This means, for example, that property within a DB provision cannot be reclassified as property within a MP provision unless it could be transferred under the applicable subsections within section 147.3.
If the transfer between provisions of an RPP does not comply with the subsections listed above under section 147.3 of the Act, then the plan has not complied with paragraph 8502(k) of the Regulations, and the plan is revocable under paragraph 8501(2)(a). The income inclusion and deemed contribution rules of subsection 147.3(10) do not apply to excess "transfers" within the same plan.
The terms of the plan must clearly provide for the transfer of amounts between the plan's provisions. The terms need only indicate that the transfer will be done as permitted by the Act.
Transfers – 147.3
Qualifying Transfers – 8303(6)
8.12 8502(l) – Appropriate Pension Adjustments
A plan with an unusual benefit formula must not result in pension credits that do not reflect the benefit earned under the plan.
We accept $66 and $111 flat benefit plans subject to an appropriate PA being reported.
The PA should be calculated based on the annual retirement pension that would be payable based on all years of service up to and including the year for which the PA is being calculated, minus the annual amount of retirement pension that would have been payable based on all years of service up to, but not including, the year for which the PA is being calculated.
Section 78 of the Supplemental Pension Plans Act of Quebec
Section 78 of the Supplemental Pension Plans Act of Quebec (the SPPA) requires that the value of benefits accrued in a DB provision during the postponement period be at least equal to contributions made by the member during the same period, plus interest. To meet this requirement, a number of plans have a benefit formula based on the greater of a DB and an MP provision for service during the postponement period.
Even though these arrangements contravene paragraphs 8503(3)(f) and 8502(l) of the Regulations, a plan that promises benefits based on the greater of a DB and an MP provision is not acceptable. This is because “the greater of” benefits will only be known when they become payable. Pension credits, required to be determined annually, are therefore indeterminable. An MP provision must be added for the postponement period to correct the situation.
At the present time no DB regulation allows for a periodic payment from the member’s net contribution account. Paragraph 8503(2)(h) of the Regulations only provides that any payment from the net contribution account be as a single amount.
Paragraph 8502(l) of the Regulations does not apply to grandfathered plans until 1992.
Lump Sum Payments on Termination – 8503(2)(h)
Determination of Retirement Benefits – 8503(3)(f)
Increase in Accrued Benefits – 8503(3)(h)
Increase in Accrued Benefits – Part-Timers – 8503(3)(i)
Artificially Reduced PA – 8503(14)
Conditions Applicable to Amendments – 8511(1)(a)
8.13 8502(m) – Participants in GSRAs
Paragraph 8502(m) of the Regulations provides that an RPP may not have a connected member who is also entitled to benefits under a government-sponsored retirement arrangement (GSRA).
Definition of Government-Sponsored-Retirement Arrangement – 8308.4(1)
Definition of Connected Person – 8500(3)
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