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.
Principal Issues: Whether an employer ceases to be a participating employer where the employer no longer actively participates in the RPP?
Reasons: There is nothing in the definition that provides for such cessation. Consistent with general scheme of RPP rules that restricts employers from making contributions in respect of another employer’s employees and former employees.
June 26, 2019
Registered Plans Directorate HEADQUARTERS
Genevieve Fiset Income Tax Rulings Directorate
Participating employer of a registered pension plan
This is in reply to your email of January 9, 2019 regarding a question that has arisen in your work on developing an actuarial bulletin to provide guidance on reasonable methods to apportion assets and actuarial liabilities for the purposes of funding a defined benefit provision of a registered pension plan (RPP) that has more than one participating employer.
You are considering how the apportionment condition in subparagraph 147.2(2)(a)(vi) (footnote 1) would apply to an actuarial valuation of a plan where one of the employers ceases to have any involvement with the plan with no further obligation or possibility to make contributions. We understand that there are various reasons why this might occur, such as a bankruptcy, winding-up, dissolution, sale of business, or voluntary exit from the plan. You have asked for our views on whether the employer would cease to be considered a “participating employer” for the purpose of this condition.
A “participating employer” in relation to a pension plan is defined in subsection 147.1(1) as an employer who has made, or is required to make, contributions to the plan in respect of the employer's employees or former employees. (footnote 2)
A number of RPP rules in the Act and Regulations make reference to the term “participating employer” or the grammatical variation “an employer who participates in the plan”. Other RPP rules simply make reference to the term “employer”, such as “the employer's employees or former employees”. Your query is relevant to all of these rules.
Subsection 147.2(2) of the Act defines “eligible contributions” for the purpose of subsection 147.2(1), which provides for the deduction of employer contributions to an RPP, and for the purpose of paragraph 8502(b) of the Income Tax Regulations (“Regulations”), which lists the contributions that are permitted to be made to an RPP.
An employer contribution to a defined benefit provision of an RPP is an eligible contribution if it is made on the recommendation of an actuary in whose opinion the contribution is required to fund the defined benefits provided under the terms of the RPP in respect of the employer’s employees and former employees.
The actuary’s recommendation must be based on an actuarial valuation that satisfies a number of conditions. Where more than one employer participates in the RPP, subparagraph 147.2(2)(a)(vi) requires that the assets and actuarial liabilities be apportioned in a reasonable manner among the participating employers in respect of their employees and former employees. This requirement ensures that any unfunded liability associated with a participating employer, and thus the employer’s contributions in respect of that liability, are not excessive. It also ensures that there is a reasonable determination of each participating employer’s actuarial surplus for the purpose of paragraph 147.2(2)(d). (footnote 3)
In a situation where one of the participating employers ceases to have any involvement with the plan with no further obligation or possibility to make contributions, it is our view that the particular employer would nonetheless continue to be considered a participating employer for the purposes of the various rules in the Act and Regulations that refer to the term. Consequently, in applying the apportionment condition described above, assets and liabilities should continue to be apportioned to that employer. In this regard, we understand that your Directorate considers reasonable an apportionment method that preserves the funding ratio applicable to the employer as at the time the employer ceased to be actively involved in the plan. This helps avoid problems that could arise from experience gains or losses.
In our view, it would not be appropriate to re-allocate the assets and liabilities that relate to the particular employer’s employees and former employees to the other employers who remain actively involved in the plan. To do so would be contrary to the general scheme of the RPP rules that restricts employers from making contributions in respect of another employer’s employees and former employees.
This position applies regardless of whether the particular employer ceases to exist, except where specific rules provide otherwise. Paragraph 147.2(8) provides that a former employee of a predecessor employer of a participating employer in relation to a pension plan is deemed to be a former employee of the participating employer in relation to the plan if certain conditions are met. In addition, paragraph 87(2)(q) treats an amalgamated corporation as a continuation of its predecessors for the purposes of the RPP rules. Paragraph 88(1)(e.2) provides a similar rule that applies on the winding-up of a subsidiary into its parent corporation. Where any of these rules apply, the assets and liabilities that relate to the predecessor employer should be apportioned to the continuing employer who would be permitted to make eligible contributions in respect of the former employees of the predecessor employer.
We trust our comments will be of assistance.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Unless otherwise stated, all statutory references in this memorandum are references to the provisions of the Income Tax Act (the “Act”).
2 The definition also includes a prescribed employer and an employer that does not make contributions to the plan but makes payments to its employees pursuant to the terms of the plan (such as a public sector plan that is not funded).
3 Paragraph 8515(6)(d) and subparagraphs 8516(2)(b)(iv) and 8516(3)(b)(ii) of the Regulations contain a similar apportionment condition.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2019
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2019