Registered Plans Directorate Newsletter, no. 92-5
August 18, 1992

Pre-Reform Death Benefits

Introduction

The Income Tax Regulations require that all pre-reform benefits provided under a defined benefit provision of a registered pension plan be acceptable to the Minister of National Revenue. This permits the Department to continue to apply a number of restrictions in Information Circular 72-13R8 that have not been included in the Regulations or that differ from the restrictions in the Regulations.

This is the first of several newsletters that will explain how to apply the new pension legislation to benefits provided for pre-reform service under a defined benefit provision of a registered pension plan. The newsletters will also explain which administrative rules outlined in the Circular will continue to apply.

The newsletters will refer to "pre-reform" and "post- reform" service and benefits. Pre-reform service means pre-1991 service for all plans except grandfathered plans.

A grandfathered plan is a plan which contains a defined benefit provision and which was registered on March 27, 1988 or for which an application for registration was made before March 28, 1988. Pre- reform service for grandfathered plans means all service prior to the earlier of January 1, 1992 and the effective date of the amendment made to the plan to comply with the requirements of the Income Tax Regulations. All service after those dates is post- reform service. Pre-reform benefits are benefits that accrue in respect of a period of pre-reform service. All other benefits are post-reform benefits.

This newsletter covers the registration requirements that must be met if death benefits are provided for pre-reform service. Upcoming newsletters will cover topics such as disability and bridging benefits, early retirement and post-retirement indexing, eligible service, the maximum pension limits, the commutation of pre-reform benefits, and opting in and out of a plan.

This newsletter does not apply to benefits provided to connected persons as defined in subsection 8500(3) of the Regulations, or to partners and proprietors and their spouses unless specifically stated otherwise. The rules for these individuals are outlined in Pension Reform Update 91-1.

We wish to remind you that the Regulations cannot be applied to pre-reform benefits in pre-October 1968 and 1980 shareholder plans if doing so will increase the benefits or the costs under the plans.

Applying the policies described in these newsletters could increase pre-reform benefits.

A grandfathered plan which did not incorporate the provisions of the maximum pension limits in paragraph 9(g) of the Circular may not, however, be amended to include the more beneficial conditions of the Regulations for pre-reform service.

The Regulations cannot be applied to pre-reform benefits until the plan is amended to comply with the Regulations for post-reform benefits.

A new plan is a plan which was not registered on March 27, 1988 or for which an application for registration was received after March 27, 1988. The conditions of the Regulations apply to all years of service in a new plan, unless specifically stated otherwise in these newsletters.

A Past Service Pension Adjustment (PSPA) will be necessary if applying the Regulations changes the way a member's benefits are determined, for example a change in the normal form, for years in which a Pension Adjustment (PA) has already been reported, that is, for years after 1989. If the PA was over- reported, the employer must file an amended T4 Summary and issue amended T4 slips showing the correct PA.

Death benefits

The Circular allows for a reasonable death benefit to be provided to a spouse or to a parent, brother, sister or child, as long as they were dependent on the member at the time of the member's death.

The definition of "dependant" under subsection 8500(1) of the Regulations also includes grandparents and grandchildren.

Death benefits can be provided to dependants, as defined in the Regulations, based on all years of service.

The death benefit provisions of the Regulations apply to all years of service. However, in accordance with paragraph 8509(4)(a) sponsors of grandfathered plans who would like to have pre-reform death benefits exempted from the conditions of the Regulations must send a written request to the Registered Plans Division for a waiver.

Exemptions for death benefits in respect of pre-reform service will generally be granted under any of the following circumstances:

If the survivor death benefits are payable to beneficiaries other than the spouse, former spouse or dependant, as defined for purposes of the Regulations.

If the plan permits joint and survivor pensions in excess of 66 2/3% as a normal form. These may have been accepted in plans on the basis that they were actuarially equivalent to the maximum normal form of pension allowed according to the Circular. We will not, however, give exemptions if the plan provides the maximum pension based on a normal form that is more than 66 2/3% joint and survivor.

If the plan wording can be interpreted as complying with paragraph 9(f) of the Circular, the death benefits which relate to pre-1992 lifetime retirement benefits may be exempted.

Requests for waivers should be sent to:

Registered Plans Division Revenue Canada, Taxation Ottawa, Ontario K1A 0L8