RPP Consultation Session - 2004
Ottawa - November 23, 2004

Questions and Answers

1. Unable to Locate Members
2. PA During Period of Disability Leave
3. Contributions to a Plan With No Participating Employer
4. RRIF-Type Payments from a Money Purchase Provision
5. Bankruptcy - Appointed Administrators - Newsletter
6. Issues Arising out of the Monsanto Case
7. Refund of Excess Contributions Prior to T4 Preparation
8. PSPA Calculation - New Limits
9. Withholding Tax on Refunds of Excess Contributions
10. Severance Pay as Pensionable Earnings and Credited Service
11. Streamlining the Waiver Process
12. Recommended Contributions to a Designated Plan
13. Actuarial Increase on Retirement After Age 65
14. Issues Arising out of the Transamerica Case
15. Flexible Pension Plans - Employee Optional Ancillary Contributions
16. Funding Issues
17. Prescribed Amount and Phased Retirement - Quebec
18. Disclosure of Personal and Private Information

Question 1 - Unable to Locate Members

What are the obligations of the plan administrator when they are unable to locate members of a terminating pension plan, and what steps can be taken to satisfy the members' entitlements?

Answer 1:

As per subsection 147.1(7) of the Income Tax Act, the administrator of a pension plan is required to administer a pension plan as registered. They must ensure that members receive any benefit entitlements from the plan and that they are paid in accordance with the terms of the plan text.

If the administrator is unable to locate a member, there are government services available that may aid in a search. One of these options is the National Search Unit with Social Development Canada. They can be reached at (613) 957-9052.

If the administrator was still unable to locate the member, then the following actions could be considered:

• Providing the plan terms allow for it, the full amount of the member's entitlement could be paid in a lump sum and deposited into an account in trust for the member.
• We are aware of specific cases in which application was made to the provincial court to allow payment into the court of the missing member's lump sum entitlement.

Question 2 - PA During Period of Disability Leave

The Pension Adjustment (PA) Guide indicates that we should use "a reasonable estimate of the annual rate of pay that the member would have received if he or she worked full-time throughout the year". Suppose a plan explicitly defines pensionable earnings during a period of disability leave as the annual rate of pay in effect immediately prior to the period of leave, and applied accordingly to the length of the period of leave. For instance, a person's salary was $40,000 immediately before they became disabled. Thus, in accordance with the plan document, their annual pension accruals are determined using $40,000 each year. However, suppose the salary for the member's position has increased a year later to $45,000 and the person remains disabled. Should the PA for the second year of disability be calculated using $40,000 or $45,000? If $45,000, please quote the appropriate section of the Income Tax Regulations that requires this and explain how such action would not violate the calculation of the PA using the "normalized pension method".

Answer 2:

Where the lifetime retirement benefits depend on remuneration in another year (i.e., final average or best average earnings plans), there is a specific Income Tax Regulation, subparagraph 8302(3)(e)(iii), that requires a different method in determining remuneration for the purposes of calculating a PA where service is not rendered by the individual. It is a requirement under this subparagraph to indicate a reasonable estimate of what that individual would have received had they been rendering service, when determining the pension credit (PA). This is to ensure that in cases where the individual returns to work, the PA properly reflects the benefit accrued. Therefore, based on the example provided in the question, the PA would be calculated based on a salary of $45,000.

Question 3 - Contributions to a Plan With No Participating Employer

Can a non-participating employer contribute to a registered pension plan to cover a deficiency in respect of accrued benefits in a situation where there are no remaining participating employers?

Answer 3:

No, we will not allow a non-participating employer to make contributions to a registered pension plan whether the employer is a "related" employer or not.

Pursuant to subsection 147.2(2) of the Income Tax Act, a contribution is eligible if it is, among other things, in respect of the employer's employees and former employees.

Question 4 - RRIF-Type Payments from a Money Purchase Provision

We would like to know when the draft regulations will be passed.

Answer 4:

It is our understanding that the Department of Finance is currently finalizing the regulations with regards to the RRIF-type payments. At this time, we have no knowledge of when the regulations will be enacted.

Question 5 - Bankruptcy - Appointed Administrators - Newsletter

Would the Registered Plans Directorate consider publishing a Newsletter addressing the unique situation faced by appointed administrators of Registered Pension Plans of insolvent/bankrupt companies?

Answer 5:

Since each situation faced by an appointed administrator is unique, we feel that it may be more beneficial to create general questions and answers that would be available on our Website.

If there is an increase in related requests, we may consider publishing a Newsletter to outline those concerns.

