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Chapter 9 - 8503(1) & 8503(2) – Defined Benefit Provisions

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9.1 8503(1) – Net Contribution Account

Under the Regulations, the net contribution account is a concept, rather than an actual account, which exists in order to ensure that members retain their rights to their own contributions plus amounts transferred in from other plans or provisions, plus interest, to the extent that they have not been used to pay the benefits promised under the plan. In combination with paragraph 8503(2)(h) of the Regulations, for example, subsection 8503(1) permits a refund of excess employee contributions on termination of employment. This definition of net contribution account is also relevant for purposes of subsection 8517(2) – Minimum Prescribed Amount.

For purposes of "reasonable rate" of interest in a net contribution account, we consider acceptable the assumptions described below, as long as they are reasonable at the time they are used.

Acceptable assumptions:

We also accept the minimum assumptions that are required to be used by reason of the PBSA or a similar law of a province.

Keep in mind that the determination of whether an assumption is reasonable can only be made based on the specific circumstances of each case. What we accept in one case may not be acceptable for a similar case at another time. For example, CANSIM + 2%, would not initially be acceptable without looking at the particulars of a specific case. If CANSIM + 2% has historically been lower than the fund rate, or is lower for a specific year, it may be reasonable for that year but not necessarily on an ongoing basis, unless the rate of interest is "capped" by the fund rate.

Note

The minimum interest rate on employee contributions to an MP plan is the fund rate of return based on the market value of investments.

Plan text

The plan text does not have to explicitly provide for a net contribution account. If it provides for the refund of contributions to the member or amounts transferred in, it must do so in a manner that does not conflict with the net contribution account concept, in combination with the other applicable areas of the Regulations. This means, for example, that it could not provide for unreasonable rates of interest on contributions.

Where an employer uses a reciprocal agreement, the new employer can’t recreate the employee's previous net contribution account with employer contributions or plan funds. Under a reciprocal agreement, where no funds are transferred between plans, the net contribution account under the importing plan starts at zero. The net contribution account the individual had under the exporting plan must also be extinguished.

Cross references:

Permissible Distribution – Retroactively Non-Contributory – 8502(d)(iv)
Minimum Prescribed Amount – 8517(2)

9.2 8503(2) – Permissible Benefits

A general reference in the plan that the payment of benefits may be made in an optional form (that is, in a form other than the normal form) is acceptable if the plan terms state that the optional forms are subject to the limitations imposed by the Act and Regulations. Otherwise, the optional forms must be specified. An example of an acceptable optional form would be a member foregoing LRBs to receive a basic or additional bridging benefit of an actuarially equivalent value, which is permissible under paragraphs 8503(2)(b) and 8503(2)(l) of the Regulations.

A plan may state that additional or other benefits may be provided at the discretion of the employer (discretionary benefits). The plan need not be amended (that is, naming the members and describing their entitlements) when the employer subsequently exercises such discretion, provided that the discretionary benefits:

Where one or more of these conditions is not met, the plan will need to be amended each time the employer chooses to provide discretionary benefits.

Regardless of whether an amendment is needed, there must be no reason to believe that there is or will be funding for the discretionary benefits based on the possibility that they will be provided. Funding is only permissible when a member becomes factually entitled to discretionary benefits because the employer has exercised its discretion to provide them. An exception is provided, however, under paragraph 147.2(2)(c) of the Act which allows the pre-funding of inflation adjustments even if the plan does not provide for such automatic inflation adjustments but it is reasonable to expect that they will be made on an ad-hoc basis.

9.3 8503(2)(a) – Lifetime retirement benefits

The general rule is that LRBs, which exclude bridging benefits, must be paid in equal periodic amounts. The exceptions to this rule are listed below.

9.3.1 8503(2)(a)(i) – Death benefits

The member's benefits may be reduced after the spouse or common-law partner dies. This is often referred to as a joint and contingent pension. A similar benefit, where the spouse or common-law partner receives a reduced pension after the death of the member, is permitted as a death benefit under paragraph 8503(2)(d) of the Regulations. There is no restriction on the percentage reduction of the pension payable after the spouse's or common-law partner's death.

9.3.2 8503(2)(a)(ii) – Cost-of-living adjustments

Plans may provide for regular indexing, capped by the Consumer Price Index (CPI), from the date the LRBs commence to be paid. There is no age restriction.

Plans may provide for 4% annual increases to pensions in pay, whether or not the 4% is warranted by CPI. However, the maximum pension rules in section 8504 of the Regulations restricts the LRBs in years following the commencement year to the maximum formula plus increases as warranted by CPI. This means that a plan which pays benefits at the maximum level with 4% indexing would, in effect, be restricted to the lesser of 4% and CPI. The CPI cap would likely not affect a less generous plan, for example an integrated plan, if it provided for 4% indexing.

Where the excess earnings approach is used, it should be reasonable to expect that the present value of the additional benefits will not exceed the present value of the greater of CPI and a flat 4% indexing.

Clause 8503(2)(a)(ii)(D) of the Regulations allows combinations of CPI, 4%, and excess earnings indexation, as long as the present value of the indexation payable can't reasonably be expected to exceed the present value of the greater of CPI and 4% indexing. For example, a plan that provides for indexation based on the greater of an excess earnings rate and 5% would automatically contravene this requirement.

9.3.3 8503(2)(a)(iii) – Ad hoc increases

Plans may provide ad hoc increases to the pensions of retired members from time to time. Lump sum catch-up payments are not permitted where indexing is provided to retired members who have commenced pension payments.

If a plan provides for ad hoc indexing at the discretion of the administrator, it is not necessary for the CRA to receive an amendment, board resolution, or other documentation if that discretion is exercised. However, actuarial valuation reports must show the ad hoc indexing, and the plan terms that give authority to increase benefits in this way must state that such increases will be warranted by increases in CPI.

Some plans do not provide general authority to increase benefits. Instead, they occasionally amend the plan or attach an appendix to add the increase. In these cases, we must be satisfied that the increase is warranted by CPI. If it is not obvious that this is the case, we will ask the administrator for written confirmation.

9.3.4 8503(2)(a)(iv) – Additional lifetime retirement benefits

A member's benefits may be increased as a result of additional LRBs being provided. For example, the plan may increase the benefit accrual rate retroactively for all members, active and retired, or service with the employer that was previously not pensionable service under the plan becomes pensionable service for all members. Lump sum catch-up payments to retired members whose benefits were retroactively increased are not permissible.

9.3.5 8503(2)(a)(v) – Early retirement

The plan may provide for an adjustment to LRBs where the adjustment reduces or eliminates the portion of an early retirement reduction that was not required to be applied to comply with the early retirement rules in paragraph 8503(3)(c) of the Regulations. In other words, if the member's pension at the time of commencement was subject to an early retirement reduction that was more restrictive than what is required under paragraph 8503(3)(c), the reduction can’t be completely eliminated later when the member reaches one of the 60/30/80 factors (55/25/75 for those in public safety occupations).

9.3.6 8503(2)(a)(vi) – Disability benefits

Some DB plans provide that a member's pension is to be reduced to reflect disability benefits provided to the member under the CPP or QPP, worker's compensation or private insurance plans. Normally, the offset to the RPP pension is eliminated when the other benefits cease to be paid. Subparagraph 8503(2)(a)(vi) of the Regulations allows for the adjustment of the LRBs in this situation.

9.3.7 8503(2)(a)(vii) – Optional forms – Increased

Most plans offer optional forms of survivor benefits based on the actuarial equivalent of the normal form. Some of these optional forms will decrease the amount of LRBs the member will receive. Subparagraph 8503(2)(a)(vii) of the Regulations allows a member's benefit to be increased due to a change in form of survivor benefit after the member commences to receive their LRBs. For example, if a member has a spouse or common-law partner when they retire, has chosen a joint and survivor form of pension and the spouse or common-law partner dies before the member, the plan can allow the member to change the form of benefit to a life only pension.

9.3.8 8503(2)(a)(viii) – Optional forms – Decreased

A plan can provide for a decrease in the member's LRBs due to a change in form of survivor benefit after the member has commenced to receive LRBs. For instance, the member has no spouse or common-law partner when they retire and chooses a life and 10 form of benefit. The member later marries or enters into a common-law relationship and decides to change the form of benefit previously chosen to a joint and survivor benefit. Subparagraph 8503(2)(a)(viii) of the Regulations allows for the decrease in the member's LRBs due to the change in the form of benefit.

9.3.9 8503(2)(a)(ix) – Retirement benefits while remunerated

A plan can provide a member with lower retirement benefits while he or she is receiving remuneration from a participating employer. This exception is intended to accommodate plans that require a pension of a member who becomes re-employed after pension commencement to be reduced to reflect the remuneration received during re-employment. The pension is later increased to the full amount when the member subsequently retires.

9.3.10 8503(2)(a)(x) – Adjustments approved by the Minister

The member's benefits can be adjusted in accordance with an amendment submitted to the CRA before April 19, 2000, as long as we approved the amendment in writing and the benefits begin to be paid before 2003.

Plans do not necessarily have to contain the words "equal, periodic"; however, we must ensure that the plan does not provide for benefits which are other than equal and periodic unless they fall within the exceptions listed above.

Shortened life expectancy

Some provincial legislation allows a plan to provide for a fixed term pension if the person has a condition that is likely to shorten considerably his or her life expectancy. The Regulations were designed to cover premature death through the 15-year guarantee period and the commutation provisions. The guarantee period was included to ensure that a member would get at least 15 years of benefits. We will therefore not accept a provision allowing for a term certain on shortened life expectancy. The member could, however, commute the benefit and roll it to an RRSP and take it from the RRSP in whatever form the province will allow.

Grandfathered plans

There is no general grandfathering provision for benefits in conflict with paragraph 8503(2)(a) of the Regulations. A grandfathered plan has to comply with this rule from January 1, 1992. This applies to pre-reform benefits accrued under the plan as well as benefits in pay.

The limited grandfathering provisions that do exist under the Regulations are:

Cross reference:

Payment of Pension – 8502(e)

9.4 8503(2)(b) – Bridging benefits

All bridging benefits, except additional bridging benefits permissible under paragraph 8503(2)(l) of the Regulations, are subject to the CPP/QPP/OAS cap and age and service restrictions in this paragraph.

Bridging benefits payable to a member may be funded by employer contributions, by employer and member contributions, or be funded as an optional form by the member foregoing a proportionate amount of LRBs.

In a plan where benefits are reduced by any public pension benefits (CPP/QPP, OAS) that become payable, the portion of the benefit, which will disappear when the public pension benefits are paid, is a bridging benefit by definition.

Combination plans that contain an MP provision for future service and a DB provision (single purchase annuity) for years of past service may provide bridging benefits based on the pensionable years of service under the DB provision only.

