22 August 1994 Internal T.I. 9415156 - COMMUTATION OF DEFINED BENEFITS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

commutation of defined benefits in RPP and transferring part of amount to a right to a lump sum

Position TAKEN:

	either subject to transferring limits or could cause 	the plan to be revoked

Reasons FOR POSITION TAKEN:

legislation

Pierre Cloutier
Chief
Policy Section 7-941515
Registered Plans Division D. Duff
(613) 957-8953
Attention: Sharon Yetts

August 22, 1994

Dear sirs;

Re: Commutation of Defined Benefits pursuant to Paragraph 8503(2)(m)

This is in response to your memorandum of June 10, 1994, referencing an earlier memorandum of April 14, 1994, and further to a telephone conversation (Yetts/Duff) of August 18, 1994 requesting our opinion on the interpretation of paragraph 8503(2)(m) of the Regulations.

An individual can commute benefits under defined benefit provisions of an RPP and transfer the commuted amount pursuant to subsection 147.3(4) of the Act to a money purchase provision of another RPP, an RRSP or an RRIF. Transfers under subsection 147.3(4) are limited to a prescribed amount which is often less than the total value of the commuted benefits. You were concerned with the situations where a pension administrator may commute a member's benefits under an RPP and transfer only the amount permitted under subsection 147.3(4), leaving the balance in the RPP as a lump sum to be paid out at a later date. You felt that this violated paragraph 8503(2)(m) of the Regulations since there was not a payment of a single amount in satisfaction of the member's entitlement to other benefits under the plan.

In our opinion this probably would not violate paragraph 8503(2)(m) of the Regulations since that paragraph refers to partial commutations. A payment can be made in respect of part of a member's rights under the plan with the member retaining the balance of his rights in the plan. However, if the remaining rights under the plan are represented by an entitlement to a lump sum at a later date, the plan, as registered, must provide for such a right. If all or part of a member's defined benefit rights are converted to an entitlement to a lump sum amount to be paid at some future date and the plan does not provide for such a benefit, the plan is not being administered as registered and, pursuant to paragraphs 147.1(11)(b) and (k) of the Act, the Minister may give notice of intent to revoke the registration of the plan.

If the plan, as registered, can provide for both defined benefits and money purchase benefits and also provides for the replacement of defined benefits with money purchase benefits within the same plan, then paragraphs 147.1(11)(b) and (k) of the Act would likely not be violated. However, paragraph 8502(k) of the Regulations prevents transfers of funds from one benefit to another unless the transfer complies with the provisions in section 147.3 of the Act for transferring from one plan to another. Consequently, where defined benefits are commuted and partially transferred to an RRSP and partially to a lump sum money purchase provision of the same plan the total of the two transfers would be subject to the limits in subsection 147.3(4) of the Act. If paragraph 8502(k) of the Regulations is violated, by virtue of paragraph 8501(2)(a) of the Regulations, the plan becomes a revocable plan for the purposes of paragraph 147.1(11)(c).

Yours truly

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch