CRA is now effectively prohibiting the avoidance of contribution holidays or designated plan status through using hybrid defined benefit/money purchase provisions
S. 147.1(5) gives Minister the discretion to impose reasonable conditions on one or more registered pension plans. CRA has now announced two blanket conditions.
First, some employers who sponsor individual pension plan and designated plans (with fewer than four members, at least one who is related) 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.
CRA has now imposed a condition, effective March 16, 2021, that prohibits 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.
A second condition is aimed at plans that in substance are designated plans but that avoid that status by providing that 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. Such plans would typically then generate much higher defined benefit contributions than would otherwise be permitted if the plan was subject to the funding restrictions for a designated plan.
CRA is now imposing a condition that deems such plans to be designated plans. The condition is applicable to “employer contributions made pursuant to an actuary’s recommendation contained in an actuarial valuation report that is filed with us after [March 16, 2021]”.
Neal Armstrong. Summary of Newsletter 21-1, Additional Conditions Applicable to Individual Pension Plans and Designated Plans, 16 March 2021 under s. 147.1(5).