Plan text

Where the bridging benefit is funded by employer or employer and member contributions, it must be set out in the plan and it must be apparent that it will not exceed the appropriate limits.

Where the bridging benefit is an optional form, it can be an explicit or an implicit benefit. If explicit, it must be apparent that the bridging benefit will not exceed the limits under paragraph 8503(2)(b) of the Regulations or paragraph 8503(2)(b) in combination with paragraph 8503(2)(l). If it is implicit, as with any optional form of benefit, we require some reference to it being subject to the limits and conditions of the Act and Regulations.

The requirements of paragraph 8503(2)(b) of the Regulations may be satisfied by the plan stating that the bridging benefit is subject to paragraph 8503(2)(b), by stating generally that it is subject to the requirements of the Act and Regulations (this is the most common when the bridging benefit is implicit as an optional form of benefit), or by itemizing the restrictions in the plan text. In the latter case, it must be clear that the bridging benefit will:

The bridging benefit may be indexed for increases to CPI.

Payments of public pensions (CPP/QPP) can be deferred until after age 65. However, a plan can’t allow for bridging benefits to begin when the member is eligible to begin his unreduced public pension benefits. The plan must specifically provide that bridging benefits can cease no later than the end of the month immediately following the month in which the member attains 65 years of age.

As stated earlier, when the bridging benefit is an optional form of benefit whereby the member foregoes LRBs to receive it, paragraph 8503(2)(b) of the Regulations works in combination with paragraph 8503(2)(l) to restrict the benefits payable. In other words, paragraph 8503(2)(l) eliminates any age or service reduction that is otherwise applied by paragraph 8503(2)(b).

In the answer to question 3 of Newsletter No. 94-2 it is mentioned that "to provide additional bridging benefits in accordance with paragraph 8503(2)(l) of the Regulations, an RPP has to provide or permit basic bridging benefits...". In situations where bridging benefits are provided as an optional form in accordance with paragraph 8503(2)(l), even though the plan does not provide basic bridging benefits, the additional bridging benefit must be capped by paragraph 8503(2)(b) (without the age and service reduction) and comply with paragraph 8503(2)(l) (actuarial equivalent of LRBs foregone). Where a plan does not provide for basic bridging benefits, we consider that the bridging benefits resulting from an optional form are automatically in excess of bridging benefits that are permissible under paragraph 8503(2)(b) and therefore qualify as additional bridging benefits payable under paragraph 8503(2)(l).

Subsection 8503(7.1) of the Regulations accommodate situations where a member fully converts LRBs into bridging benefits. Subparagraph 8503(2)(b)(i) places the condition that bridging benefits can’t be paid unless LRBs be paid. However, when a member fully converts his or her LRBs into bridging benefits, paragraph 8503(7.1)(a) provides that the condition in subparagraph 8503(2)(b)(i) does not apply.

Connected persons

If connected persons are participating in the plan and entitled to bridging benefits, the 10 year pro-ration is based on actual full-time service with a participating employer rather than pensionable service. If the bridging benefit restrictions are detailed in the plan text, they should include this more restrictive service requirement for the connected persons.

MEPs

The above restrictions on the bridging benefits payable to connected persons do not apply if the plan is a MEP (including SMEPs).

Grandfathered plans

The general rule that the bridging benefit may not exceed the amount of public pension benefits that would be payable to the member if the member was 65 years old, entitled to full OAS and to CPP based on their highest 3 years' earnings, is not grandfathered unless exempted by Ministerial waiver under paragraph 8509(4)(b) of the Regulations.

The additional restrictions, which apply when members are less than 60 years old or have fewer than 10 years of service, must be added for that portion of the bridging benefit that is in respect of years after 1991.

Where we have registered a pension plan after March 27, 1988, that provides for bridging benefits which do not comply with paragraph 8503(2)(b) of the Regulations, bridging benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(b). However, the benefits must be acceptable to the Minister.

Cross references:

Definition of Bridging Benefits – 8500(1)
Additional Bridging Benefits – 8503(2)(l)
Bridging Benefits – Cross-Plan Restrictions – 8503(3)(k)
Commutation of Lifetime Retirement Benefits – 8503(7)
Limits Dependent on CPI – 8503(12)
Retirement Benefits Before Age 65 – 8504(5)
Conditions Applicable After 1991 to Benefits Under Grandfathered Plans – 8509(2)(a)
DB Under Grandfathered Plan Exempt from Conditions – 8509(4)(b)
Conditions Applicable to Amendments – 8511(1)(b)
Newsletter No. 94-2, Technical Questions and Answers
Newsletter No. 92-6, Pre-Reform Disability and Bridging Benefits

9.5 8503(2)(c) – Guarantee period

Paragraph 8503(2)(c) of the Regulations allows for a guarantee period to be attached to a member's pension.

Where retirement benefits permissible under paragraph 8503(2)(d) of the Regulations are provided under the provision to a spouse or common-law partner or former spouse or common-law partner of the member, the member's pension may be guaranteed for up to 5 years from the date of commencement.

Where retirement benefits permissible under paragraph 8503(2)(d) of the Regulations are not provided under the provision to a spouse or common-law partner or former spouse or common-law partner of the member, the member's pension may be guaranteed for up to 15 years from the date of commencement.

A member's pension may be guaranteed when retirement benefits under paragraph 8503(2)(d) of the Regulations are provided to a dependant. The guarantee period is limited to 15 years unless paragraph 8503(2)(d) retirement benefits are also payable to a spouse or common-law partner, in which case the guarantee period has to be limited to 5 years.

