Blanket prohibition against contributions to a money purchase provision if actuarial surplus is over the surplus limit
- Some employers who sponsor individual pension plan (IPPs) (as defined in Reg. 8300(1)) and x designated plans (defined in Reg. 8515(1)) with excess surplus try to avoid the requirement under s. 147.2(2)(d) for a contribution holiday by amending the plan to suspend defined benefit accruals for members and add a money purchase provision under which the employer would then continue contributions.
- This results in an abusive continuance of tax-deductible contributions while preserving or building up the surplus.
- CRA, on a case-by-case basis, has been prohibiting, pursuant to a s. 147.1(5) condition, employers and members from contributing to a money purchase provision of an IPP or to a designated plan if actuarial surplus under the defined benefit provision of the plan is more than the surplus limit – so that any required contributions to the plan’s money purchase provision are permitted only if they are made from the surplus (as permitted by Reg. 8502(k) and s. 147.3(4.1).)
- “We are now imposing this condition on all designated plans and IPPs with effect from the date of this newsletter.”
Condition deeming plan to be designated plans where current but not past service benefits are provided on a money purchase basis and the member has to option to convert the latter into defined benefits
- There has been an increase in applications for registration of pension plans covering a small number of members and under which past service benefits are provided on a defined benefit basis while current service benefits are provided strictly on a money purchase basis, and with members having the option to convert their money purchase benefits into defined benefits at regular intervals.
- Since these plans are designed to limit the provision of defined benefits to past service benefits, they fall outside of the designated plan definition, so that the funding restrictions do not apply (and, in fact, typically they generate much higher defined benefit contributions than would otherwise be permitted if the plan was subject to the funding restrictions for a designated plan).
- Furthermore, members typically choose to convert their money purchase benefits into defined benefits so that the plan essentially operates as a defined benefit RPP.
- CRA is imposing the following condition under s. 147.1(5), applicable to “employer contributions made pursuant to an actuary’s recommendation contained in an actuarial valuation report that is filed with us after the date of this newsletter”:
An RPP is deemed to be a designated plan throughout a calendar year for the purposes of the conditions in subsection 147.2(2) of the Act and section 8515 of the Regulations, when the plan:
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provides past service benefits under a defined benefit provision in the year or a previous year for members who are specified individuals (within the meaning of subsection 8515(4) of the Regulations)
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would be a designated plan throughout the year if the references in paragraphs 8515(1)(a) and (b) of the Regulations to “a defined benefit provision of the plan” were read as references to “a defined benefit or money purchase provision of the plan”
Because of subsection 8515(2) of the Regulations, such a plan will continue to be deemed to be a designated plan in subsequent calendar years unless waived by the Minister.
