RPP Consultation Session - Questions from the Industry
December 6, 2001

Questions and Answers

For obsolete questions, visit the Obsolete FAQ

1. Refund of over-contributions
2. Employer flex contributions
3. Elimination of excess surplus after valuation
4. Maximum benefit on early retirement
5. Amounts in excess of ITR 8517 transfer limit
6. New provincial requirements for parental leave
7. Periods of layoff in excess of five years
8. Seamless pension plans
9. Technical reference manual
10. Benefit transfer and recognition of pensionable earnings
11. Effective date of registration - ITA 147.1(2)
12. Catch-up payments

Question 1 - Refund of over-contributions

Paragraph 8502(d) of the Income Tax Regulations does not permit a refund of an over-contribution to a defined benefit provision except where it is done to avoid revoking registration. An employer may contribute based on a previous valuation report, resulting in an over-contribution that does not make the plan revocable. The CCRA does not permit wording in a plan text to accommodate a refund based on such an over-contribution. Why does the CCRA object to such a refund? The CCRA does permit the payment of plan expenses from a plan, which is not explicitly permitted under paragraph 8502(d).

Answer 1

Subparagraph 8502(d)(iii) of the Income Tax Regulations clearly states that a return of contributions is only permitted to avoid the revocation of the plan's registration. Paragraphs 8503(4)(c) and 8506(2)(d) further support this requirement.

The CCRA cannot accept a provision in a plan that clearly contravenes the Regulations and places the plan in a revocable position.

If over-contributions have been refunded, other than to avoid the revocation of registration, the plan would be in a revocable position since it does not comply with a prescribed condition for registration.

In very limited circumstances, the Minister may choose not to revoke the plan's registration for making such a payment. Each situation would be reviewed on a case-by-case basis.

In our discussions with the Financial Services Commission of Ontario, it was determined that specific wording on a refund of employer contributions is not required in the plan terms. They review each request for a return of employer contributions on a case-by-case basis.

We do agree that paragraph 8502(d) does not specifically permit the payment of plan expenses from a pension plan. However, reasonable administrative, investment, and similar expenses are a legitimate cost of the plan. As indicated by the explanatory notes, it was not the Department of Finance's intent to exclude such a distribution.

Question 2 - Employer flex contributions

What is the CCRA's position on employer funding of ancillary benefits elected by plan members? Can flexible pension plans that provide for such employer funding be registered?

Answer 2

Although Newsletter 96-3 was primarily intended to allow plan members to contribute to enhancing their own optional ancillary benefits under the plan, neither the CCRA nor the Department of Finance objects to the concept of employer contributions for flexible ancillary benefits. The challenge has been to ensure that employer flexible contributions and allocation of plan surplus fit defined benefit rules. We are working on additional conditions under which employer contributions for flexible ancillary benefits would be allowed, and we hope to publish them before the end of March 2003.

Regarding the registration of flexible pension plans that provide for employer flexible contributions, the flexible pension plan rules outlined in Newsletter 96-3 were imposed under the authority of subsection 147.1(5) of the Income Tax Act. These rules currently provide no opportunity for employer flexible contributions because optional ancillary benefits can only be provided "as a consequence of the member having made optional contributions under the plan." This means that we currently cannot register plans that provide for any contributions other than "optional contributions" as defined in Newsletter 96-3.

Question 3 - Elimination of excess surplus after valuation

Suppose an actuary is in the process of preparing a triennial valuation at December 31, 2000, that showed an excess surplus leading to a mandatory contribution holiday. Suppose also that bad investment performance since the start of the year has caused a decline in assets so that, if the valuation were performed today, there would be no excess surplus.

The CIA standards on pension plan valuations would allow the actuary, before finalizing a valuation, to classify the stock market decline as a "Type 2 subsequent event" which must be disclosed and may lead to adjusted results if they are in accordance with applicable legislation. Would the CCRA accept the valuation if the actuary adjusted the assets in a reasonable way to allow for some or all of the subsequent asset decline and thus eliminate all or part of the excess surplus? If so, do you have examples of what would be acceptable in advance?

Answer 3

No, we would not accept an adjustment in the asset value (e.g., market value) at the valuation date to reflect a subsequent event. If the asset valuation method at December 31, 2000, is different from that used in the previous valuation, the recommendation for contributions will only be accepted if the conditions in subsection 147.2(2) of the Income Tax Act and generally accepted actuarial practice are satisfied. However, we will accept a revised recommendation effective after the date of occurrence of the "Type 2 subsequent event" reflecting the decline in asset value.

We invite you to write to us regarding other situations.

Question 4 - Maximum benefit on early retirement

We understand that you may test the plan formula benefit as reduced by the plan's early retirement factors against the maximum lifetime pension limit under Regulation 8504 of the Income Tax Regulations (2 %/$1,722.22) reduced by the minimum early retirement reduction under paragraph 8503(3)(c) of Income Tax Regulations (1/4 % from 60/30/80). Please confirm.