The guarantee is on the member's pension. If a member dies before the end of the guarantee period, the unreduced retirement benefits can continue to be paid to the member's beneficiary until the end of the guarantee period, following which the beneficiary under a joint and survivor pension may receive a reduced pension.

If both the plan member and the member's beneficiary die before the end of the guarantee period, the unreduced retirement benefits can continue to be paid to the member's estate until the end of the guarantee period.

By virtue of paragraph 8503(2)(n) of the Regulations, an RPP may permit or require guaranteed retirement benefits to be commuted rather than paid on a periodic basis.

All plans may apply the provisions of paragraph 8503(2)(c) of the Regulations with respect to pre-reform benefits.

Grandfathered plans

Grandfathered plans do not have to comply with this condition until 1992.

Where we have registered a pension plan after March 27, 1988, that provides benefits that do not comply with the conditions, any death benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(c) of the Regulations. However, the death benefits must be acceptable to the Minister.

Cross references:

Definition of Dependant – 8500(1)
Pre-Retirement Death Benefits – 8503(6)

9.6 8503(2)(d) Post-retirement survivor benefits

Plans may provide for joint pensions of up to 66 2/3% to a spouse or common-law partner, former spouse or former common-law partner, or dependant. The definition of dependant under subsection 8500(1) of the Regulations includes grandparents and grandchildren, who were not included as dependants under IC72-13R8. A survivor benefit can be provided to the dependants, as defined for purposes of the Regulations, based on all years of service.

Such joint pensions may benefit more than one individual, as long as the individual qualifies as a spouse or common-law partner, former spouse or former common-law partner or dependant. The benefits payable to the various beneficiaries may not exceed 100% of the amount, which the member was receiving before his or her death, and no one individual, may receive more than 66 2/3%. If a minor dependant is entitled to benefits, it is acceptable to pay the benefit to the person fiscally responsible for the dependant's care rather than to the dependant.

A plan may provide a post retirement death benefit after the pension has commenced to be paid, so long as the member's equal, periodic payments are not altered.

The 66 2/3% limit applies to retirement benefits, which include both LRBs and bridging benefits. The beneficiary could therefore receive up to 66 2/3% of what the member was receiving, including 66 2/3% of the bridging benefit.

Plans will often provide a separate normal form for married members and single members. The text will state that all optional forms will be "actuarially equivalent" to the normal form. We should not question which of the normal forms the optional form will be equivalent to, because we assume that they will use the form that relates to the individual.

Grandfathered plans

Joint and survivor pensions in excess of 66 2/3% as a normal form may have been accepted in grandfathered plans on the basis that they were actuarially equivalent to a maximum pension based on joint and 60% (see paragraph 9(g) of IC72-13R8). Where that is the case, Ministerial exemptions under paragraph 8509(4)(a) of the Regulations will be granted for death benefits that relate to LRBs accrued before 1992. We will not, however, give exemptions if the plan provides a 2% pension based on a normal form in excess of 66 2/3%.

We will grant exemptions under paragraph 8509(4)(a) of the Regulations for joint and survivor pensions where the survivor may be someone other than the spouse or former spouse as defined in subsection 147.1(1) of the Act. The exemptions apply only to the portion of the survivor benefits that relate to LRBs accrued before 1992.

Where we have registered a pension plan after March 27, 1988 that provides death benefits that do not comply with paragraph 8503(2)(d) of the Regulations, any death benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(d). However the death benefits must be acceptable to the Minister.

Cross references:

Definition of Dependant – 8500(1)
Post-Retirement Survivor Benefits – 8503(2)(c)
Additional Post-Retirement Death Benefits – 8503(2)(k)
IC72-13R8, Employees' Pension Plans

9.7 8503(2)(e) – Pre-retirement survivor benefits

Rather than a form of pension chosen by the member, with an attached death benefit (that is, guarantee period or joint pension), this pension is payable only to the survivors where the member dies before receiving any pension benefit. IC72-13R8 referred to this type of pension as a death benefit (paragraph 9(e)), rather than a form of pension (paragraph 9(g.2)(i)).

Plan text

It is acceptable for a plan to provide as a death benefit to the spouse or common-law partner or former spouse or former common-law partner or dependant, periodic payments amounting to 66 2/3% of the LRBs (excludes bridging benefits) which the member would have received at his or her date of death had he or she retired on a pension which was not reduced for early retirement. It is also acceptable for a plan to provide up to 66 2/3% of what the members would have received had they continued in employment to age 65 at the rate of pay they were earning in the year of death, as long as the deeming of the additional years of service does not result in an annual death benefit pension which is greater than 3/2 of YMPE. If the member's accrued benefit without deeming of service was already in excess of 3/2 of YMPE, no service could be deemed, and the death benefit could not exceed 66 2/3% of the actual accrued benefit. If a minor dependant is entitled to benefits, it is acceptable to pay the benefit to the person fiscally responsible for the dependant's care rather than to the dependant.

More than one spouse or common-law partner, former spouse or former common-law partner or dependant may receive the death benefit, but the total benefits can't exceed the member's accrued unreduced LRBs, with the deeming of service to age 65 described above. For example, a spouse or common-law partner might receive a pension of 50% of the member's accrued pension for life, and 2 dependants might receive pensions of 25% of the accrued pension until the end of the eligible survivor benefit period.

These benefits may be indexed for CPI.

Connected persons

The additional amount that the member would have received had they continued in employment until age 65 is not available to connected persons.

