10 March 1992 Administrative Letter 9127416 F - Computation of Earnings of a Pension Plan

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.

March 10, 1992

Attention:  R. Grabs

Allocation of Plan Earnings

This is in reply to your memorandum of September 25, 1991 and further to our (Grabs/Delorey) telephone conversation on March 5, 1992.

Your concern relates to a proposal put forth by    24(1)    with respect to the requirements in paragraph 8506(2)(e) of the Regulations. That paragraph requires a registered pension plan containing a money purchase provision to allocate earnings of the plan (other than earnings attributable to forfeited amounts or a surplus under the provision) on a reasonable basis and no less frequently than annually to plan members.

24(1)

24(1)

Before deciding if this proposal is acceptable, you ask for our views on the meaning of the expression "earnings of the plan" for the purposes of paragraph 8506(2)(e) of the Regulations.

Our Comments

Theoretically, it would seem that allocations at the end of a year to members of a money purchase pension plan should reflect each member's share of the fair market value of the plan at that time. Under this theory, the "earnings for the year" of the plan would include both realized and unrealized capital gains and losses. From a practical perspective, however, we see no reason to change the method used in the past solely because relevant Regulations have been enacted. Rather, the governing principle in our view is that such earnings should be computed in a consistent manner from year to year and in a manner consistent with that used in the industry.

With respect to the method used in the past, the computation and allocation of the earnings of a money purchase plan are not new concepts as noted in paragraph 6(i) of IC72-13R8. However, as mentioned during our telephone conversation, a review of our files indicates that this Directorate has not previously considered the proper method of computing the earnings of a pension plan. Based on the comment "instead of allocating 100% of capital gains and losses" in       24(1)        letter and the calculation in Schedule IV to the T3P Return, it appears that the accepted practice has been to include in those earnings 100% of realized capital gains and losses and to exclude therefrom unrealized capital gains and losses. You indicated during our telephone conversation that you also felt this was the practice in the past.

In summary, we see no reason to change the practice of computing an RPP's earnings from that used in the past. Also, it is our view that paragraph 8506(2)(e) cannot be interpreted in a manner that would allow some earnings for a particular year to not be allocated to plan participants at the end of that year. We therefore recommend that     24(1)     proposal not be accepted.

As mentioned during our telephone conversation, we are prepared to provide further assistance in this regard if needed.

for DirectorFinancial Industries DivisionRulings Directorate