Question 6 - Issues Arising out of the Monsanto Case

The recent decision in the Monsanto case was to require the distribution of actuarial surplus related to the part of the registered pension plan being wound up, on the effective date of the partial wind up. Partially wound-up plans, which were on hold pending the Monsanto decision, may no longer be in a surplus position or may not have sufficient surplus to make the required surplus distribution. What is the Registered Plans Directorate's position in the event that an employer needs to contribute to a registered pension plan in order to pay out the required surplus distribution?

Answer 6:

There are funding issues that need to be resolved before the required payments can be made to members of affected plans. Registered Plans Directorate and Legal Services are currently working with the Province of Ontario to resolve these issues. We anticipate that we will have these issues resolved before the end of the year, and will have more information posted on our website when it is available.

Question 7 - Refund of Excess Contributions Prior to T4 Preparation

This could apply to both a money purchase RPP or DPSP. If a sponsor notices that an excess contribution has been made before the PA is being reported to the member, can the sponsor withdraw the excess without the Canada Revenue Agency's approval?

Answer 7:

Where an excess contribution is made to a money purchase (MP) pension plan, the registered status of the plan becomes revocable. Paragraph 8506(2)(d) of the Income Tax Regulations (the Regulations) would require that the amounts be refunded in order to avoid revocation. The amounts refunded should not be included in the pension credit calculation and prior approval from the Canada Revenue Agency would not be required.

Most deferred profit sharing plans (DPSPs) do not have a clause similar to MP plans that would allow a refund of contributions. Therefore, the employer or trustee would have to write to the Registered Plans Directorate requesting administrative relief, to allow for the refund of the excess contribution. However, DPSPs may be amended to allow for a refund of contributions, in which case administrative relief would no longer be required. In either case the refund would have to be made by the end of February in order to have the pension credit reduced by the amount of the refund, pursuant to proposed paragraph 8301(2.1)(b) of the Regulations.

Question 8 - PSPA Calculation - New Limits

The plan administrator wants to change the maximum pension to $2000 in 2006. Should the past service pension adjustment be calculated for all years after 1989 (including the years the plan already included the $1722.22 maximum) or should it be calculated only for the years the plan didn't recognize the new maximum pension (i.e., 2004 & 2005)?

Answer 8:

The past service pension adjustment in this case should be calculated for all years after 1989. However, because of the limitation on the benefit accrual imposed by paragraph 8302(2)(b) of the Income Tax Regulations (the Regulations), the benefit accrual for years 1990 to 1994 may not be increased, and therefore, there will be no PSPA implications for these years.

The Department of Finance recently sent out a comfort letter to the members of the Pension Review Committee regarding the impact of the increase in the DB limit on PSPAs. We believe that this October 28, 2004 letter will answer the above question.

Addendum: Copies of the above-mentioned comfort letter were handed out at the 2004 RPP Consultation session, which was held on November 23, 2004, where these Questions and Answers were discussed.

Question & Answer 8 and the comfort letter were all prepared on the basis of proposed changes to the Regulations. With the release of the 2005 Budget, more complete and up-to-date information is being released to the public. You can find further information about this topic on the RPD website .

Question 9 - Withholding Tax on Refunds of Excess Contributions

We have been withholding tax on excess contributions refunded to sponsors as described in Income Tax Rulings Directorate interpretation 2002-016353. We have received push back from sponsors on the withholding tax requirement. We would like to know if other companies have encountered similar problems and whether the Canada Revenue Agency will include information in any future tax guides so the rules are clear to all the parties involved.

Answer 9:

The above-noted interpretation concerns withholding tax requirements for payments of:

1) return to a participating employer of an overpayment resulting from clerical or administrative error; 2) return of an excess employer contribution to avoid the revocation of the plan registration; 3) a refund of plan administrative expenses paid by the employer; and 4) a payment of plan surplus. Each of these payments is considered a "superannuation or pension benefit" as defined in the Income Tax Act (the Act) and the payer is required, pursuant to paragraph 153(1)(b) of the Act and subsection 200(1) of the Income Tax Regulations (the Regulations) to withhold the prescribed amount of tax and report the amount on the T4A Supplementary. Items 1, 2 and 3 would be reported as "Other Income" and item 4 would be reported as a "Lump Sum Payment".

The prescribed amount of tax is calculated using the rates in subsection 106(1) of the Regulations for items 1, 2 and 3 (considered to be periodic payments) and the rates in subsection 103(4) of the Regulations for item 4 (considered to be a lump sum if paid on winding-up of the plan in full satisfaction of the rights of the plan sponsor).

A severed copy of document 2002-0163535 may be obtained by contacting Céline Charbonneau at céline.charbonneau@ccra.gc.ca or alternatively by telephone at (613) 957-2137. Should you have any questions relating to the content of the above document, they may be forwarded to the Income Tax Rulings Directorate at (613) 957-8953. General questions concerning withholding and reporting requirements should be directed to the Information and services for businesses and self-employed individuals toll-free lines at 1-800-959-5525 for service in English and 1-800-959-7775 for service in French.

Although current publications do not contain this complete interpretation, we will forward it to the appropriate area for review and possible inclusion. The Tax Information Division of the Client Services Directorate (Assessment and Client Services Branch) is the area that publishes specialty guides and forms for employers and other sectors.

Addendum: Some comments from the above-mentioned document have been revisited i.e., comments with respect to the withholding tax requirements for payments of plan administrative expenses. In part, a subsequent interpretation indicates that "a reimbursement payment paid by an RPP to an employer in respect of bona fide plan administration expenses that have been paid by the employer on behalf of the plan should not constitute a superannuation or pension benefit. Accordingly, there should not be a requirement for the RPP to withhold tax in respect of, or to report, such a payment." For more information on this topic, please refer to Income Tax Rulings interpretation #2004-0100601(E).

Question 10 - Severance Pay as Pensionable Earnings and Credited Service

Can severance pay, either in the form of a lump sum or salary continuance, be included in pensionable earnings? If so, can the member be granted a commensurate amount of credited service?

Answer 10:

We referred this question to the Income Tax Rulings Directorate, who identified their response as interpretation 2004-0097241I7. A severed copy of document 2004-0097241I7 may be obtained by contacting Céline Charbonneau at céline.charbonneau@ccra.gc.ca or alternatively by telephone at (613) 957-2137. Should you have any questions relating to the content of the above document, they may be forwarded to the Income Tax Rulings Directorate at (613) 957-8953. General questions concerning withholding and reporting requirements should be directed to the Information and services for businesses and self-employed individuals toll-free lines at 1-800-959-5525 for service in English and 1-800-959-7775 for service in French.

It should be mentioned that the author of the document noted that the term "severance payment" is not defined in the Income Tax Act (the Act). However, "compensation" and "retiring allowances" were discussed in the response.

Although the answer depends on the particular circumstances of the situation, it appears that two comments from the interpretation provide guidelines that you could expect to apply in most situations:

• "a lump sum amount received as a retiring allowance will not qualify as "compensation" for the purposes of the RPP rules"
• "payments received as salary continuance may qualify subject to the terms of the RPP".

A retiring allowance is included in income under subsection 56(1) of the Act and would not meet the definition of compensation for the purposes of the RPP rules. Therefore, a lump sum severance payment qualifying as a retiring allowance will not qualify as pensionable earnings, so it could not be used to improve RPP benefits.

If the severance payment was received in the form of a salary continuance, it might be possible to improve RPP benefits, depending on circumstances. Relevant circumstances would include plan terms that permit the employee to remain eligible to accrue pensionable service and benefits, and the continuation of an employer/employee relationship during the salary continuance period. In addition, the payment would have to be in a form that would be included in employment income, in order to qualify as "compensation" for the purposes of the RPP rules. For further information, please request the full document.

Question 11 - Streamlining the Waiver Process

In previous consultation sessions, the Registered Plans Directorate (RPD) said that it would look for ways to alleviate the administrative burden that the current process of approving lump sum payments in lieu of missed pension payments places on both the industry and RPD. Please provide an update.

Answer 11:

As mentioned at last year's consultation session, we had considered establishing criteria under which lump sum payments in lieu of missed pension payments could automatically be made without a need for case-by-case written approval from the Registered Plans Directorate. However, we determined that it was not feasible and advised that waiver requests would continue to be dealt with on a case-by-case basis. We have also researched the possibility of requesting an amendment to the instruments of delegation under the Income Tax Act. We recently determined that such an amendment is not feasible. Therefore, within the next four months we will institute revised internal procedures to allow routine waivers to be approved more quickly by eliminating certain levels of review.

Addendum: We have recently revised the internal review procedures with respect to the final downsizing approvals (subsection 8505(2) of the Income Tax Regulations) and non-resident administrator waiver requests (subsection 147.1(6) of the Income Tax Act). We will continue to look at the other waivers to determine if we can streamline our review procedures further.