MEPs

The restriction regarding connected persons does not apply if the plan is a MEP (including SMEPs).

Grandfathered plans

We will grant exemptions under paragraph 8509(4)(a) of the Regulations for grandfathered plans that provide that the survivor may be someone other than the spouse, common-law partner or former spouse or former common-law partner, or dependant as defined in subsection 8500(1). The exemptions apply only to the portion of the survivor benefits that relate to LRBs accrued before 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits which do not comply with the conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(2)(e) of the Regulations. However, the benefits must be acceptable to the Minister.

Cross references:

Pre-Retirement Survivor Benefits – Guarantee Period – 8503(2)(g)
Lump Sum Payments on Termination – 8503(2)(h)
Lump Sum Payments on Death – 8503(2)(j)
Commutation of Benefits – 8503(2)(n)
Limits Dependent on CPI – 8503(12)
Transfer – Lump Sum Benefits on Death – 147.3(7)
IC72-13R8, Employees' Pension Plans

9.8 8503(2)(f) – Pre-retirement survivor benefits – Alternative rule

The basic difference between paragraphs 8503(2)(e) and 8503(2)(f) of the Regulations is that under paragraph 8503(2)(e) an annual amount is determined. Under paragraph 8503(2)(f), a value rather than an annual amount is determined.

The spouse may receive a pension equal in value to the member's accrued benefit. The actual amount payable to the spouse or common-law partner or former spouse or former common-law partner will depend on the member's accrued benefit, the spouse's or common-law partner's age, and whether or not the spouse or common-law partner elects to attach a guarantee to the benefit.

Plan text

Where pre-retirement death benefits are provided under a plan, if it is a benefit under paragraph 8503(2)(f) of the Regulations, it must only be payable to a spouse or common-law partner or former spouse or former common-law partner and not to a dependant.

Also the plan must state that the death benefit will be payable by the later of one year after the day the member died and the end of the year the spouse or common-law partner or former spouse or former common-law partner turns 71.

Finally, the plan must state that the death benefit will be paid in equal periodic amounts, with the only exceptions being those permitted under paragraph 8503(2)(a) of the Regulations.

Grandfathered plans

We will grant exemptions under paragraph 8509(4)(a) of the Regulations for survivor pensions where the survivor may be someone other than the spouse, common-law partner or former spouse or former common-law partner. The exemptions apply only to the portion of the survivor benefits that relate to LRBs accrued before 1992.

In addition, death benefits relating to LRBs accrued before 1992 will be exempted if they can be interpreted as complying with paragraph 9(f) of IC72-13R8.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(2)(f) of the Regulations. However, they must be acceptable to the Minister.

Cross references:

Payment of Pension – 8502(e)
Pre-Retirement Survivor Benefits – Guarantee Period – 8503(2)(g)
Lump Sum Payments on Death – 8503(2)(j)
Commutation of Benefits – 8503(2)(n)
Transfer – Lump Sum Benefits on Death – 147.3(7)
IC72-13R8, Employees' Pension Plans

9.9 8503(2)(g) – Pre-retirement survivor benefits – Guarantee period

Paragraph 8503(2)(g) of the Regulations allows a guarantee period of up to 15 years to be attached to a pre-retirement survivor benefit, as set out in paragraphs 8503(2)(e) and (f). The remainder of the guarantee period may be paid to any beneficiary.

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 death benefits that do not comply with paragraph 8503(2)(g) of the Regulations, any such benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(g). However, the benefits must be acceptable to the Minister.

Cross references:

Pre-Retirement Survivor Benefits – 8503(2)(e)
Pre-Retirement Survivor Benefit – Alternative Rule – 8503(2)(f)

9.10 8503(2)(h) – Lump sum payments on termination

It is not necessary for plans to establish or refer to net contribution accounts as long as the rules relating to returns of employee contributions are met.

Plans may provide that on a member's termination from the plan (including retirement, termination of employment, termination of the plan and termination of membership), employee contributions and amounts transferred to the plan for the member, plus interest, may be refunded to the member as a lump sum to the extent that they were not paid to the member as part of any other entitlements under the plan. This may occur, for example, where members have funded more than half of their benefit and pension benefits legislation permits a refund of the excess. The excess would be the balance in the net contribution account after the payment of the benefit.

In certain circumstances, plans may provide that members will receive twice the employee contributions plus interest [2 x (contributions + interest)] minus whatever portion of the contributions formed part of any other pension benefits paid to them under the plan. That payment of 2x contributions can be comprised of member contributions made to the particular plan, as well as contributions the member made to a prior DB plan, where those prior contributions (including the member’s prior benefits) were transferred into the current plan under subsection 147.3(3) of the Act. The ability to provide a “2x” contributions benefit that includes contributions made to a prior DB plan can only occur if the current plan is essentially replacing the former DB plan – that is, all or a significant number of members of the prior DB plan must transfer their entitlements to the current DB plan. Further commentary in relation to contributions made to a former plan that may form a benefit under a current plan can be found in subsection 8500(9) of the Regulations.

A larger payment can be made, based on 2x contributions, when the contributions made by the member would satisfy the member contribution limit in paragraph 8503(4)(a) of the Regulations if the limits within that paragraph were based on 50% of the member’s pension credit instead of 70%, or where the Minister has waived the contribution limit in paragraph 8503(4)(a) altogether under its authority under subsection 8503(5).

The return of employee contributions must be the final payment to the member under the provision. In some instances, it will be the only payment to the member. This would occur where a plan promised a certain DB benefit but guaranteed that in no event would the benefit be less than the employee contributions plus reasonable interest.

Some plans provide two vesting schedules. The first is determined by the employer, the other is imposed by the PBSA or a similar law of a province. The imposed vesting period is normally not retroactive so many plans promise a return of contributions in respect of service before the imposed vesting period and a commuted value payment in respect of service after the imposed vesting period. Where a plan provides a lump-sum refund in respect of the service before the imposition of the mandatory vesting period and the commuted value or an annuity in respect of all other periods, we will not insist that the lump-sum be the last payment made from the provision.

If a plan provides that the pension payable will:

the pension is unacceptable unless the pension is grandfathered for pre-reform years.

Paragraph 8503(2)(h) of the Regulations provides that any payment from the net contribution account must be made as a single amount. A periodic payment from a member's net contribution account is not a permissible benefit for DB plans under subsection 8503(2). However, periodic payments based on a member's contributions are acceptable if made with regard to subparagraph 8502(c)(iii).

SMEPs

Although paragraph 8510(6)(c) of the Regulations indicates that SMEPs are exempted from paragraph 8503(4)(a), such plans must still fall within the circumstances outlined above in order to be able to provide for a return of twice employee contributions.

Grandfathered plans

Grandfathered plans do not have to comply with the requirements of paragraph 8503(2)(h) of the Regulations until 1992.

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 commenced to be paid before 1992 are not affected by paragraph 8503(2)(h) of the Regulations. However, such benefits must be acceptable to the Minister.

Cross references:

Flexible Pension Plans – 147.1(5)
Contributions made to a former DB provision – 8500(9)
Permissible Benefits – 8502(c)(iii)
Member Contributions – 8503(4)(a)
Waiver of Member Contribution Condition – 8503(5)
Newsletter No. 96-3, Flexible Pension Plans

9.11 8503(2)(i) Commuted value – Pre-retirement death

Plans may provide pre-retirement death benefits to beneficiaries other than the spouse, common-law partner, former spouse or former common-law partner. Such benefits must be paid in lump sums and as soon as practicable after the member's death. Plans will not be required to state that the benefit will be paid as soon as practicable. Our rule of thumb, however, will be that the benefits should be paid within one year of the member's death. If a plan states that the benefits will be paid out later than one year after the member's death, it will have to be amended.

Such lump sum death benefits may be provided to more than one beneficiary, however, the plan can’t provide for the payment of total death benefits in excess of the present value of the member's accrued benefit.

Also, a plan can’t allow for lump sum death benefits to be paid in combination with periodic death benefits. One or the other may be made available to beneficiaries, but not both.

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 the conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(2)(i) of the Regulations. However, they must be acceptable to the Minister.

Cross reference:

Undue Deferral of Payment – 8503(4)(d)

9.12 8503(2)(j) – Lump sum payment on death

If plans provide for a return of any employee contributions that were not used to fund death benefits, it must be clear that they will be the last payments in respect of the member. The payment may be made to any beneficiary, including the estate.

In cases where the plan provides for a return of employee contributions based on the member's net contribution account credited with twice the member's current service contributions, the following conditions must be met:

If the plan provides two vesting schedules, we will permit the surviving spouse or common-law partner or former spouse or former common-law partner of a member to receive a lump-sum refund for periods of service before the mandatory vesting period and either the commuted value or an annuity (not available to beneficiaries) in respect of other periods of service. Thus, the requirement under paragraph 8503(2)(j) of the Regulations that the refund be "the last payment under the provision with respect to the member" can be ignored and the surviving spouse or former common-law partner or former spouse or former common-law partner can opt for an annuity instead of a lump sum.

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 the conditions, any death benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(j) of the Regulations. However, they must be acceptable to the Minister.

Cross references:

Flexible Pension Plans – 147.1(5)
Lump Sum Payments on Termination – 8503(2)(h)
Member Contributions – 8503(4)(a)
Undue Deferral of Payment – 8503(4)(d)
Newsletter No. 96-3, Flexible Pension Plans

9.13 8503(2)(k) – Additional post-retirement death benefits

Paragraph 8503(2)(d) of the Regulations limits the post-retirement survivor benefits to 66 2/3% and paragraph 8503(2)(c) limits the guarantee period on a member's pension to 5 years where retirement benefits permissible under paragraph 8503(2)(d) are provided under the provision to a spouse or common-law partner or former spouse or former common-law partner of the member.

Paragraph 8503(2)(k) of the Regulations permits benefits payable to a spouse or common-law partner or former spouse or former common-law partner of a member to be increased from 66 2/3% to 100% and permits the guarantee period on a member's pension, payable to any beneficiary, to be increased from 5 years to 15 years, both such increases being instead of a proportion of the member's LRBs. In other words, the plan member can give up some of their LRBs to get an enhanced survivor benefit.

In addition, the present value of the increased survivor pension and guarantee period can’t exceed the present value of what would have been paid had the plan member not opted for the increase. In determining the present value of what would have been paid, the Regulations allow the plan to assume that it has a 66 2/3% survivor benefit form. It does not, however, allow the plan to assume that there is a five-year guarantee if the plan has less than a five year guarantee; that is, it allows the plan to assume a greater survivor benefit but not a greater guarantee period than the plan actually provides.

For example, a plan can provide a 100% survivor benefit, payable to a spouse or common-law partner or former spouse or former common-law partner of the member, that has the same present value as a 66 2/3% plus the 5-year guarantee if the 5-year guarantee is provided for in the plan. If the 5-year guarantee is not provided for in the plan, then it can’t be assumed. If the plan had a 3-year guarantee, the plan can only take into account a 3-year guarantee in calculating the present value limit. If the plan had a 50% survivor benefit, the plan could assume a 66 2/3% survivor benefits for the purposes of the present value limit.

Plan text

If the plan permits the member to choose a joint and survivor pension, payable to a spouse or common-law partner or former spouse or former common-law partner of the member, of greater than 66 2/3% and/or an increased guarantee period of up to 15 years, it must be instead of a proportion of the LRBs otherwise payable and the present value of the enhanced benefits can’t exceed the present value of a 66 2/3% joint and survivor benefit. A reference to actuarial equivalence to the normal form would be acceptable for the purposes of the present value limit.

Grandfathered plans

The above restrictions do not apply to a grandfathered plan until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits that have commenced to be paid before 1992 are not affected by paragraph 8503(2)(k) of the Regulations. However, the benefits must be acceptable to the Minister.

Cross references:

Guarantee Period – 8503(2)(c)
Post-Retirement Survivor Benefits – 8503(2)(d)

9.14 8503(2)(l) – Additional bridging benefits

This would normally be provided in a plan as an optional form of benefit. Where it is provided, it must be clear that it will not result in total benefits in excess of the actuarial equivalent of the normal benefit promised under the plan. These additional bridging benefits are funded by the member, by foregoing either LRBs or survivor benefits in order to obtain this bridging benefit. Any bridging benefits that are paid instead of LRBs, on an actuarially equivalent basis, are not subject to the pre-65 maximum in subsection 8504(5) of the Regulations.

In the answer to question 3 of Newsletter No.94-2, Technical Questions and Answers, it is mentioned that "to provide additional bridging benefits in accordance with paragraph 8503(2)(l) of the Regulations, an RPP has to provide or permit basic bridging benefits...". In situations where bridging benefits are provided as an optional form in accordance with paragraph 8503(2)(l) even though the plan does not provide basic bridging benefits, the additional bridging benefit must be capped by paragraph 8503(2)(b) (without the age and service reduction) and comply with paragraph 8503(2)(l) (actuarial equivalent of LRBs foregone). Where a plan does not provide for basic bridging benefits, we consider that the bridging benefits resulting from an optional form are automatically in excess of bridging benefits that are permissible under paragraph 8503(2)(b) and therefore qualify as additional bridging benefits payable under paragraph 8503(2)(l).

A plan can’t allow for bridging benefits to cease when CPP/QPP or OAS payments begin, because payments of government pensions can be deferred until after age 65. A plan can’t allow for bridging benefits to begin when the member is eligible to begin his unreduced public pension benefits. The plan must specifically provide that bridging benefits can cease no later than the end of the month immediately following the month in which the member attains 65 years of age.

Section 91.1 of the Supplemental Pension Plans Act of Quebec provides to a member or spouse the right on retirement to replace, in whole or in part, the life pension accrued by a temporary pension which will not exceed 40% of the YMPE of the year in which the payment of the pension begins. Paragraph 8503(2)(l) of the Regulations was amended to accommodate this benefit.

Grandfathered plans

Grandfathered plans are not subject to this restriction 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 commenced to be paid before 1992 are not affected by paragraph 8503(2)(l) of the Regulations. However, the benefits must be acceptable to the Minister.

Cross references:

Bridging Benefits – 8503(2)(b)
Excluded Benefits – 8504(11)
Newsletter No. 94-2, Technical Questions and Answers

9.15 8503(2)(l.1) – Survivor bridging benefits

Paragraph 8503(2)(l.1) of the Regulations permits a spouse, common-law partner or former spouse or common-law partner of the deceased member to choose to receive bridging benefits in place of all or a portion of their survivor benefit.

Section 91.1 of the Supplemental Pension Plans Act of Quebec provides to a member or spouse the right on retirement to replace, in whole or in part, the life pension accrued by a temporary pension which will not exceed 40% of the YMPE of the year in which the payment of the pension begins. Paragraph 8503(2)(l.1) of the Regulations was introduced to accommodate this benefit.

9.16 8503(2)(m) – Commutation of benefits

Deferred payment of amount in excess of prescribed amount

Commutation of benefits as a permissible benefit requires payment of one lump sum representing the value of the benefits commuted. The lump sum payment can take the form of a cash payment, a transfer to another plan, a purchase of an annuity, or a combination of one or more of these forms. Commutation is not a permissible benefit if the payment occurs in more than one stage. Therefore, it is not permissible for:

Indexing assumptions

Subject to the restrictions below for connected persons, even if a plan doesn't provide for indexation of benefits, or the use of indexation assumptions when a member commutes benefits, an actuary can use indexing assumptions to determine the value of commuted benefits. However, the "additional benefits" resulting from the use of indexing assumptions have to be in accordance with subparagraph 8503(2)(m)(ii) of the Regulations.

Locking-in

Commuted benefits don't have to be locked-in, as was previously required by paragraph 9(b) of IC72-13R8. Therefore, funds that have already been transferred on a locked-in basis under paragraph 9(b) may be unlocked, if the RRSP issuer is willing to amend the contract and if the governing PBSA or a similar law of a province permits it.

