24 October 1996 External T.I. 9633065 - PENSIONABLE EARNINGS

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:

Whether registered pension plan may exclude certain employment income amounts from its definition of "pensionable earnings".

Position:

Yes.

Reasons:

Registration rules require that a plan not define "earnings" (for purposes of defined benefit formula) more broadly than permitted in the Act and Regs - a more restrictive definition is o.k.

		963306
XXXXXXXXXX		P. Spice

October 24, 1996

Dear Madam:

Re: Pensionable Service, Eligible Service
and Pensionable Earnings Under a
Registered Pension Plan ("RPP")

This is in reply to your letter of September 22, 1996, concerning a decision by the Saskatchewan Teachers' Superannuation Commission (the "Commission") that certain amounts you received for teaching summer school and the Accelerate Learning Class are not pensionable earnings. You attached copies of the correspondence between yourself and the Commission concerning this matter and asked for our views on the Commission's decision. You also ask us to provide the reference to the provision in the Income Tax Act (the "Act") which prompted the amendment to the Memorandum of Agreement to the Provincial Collective Agreement of 1992-1994 (the "Memorandum"), a copy of which Memorandum you enclosed.

We will refer to the Act and the Income Tax Regulations (the "Regulations") which set down the rules relating to service and contributions after 1990 (and after 1991 for certain RPPs). For service and contributions before 1991 (or 1992), Information Circular 72-13R8 provides similar rules and any differences are not material to our conclusions.

With respect to your first question, "pensionable service" is defined in subsection 8500(1) of the Regulations to mean the periods in respect of which lifetime retirement benefits are provided to the RPP member. Subparagraph 8504(1)(a)(ii) of the Regulations limits the amount of lifetime retirement benefits to (for a person who is not "connected" to the employer) the amount determined by the formula F x G where

F is the lesser of

(A) 2 percent of the member's highest average compensation...for the purpose of the provision, indexed to the year of commencement, and

(B) the defined benefit limit for the year of commencement, and

G is the aggregate of all amounts each of which is the duration (measured in years, including any fraction of a year) of a period that is pensionable service of the member under the provision....

Section 8504 contains further formulas in which "pensionable service" is used in a similar fashion and which impact on the benefits which may be provided under a defined benefit RPP but, in the context of our reply to your specific question, it is not necessary to describe them.

"Eligible service" is a heading in subsection 8503(3) of the Regulations which contains the restrictions placed on the benefits to be provided under a defined benefit RPP. One of these restrictions is that lifetime retirement benefits can only be provided "in respect of (certain) periods". The period of eligible service relevant to your situation is described in subparagraph 8503(3)(a)(i) of the Regulations as follows:

a period throughout which the member is employed in Canada by, and receives remuneration from, an employer who participates in the plan.

("Remuneration" is not defined in the Act or Regulations but it is our view that the word should include those amounts which are included within the meaning of the word "compensation".)

Lastly, "pensionable earnings" is not defined in the Act or Regulations but is the term commonly used in RPPs to limit the pension benefits to be funded and provided under the defined benefit formula.

Note that the terms "pensionable service" and eligible service" are used to limit benefits that can be provided. They are maximums - in other words, an RPP can provide benefits for a shorter period of time and exclude periods that would otherwise qualify under the Regulations. Therefore, it is possible for your RPP to restrict the number or duration of periods which qualify for benefits by giving a more restrictive meaning than is mandated by the Act and Regulations. For the same reason, if the RPP uses the term "pensionable earnings" to limit the benefits which may accrue or the contributions that can be made, so long as the term does not result in accruals or contributions in excess of the maximums permitted by the Act and Regulations, the term is acceptable even though it may not include all types of compensation or remuneration recognized under the Income Tax Act and Regulations.

In reply to the second question, we do not know what provision in the Act prompted the amendment to the Memorandum.

To elaborate, section 10 of the Memorandum refers to an amendment to clause 2(1)(n) of a statute. We assume the statute in question is the Saskatchewan Superannuation Act which we understand was the governing legislation for your defined benefit RPP. The amendment adds after the words "determined by the commission": "For the purposes of determining the pension adjustment limits under the Income Tax Act, salary shall mean salary actually paid to the teacher plus any prescribed compensation determined under the Income Tax Act".

A "pension adjustment" ("PA") is a term defined in subsection 8301(1) of the Regulations and means the total of an individual's pension credits for the year with respect to an employer under certain types of retirement plans, one of the plans being a benefit provision of an RPP. In turn, a "pension credit" for a defined benefit RPP is defined in subsection 8301(6) and section 8302 of the Regulations and, in essence, means the value (using certain actuarial assumptions as set out in the Regulations) of benefits accrued to the individual in the year under the defined benefit provision .

An individual's PA will reduce the amount the individual may contribute to a registered retirement savings plan which may be deducted from income.

Every RPP is subject to the pension adjustment limits which are contained in subsection 147.1(8) of the Act and which require that your benefit accruals in the year cannot exceed 18% of your "compensation". The word "compensation" is defined in subsection 147.1(1) of the Act.

Although section 10 of the Memorandum refers to "salary", there is nothing in the Act which limits the PA by reference to salary. "Compensation" as defined in the Act includes salary and other employment income amounts - it is irrelevant that the RPP define salary "for the purpose of determining the pension adjustment limits" since it is the definition of "compensation" in the Act which provides the basis for the 18% calculation. Therefore, we are unable to explain the reason for the amendment.

Since the Commission's decision (concerning the types of salary which it considers to be "pensionable earnings") relates to an interpretation of the Teachers' Superannuation and Disability Benefits Act and does not contravene the provisions in the Income Tax Act and Regulations respecting RPPs, the Department is unable to assist you. We hope, however, that the foregoing comments clarify the requirements of the Income Tax Act and Regulations.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch