CRA accommodates a pension plan correcting excess borrowing on a going-forward basis through assumption of the debt by a 149(1)(o.2)(ii) sub

The Directorate considered that a pension plan breached Reg. 8502(i) as the amount of borrowing in respect of certain real estate properties of the Plan exceeded their cost. The Directorate thus considered that this excess borrowing limitation applies on a property-by-property basis. (It did not discuss IA s. 33(3): “singular include[s] the plural.”)

The Plan’s advisor proposed that the Plan transfer all real properties for which there were borrowing issues to a newly-formed s. 149(1)(o.2)(ii) subsidiary, which would assume the related debts, with the Plan being released but providing some guarantees. The Directorate stated that this “appears to be a reasonable solution to resolve past non-compliance.” (This appears to accept that a 149(1)(o.2)(ii) corp. can incur purchase price indebtedness on an internal transfer in excess of historic cost and that Reg. 8502(i) does not prohibit guarantees.)

The Directorate went on to state:

If the Plan is a defined benefit plan, there is perhaps less of a concern about leveraged investing as the income tax rules provide for a self-adjusting mechanism. A higher rate of return than appropriate results in lower employer contributions. However, if the Plan is a money purchase plan, the concern about leveraged investing takes on greater importance as the borrowing would have served in effect to circumvent the RPP contribution limits. In this case, consideration should be given to requiring any excess investment earnings to be withdrawn from the Plan.

Neal Armstrong. Summaries of 10 May 2016 Internal T.I. 2016-0644761I7 under Reg. 8502(i) and s. 149(1)(o.2)(ii).