Answer 4

The calculation of the maximum pension and the early retirement reduction are separate calculations that apply to the benefits payable to each member covered by a defined benefit provision of a registered pension plan.

The terms of the plan must provide that the maximum limit under Regulation 8504 will not be exceeded, and in no case can the benefits on early retirement be reduced by less than the amount required under paragraph 8503(3)(c).

You suggest the use of a plan provision that tests the plan benefit formula as reduced by the plan's early retirement factors against the maximum under Regulation 8504 reduced by paragraph 8503(3)(c).

We agree that such a provision would be acceptable as long as the plan's early retirement factors provide a reduction at least as great as that required under paragraph 8503(3)(c). Further, the plan terms must specifically allow for the test to be carried out in this manner.

If the plan's early retirement factors are less than required under paragraph 8503(3)(c), then there are salary ranges in which our requirements would not be met and the plan would have to be amended accordingly.

This information will be conveyed to all Registration Division staff to clarify our position and avoid unnecessary amendment requests.

Question 5 - Amounts in excess of ITR 8517 transfer limit

Can the excess of the commuted value over the prescribed amount be paid out as periodic benefits from the plan?

Answer 5

The CCRA's position as expressed in Newsletter 94-2 has not changed.

The amount in excess of the transfer limit relates directly to the benefits being commuted and consequently cannot be paid out of the plan as a periodic pension benefit. What can be paid out of the plan as a periodic pension benefit, subject to the plan terms and the Income Tax Act limits, is the portion of benefits that have not been commuted. This portion is not considered an excess since it relates to benefits that have not been commuted. The duration of the payments depends on the type of benefits that have not been commuted (i.e., if pre-65 benefits have not been commuted and are being paid out of the plan, these payments have to cease when the member reaches age 65).

Question 6 - New provincial requirements for parental leave

Is there a conflict between section 48 of Ontario's Employment Standards Act (ESA) and the Income Tax Act (ITA) in relation to periods of parenting and prescribed compensation?

Answer 6

Although it is not our normal role to review employment standards legislation, we read section 48 of the ESA as stating that an employee is entitled to a leave of absence without pay following the birth of a child and this leave may begin no later than 52 weeks after the child is born. In addition to this, subsection 51(1) of the ESA requires that pension coverage continue throughout this period.

Based on the prescribed compensation rules set out in Regulation 8507 of the Income Tax Regulations, an individual can generally accrue pension benefits in respect of five years of leave of absence and another three years of periods of parenting. As defined in paragraph 8507(3)(b) of the Income Tax Regulations, a period of parenting ends 12 months after the birth or adoption of a child.

If an individual has already had compensation prescribed for five years of leave (other than periods of parenting) and decides to delay the start of his or her period of parenting for six months as permitted under section 48 of the ESA, the individual would only be able to prescribe compensation for the six remaining months in the period of parenting.

Section 48 of the ESA is permissive and would allow the individual to begin the period of parenting in the above scenario early enough to have compensation prescribed for the full period of parenting. However, if the employee chooses to delay the start of the period of parenting, it would appear that subsection 51(1) of the ESA would require that pension benefits continue to accrue whereas the prescribed compensation rules of the Income Tax Regulations would not allow these benefits to be provided from the registered pension plan. We have drawn this situation to the attention of the Department of Finance. At this time, we are not aware of any amendments to the prescribed compensation rules being considered.

Question 7 - Periods of layoff in excess of five years

Is there a conflict between section 56 of Ontario's ESA and the ITA in relation to periods of temporary layoff and prescribed compensation?

Answer 7

The question seems to imply that the ESA requires, in certain circumstances, that benefits must accrue and employer contributions be made during periods of temporary layoff. It is believed that this may be in conflict with the ITA in situations where the individual has exhausted his or her five years' worth of prescribed compensation.

Although it is not our normal role to review employment standards legislation, we do not read subsections 56(1) and 56(2) to require that contributions be made during these periods of layoff.

Subsection 56(1) defines what will constitute a termination. Paragraph 56(1)(c) states that employment will be terminated if the employer lays the employee off for a period longer than a period of temporary layoff.

Subsection 56(2) defines what a period of "temporary lay-off" is. According to paragraph 56(2)(b)(ii), if the employer contributes to an RPP during the period, that period will qualify as a period of temporary layoff.

Based on our reading of the ESA, if an employer does contribute to an RPP during such a period, that period will qualify as a period of temporary layoff and not be considered a termination. We do not see where in the ESA an employer is required to make contributions to an RPP during such periods and therefore do not see a conflict between the ESA and the ITA.

Question 8 - Seamless pension plans

Can you please provide an update on your review of the SERP issue?

Answer 8

To access RPP surplus to pay for supplemental benefits in excess of the Income Tax Act (ITA) maximums, a plan design has been proposed that would see a combined RCA and RPP document being submitted to the province for registration, whereas the CCRA would be asked to register only the RPP component of the plan.