Question 12 - Recommended Contributions to a Designated Plan

In reviewing actuarial reports for designated plans, do you request a going concern valuation in addition to the maximum funding valuation? If not, why not?

Answer 12:

Employer contributions under subsection 147.2(2) of the Income Tax Act (the Act) will be eligible if they are prescribed contributions or if they comply with the prescribed conditions.

For a designated pension plan, employer contributions in addition to meeting the requirements under subsection 147.2(2) of the Act are subject to the maximum funding rules set forth in section 8515 of the Income Tax Regulations (the Regulations).

Should the contributions stated under the going concern basis be lower than those determined under the maximum funding basis, eligible contributions under subsection 147.2(2) of the Act would be limited to the contribution stated under the going concern basis, not to the funding under the maximum funding basis as suggested in the question. The maximum funding valuation determines a ceiling beyond which contributions to designated pension plans cannot be considered eligible contributions.

The maximum eligible contributions to a designated plan could be summarized by the following relationship:

Maximum Eligible Contributions = Lesser of {Going Concern basis, Maximum Funding basis}

Contributions must also be made pursuant to an actuary's recommendation, in whose opinion the contributions are required to fund the benefit. For designated plans, in principle the two valuations (i.e., going concern and maximum funding) have to be performed.

If the actuary only shows valuation results based on the maximum funding valuation, we do not insist that a going concern valuation be performed insofar as the plan benefits are similar to those valued under the maximum funding basis. In those instances the actuary incorporates a statement about the going concern valuation without actually providing the funding amounts, to the effect that the going concern results would show a higher funding requirement.

If the actuary cannot certify that the assumptions are adequate and appropriate for the purposes of the Canadian Institute of Actuaries professional standards, they include a disclaimer to that effect and state that they used the maximum funding valuation assumptions as prescribed in section 8515 of the Regulations.

Question 13 - Actuarial Increase on Retirement After Age 65

A defined benefit pension plan has a normal retirement age of 65. The plan also provides that if a member remains employed beyond his normal retirement date and elects to postpone the payment of his pension, he will continue to accrue pension benefits to his postponed retirement date. The pension paid at his actual retirement date will be the actuarial equivalent of the pension payment which was deferred.

If someone joins this defined benefit pension plan at age 66 and receives credit for past service, is the pension in respect of the period of service before age 65 actuarially increased from age 65 (normal retirement age) or from age 66 (the age he joined the plan)?

Answer 13:

In the absence of the limit on lifetime retirement benefits (LRBs) as stated in subsection 8504(1) of the Income Tax Regulations (the Regulations), the pension payable depends on the terms of the plan. For the plan described above, in respect of the period of service before age 65, the pension would be actuarially increased from age 65 (i.e., normal retirement age).

Paragraph 8504(10)(b) of the Regulations permits additional LRBs in excess of the subsection 8504(1) limit to be paid to a member whose retirement benefits commence after the member attains age 65, where the adjustment in LRBs is not more favourable than such an adjustment made on an actuarially equivalent basis. Thus, the adjustment in pension benefits for the period of service before age 65 would be made from age 65.

Question 14 - Issues Arising out of the Transamerica Case

In light of the Transamerica case, in a purchase and sale scenario where the purchaser wishes to merge the seller's pension assets and liabilities into the purchaser's pension plan, the purchaser's plan might need to have two segregated pension funds within that single plan. The pension standards regulator may not allow the assets of one group of plan members to fund the liabilities of the other. The same restriction will arise in a plan merger scenario. This is the current position of the Financial Services Commission of Ontario.

Can the employer fund the two segregated accounts separately? If the "total" plan is in a surplus (or even excess surplus) position but one of the segregated portions is in a deficit position, can the employer fund the deficit with a deductible cash contribution, as would be required by Ontario pension legislation for example?

Note that in the Transamerica case, there was an excess surplus in the plan as a whole. Part A was in excess surplus position. Part B was in a deficit position and the Court of Appeal held that contributions had to be made to fund Part B notwithstanding the overall excess surplus of the plan as a whole.

Answer 14:

NOTE: The Registered Plans Directorate has modified its position on this issue since the original answer was provided at the 2004 RPP Consultation session and the following answer has been updated to reflect the current position.

Under the Income Tax Act (the Act) an employer cannot independently fund two segregated accounts within a single pension plan. Subparagraph 147.2(2)(a)(vi) of the Act requires an apportionment of assets and liabilities in a reasonable manner among participating employers when more than one employer participates in a pension plan.

However, where plans are merged and are subject to a requirement by a regulator to maintain "exclusive benefit" trust provisions that serve to segregate assets, we will consider submissions for funding on a case-by-case basis.

Question 15 - Flexible Pension Plans - Employee Optional Ancillary Contributions

Where in a given year an employee is a member of two flexible pension plans of the same employer (e.g., he participates in Plan A for the first six months and in Plan B for the last six months), must the optional ancillary contributions made under Plan A be taken into account in determining the maximum amount of optional ancillary contributions the member is entitled to make under Plan B?

Answer 15:

No. The maximum amount of optional ancillary contributions (OACs) that can be made under Plan B is determined under Condition 4 of RPD Newsletter No. 96-3, which takes into account pension credits and current service contributions under Plan B. Condition 4 does not require that OACs made under Plan A be taken into account in determining the maximum amount of OACs that can be made under Plan B.

Question 16 - Funding Issues

Please confirm that subsection 8516(2) of the Income Tax Regulations permits the employer to make accelerated solvency payments (i.e., the full solvency deficiency is paid off in a lump sum) and to continue to make current service contributions to the end of the valuation period, despite an excess surplus.

Answer 16:

Subsection 8516(2) of the Income Tax Regulations allows funding (on a termination basis) of the deficit as of the valuation date as well as the additional amounts required so that the plan will have sufficient assets if it is terminated after the valuation date and before the end of the valuation period. Therefore, contributions made by the employer to liquidate the termination deficit in a lump sum and towards current service costs (accepted as a proxy of the above additional amounts) are eligible regardless of an excess surplus, as long as the plan is not a designated plan in the year the contribution is made.

Question 17 - Prescribed Amount and Phased Retirement - Quebec

A member of a registered pension plan decides to retire. The pension plan allows the member to transfer the commuted value of their pension at any age. How do we determine the prescribed amount as per section 8517 of the Income Tax Regulations considering the fact that the member has already received taxable lump sum benefits during the phased retirement period as allowed by the Supplemental Pension Plans Act of Quebec? Specifically, before applying the present value factor, must the member's lifetime retirement benefits be adjusted to take into account the taxable benefits already received?

Answer 17:

Position: The prescribed amount is calculated using a lifetime retirement benefit that has been adjusted for the amount paid out during the phased retirement period.

Reason: The Supplemental Pension Plans Act of Quebec allows a phased retirement period where the member can receive a lump sum amount each year 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 lifetime retirement benefit that is being paid in a lump sum, in accordance with paragraph 8503(2)(m) of the Income Tax Regulations (the Regulations). Under this arrangement, the lifetime retirement benefit is adjusted for the amounts already paid out at the time of retirement.

The amount that can be transferred on a tax-free basis is based on the member's benefit entitlement that remains in the plan at the actual date of transfer. As stated in section 8517 of the Regulations, an individual's prescribed amount is calculated using the lifetime retirement benefit under the provision that is now reduced as a result of the phased retirement payment. Therefore, the amount of lifetime retirement benefits commuted under subsection 8517(4) of the Regulations, and the subsequent prescribed amount calculation under subsection 8517(1), should reflect the fact that the member, via the phased retirement period, has already received a portion of the benefit entitlement.

Question 18 - Disclosure of Personal and Private Information

In light of recently enacted privacy laws, which section of the federal privacy law defers to the Income Tax Act and Regulations and allows the plan administrator to disclose such information without explicit employee consent?

Answer 18:

Section 8408 of the Income Tax Regulations gives the Minister and his delegates the authority to request information in order to determine that a pension plan is being administered correctly and to determine whether the plan is in a revocable position. This information often includes details specific to an individual taxpayer that may be considered "private or personal". Subsection 231.1(1) of the Income Tax Act authorizes the inspection, audit and examination of books, records and property of a taxpayer.

The federal Personal Information Protection and Electronic Documents Act makes provisions for the disclosure of personal information without explicit employee consent when requested in compliance with the Income Tax Act. Part 1, subparagraph 7(3)(c.1)(iii) of the Personal Information Protection and Electronic Documents Act states that an organization may disclose personal information without the knowledge or consent of the individual if the disclosure is made to a government institution or part of a government institution that has made a request for the information, identified its lawful authority to obtain the information and indicated that the disclosure is requested for the purpose of administering any law of Canada or any province.

These provisions of the privacy legislation clearly allow for the disclosure of employee information by the plan administrator to the Canada Revenue Agency for the purpose of auditing a pension plan.