Crediting of interest due to a delay in the payment of amounts

Paragraph 8503(2)(m) of the Regulations permits, in determining the present value of forgone benefits, the inclusion of a reasonable amount of interest calculated from a particular time to the time the single amount is paid. For the purposes of a particular time, subsection 8503(2.1) permits any calculation date (subject to certain conditions) up to two years before the payment date. See further commentary on subsection 8503(2.1) below.

Early benefit payable during phased retirement

Section 69.1 of the Supplemental Pension Plans Act of Quebec allows an active member who is within 10 years of the normal retirement age specified in the plan and whose working time is reduced pursuant to an agreement with his employer, to receive each year upon request, a lump sum amount from the plan to compensate in part for the reduction in salary. It has been determined that this benefit represents the commuted value of a portion of the member's life pension that is being paid in a lump sum, in compliance with paragraph 8503(2)(m) of the Regulations. Therefore, such a provision in a plan text is acceptable. Section 69.1 of the Supplemental Pension Plans Act also provides that the member can continue to accrue benefits for current service during the years in which he or she is in receipt of this lump sum benefit.

Plan text

A plan can provide for the commutation of benefits at any time, including benefits that have already begun to be paid. However, the plan terms must indicate that:

The requirement for pre-reform service also applies to a combination MP/DB plan, where only MP contributions are commuted. In this case, the plan can’t be amended to increase the DB benefits for the years of service relating to the commuted MP benefits.

On commutation, a plan can’t provide for deferred payment out of a DB provision of an amount in excess of the prescribed amount.

A plan must not provide for a guaranteed rate of interest on the value of a member's commuted benefits for the period between benefits becoming payable and actual payment being made. However, the plan can provide for an entitlement to interest during this period if it is clear that the interest plus the value of the commuted benefits, calculated as of the date benefits became payable, won't exceed the maximum prescribed amount limit. Note that if the plan provides for a transfer of commuted benefits plus interest on the commuted value, there should be no indication that the interest is excluded from the prescribed amount limit.

Connected persons

Unless the member has terminated employment or retired, or the plan has terminated, the following commutation of benefits are not permitted:

Even on termination of employment or retirement, additional benefits can’t be provided by the use of indexing assumptions in the calculation of the value of commuted benefits:

Quebec’s Bill 102, which amended the Supplemental Pension Plans Act, established several new types of benefits that were effective beginning in 1997 and in 1998. These benefits, such as the early benefit during phased retirement and the temporary pension on early retirement, among others, entail the commutation of LRBs. Commutation of pre-reform benefits that accrued to connected persons, partners, proprietors and their spouses are allowed but only for the payment of a benefit specifically provided for under Bill 102. Any other commutation of benefits accrued to such members in respect of pre-reform benefits are subject to the requirements of the IC72-13R8 and all other administrative rules derived from this Circular.

Plans that are subject to the 50% rule can apply the indexing assumptions in determining the value of commuted benefits for pre-reform service if the 50% rule is satisfied as at the date of commutation.

Grandfathered plans

Where a plan was submitted after March 27, 1988 and is not a replacement of a grandfathered plan, payment of an amount exceeding the amount permitted under paragraph 8503(2)(m) of the Regulations is acceptable if:

Cross references:

Transfer – DB to MP, RRSP or RRIF – 147.3(4)
Definition of Money Purchase Provision – 8500(1)
Conditions for Registration – 8501(1)(e)
Determination of Amounts – 8502(j)
Rule for Commutation of Benefits – 8503(2.1)
Commutation of Lifetime Retirement Benefits – 8503(7)
Payment from Account – 8506(1)(f)
Commutation of Benefits – 8506(1)(h)
Benefits Under Plan Other Than Grandfathered Plans – 8509(9)
Prescribed Amount – 8517
Newsletter No. 94-2, Technical Questions and Answers
Newsletter No. 92-12, Commutation and Opting Out of a Pension Plan

9.17 8503(2)(n) – Commutation – Beneficiary's benefits

Plans may provide that death benefits payable as periodic payments may be commuted. They do not have to state that the commuted amount won't exceed the present value of the benefits forgone.

If a plan provides for the commutation of the death benefit permitted under paragraph 8503(2)(e) of the Regulations, it must also stipulate that the Minister's approval must be received before the commuted amount may be transferred to an RPP, RRSP or RRIF. This approval will be considered on a case-by-case basis.

A member can name several beneficiaries for the guarantee portion of the member's benefit, but the beneficiaries can’t name other beneficiaries. The benefits payable to a beneficiary can be paid as continuing periodic payments or as a lump sum.

Grandfathered plan

Grandfathered plans are not subject to these restrictions until 1992.

Where we have registered a pension plan after March 27, 1988 that provided death benefits that do not comply with these conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(2)(n) of the Regulations. However, the benefits must be acceptable to the Minister.

The condition on transfers to a RRIF applies only to payments made after April 5, 1994.

Cross references:

Undue Deferral of Payment – 8503(4)(d)
Rule for Commutation of Benefits – 8502(2.1)

9.18 8503(2.1) – Rule for Commutation of Benefits

Subsection 8503(2.1) of the Regulations contains a special rule in regards to the determination of the present value limit under paragraphs 8503(2)(m) and 8503(2)(n) for commuting benefits under a DB provision.

In determining the present value limits, subsection 8503(2.1) of the Regulations permits any calculation date up to two years prior to the payment date if the earlier date is required under pension benefits legislation or it is reasonable based on accepted actuarial practice and the circumstances in which the member acquires the right to the payment.

A calculation date can be more than two years before the payment date only if the earlier date is required under pension benefits legislation.

Cross reference:

Designated Laws – 8513

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