The Registered Plans Directorate is still refusing to register such an arrangement. Based on our interpretation of subsection 147.1(2) of the ITA, we require that the same plan be registered both federally and provincially. As the province would be registering a more extensive and therefore different document than the CCRA, we will not accept the RPP portion of the larger plan.

Our main concerns surrounding these types of arrangements are:

• We do not want benefits in excess of the ITA limits to be funded through an RPP.
• If RCA benefits are in fact being funded, the appropriate RCA tax treatment should be applied.
• As the RCA will be regulated provincially as part of the combined plan document, we want to ensure that any resulting additional benefits, contributions, or distributions are not provided from, contributed to, or distributed from the RPP.

As there is significant interest in the industry in pursuing these arrangements, we are re-examining our current position in consultation with the Department of Justice. If it is determined that subsection 147.1(2) can be read to permit the registration of these arrangements, we will consider imposing a series of conditions under the authority of subsection 147.1(5) of the ITA to address the concerns mentioned above.

Question 9 - Technical reference manual

We understand that portions of the technical manual used by the Technical Services Section would be placed on CCRA's Web site. Will this be happening soon?

Answer 9

Client consultations and surveys have revealed a demand for a vast collection of our internal publications. The Registered Plans Directorate (RPD) wants to favourably respond to these demands by releasing a fully searchable HTML version of our procedure and technical manuals and a compilation of computer-based technical training packages. This will be undertaken as part of RPD's commitment to the Government's online initiative.

Question 10 - Benefit transfer and recognition of pensionable earnings

Can a previous employer's earnings be used in determining a member's benefit when a member transfers from a previous employer's plan to a current employer's plan as a result of either a termination of employment or a sale of a business?

Answer 10

Section 8504 of the Income Tax Regulations permits only the earnings from an employer who participates in the plan to be used when determining the maximum pension.

In situations in which a company or division has broken off and started a new plan, we have permitted earnings from the "predecessor employer" to be used.

To be a "predecessor employer" as defined in the Regulations, an employer must have sold, assigned, or otherwise disposed of all or part of its business to another employer.

Although the ITA does not specifically permit the earnings from the predecessor employer to be used in determining the maximum pension, we have discussed this issue with the Department of Finance. They have confirmed that it was not their intent to prohibit the use of earnings from a predecessor employer in the situation of a purchase/sale. As a result, we have accepted plans that permit the use of earnings from a predecessor employer.

We have asked the Department of Finance to address this situation through a legislative amendment that gives clear legislative support for this position. They have agreed with our position and have indicated that they will recommend a legislative amendment. It is not anticipated that such a change would extend to prior employers.

Question 11 - Effective date of registration - ITA 147.1(2)

Upon the purchase of a company, the CCRA will consider an effective date before the year of application for registration. Subsection 147.1(2) of the Income Tax Act does not give the Minister discretion to accept an effective date before the year of application. The CCRA does not allow discretion in other circumstances. Please explain.

Answer 11

In our opinion, paragraph 147.1(2)(c) of the ITA leaves no room for discretion.

However, we have been in contact with the Department of Finance and they support acceptance of an earlier effective date in very specific circumstances. We confirm that the previously published position (considering requests for earlier effective dates on a case-by-case basis) still stands.

An important factor considered in reviewing specific cases is whether there is continuity of coverage for the plan members. Buy/sell agreements or plan splits tend to be the circumstances in which we are more flexible. Our flexibility is based on the fact that there is no break in coverage. The members are covered under an existing plan and coverage continues under the new plan. In these limited circumstances we may consider an earlier registration date.

We can confirm that this position has been applied in a very limited number of situations under appropriate circumstances.

Given our recent experience in this area, we will recommend to the Department of Finance that they reconsider legislative changes to accommodate these specific circumstances.

Question 12 - Catch-up payments

The CCRA does not allow back payments or actuarial increases in situations involving late commencement of payments. Provincial standards prohibit forfeitures of benefits. Is the Department of Finance looking into this?

Answer 12

We are not aware of any conflict with provincial pension legislation.

Paragraph 8504(10)(b) of the Income Tax Regulations excludes additional lifetime retirement benefits being paid as a result of an actuarial increase in the pension to reflect postponing the pension after age 65 for the maximum pension rule in subsection 8504(1).

Paragraph 8502(e) requires that retirement benefits start being paid no later than the end of the calendar year in which the member reaches age 69.

The Minister may allow, under clause 8502(e)(i)(B), retirement benefits to be paid at a later time, provided the annual amount of the benefits payable does not exceed what would be payable if the benefits started being paid at age 69.

A lump-sum payment of the amounts that should have been made would violate paragraphs 8503(2)(a) and 8502(e).

We do consider lump-sum catch-up payments on a case-by-case basis. Generally, we give favourable consideration when the delay in starting pension payments is beyond the control of the employee.

For example, if an employee has taken an unreasonable amount of time in applying for a pension, selecting an option, supplying required information, or otherwise causes the delay, we would not look favourably on a request for approval to make a lump-sum catch-up payment.

Currently, the Department of Finance is not considering any changes in this regard.