28 April 1994 External T.I. 9410245 - USES OF RPP SURPLUS & FORFEITURES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether forfeitures under money purchase plan can be used to offset employer contributions if plan has a surplus; whether surplus can be used to cover plan expenses.

Position TAKEN:

Yes; no.

Reasons FOR POSITION TAKEN:

Same position as in 940608 but taking into account amendments to Regulations announced on April 5, 1994.

			April 28, 1994

	Head Office	Head Office
	Registered Plans Division	Rulings Directorate
Mrs. Stella M. Black	(613) 957-8953
	Director
	Attention:  Marcel Mathieu

			941024

Effect of Proposed Amendments Announced
April 5, 1994 on Memorandum of April 6, 1994
Concerning Use of Plan Surplus/Forfeitures (940608)

This is further to the above-noted memorandum and our telephone conversation (Spice/Mathieu) of April 21, 1994. We have reviewed the amendments to the Income Tax Regulations announced by the Department of Finance on April 5, 1994 (News Release 94-033), and note the relevant changes and their effect on the views expressed in our previous memorandum as follows.

Proposed Amendments Affecting Previous Memorandum

The definition of "surplus" in subsection 8500(1) is proposed to be amended to read as follows (changes in italics):

Surplus under a money purchase provision of a pension plan at any time means such a portion, if any, of the amount held at that time in respect of the provision as had not been allocated to members and is not reasonably attributable to

(a)forfeited amounts under the provision or earnings of the plan that are reasonably attributable to those amounts,

(b)contributions made under the provision by an employer that will be allocated to members as part of the regular allocation of such contributions, or

(c)earnings of the plan (other than earnings attributable to the surplus under the provision before that time) that will be allocated to members as part of the regular allocation of such earnings.

The change to paragraph (a) is merely a consolidation of the former paragraphs (a) and (b) of the provision; the new paragraph (b) removes any doubt that employer contributions are not to be considered surplus, even where they are not allocated immediately upon contribution to the plan.

New subsection 8300(8) deems an amount allocated to an individual which is attributable to forfeited amounts, surplus or surplus transferred in accordance with subsection 147.3(4.1) of the Income Tax Act (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act") to be an employer contribution with respect to the individual for purposes of Part LXXXIII. Amendments to subsection 8301(4) result in an individual's pension credit including amounts allocated to the individual which are attributable to surplus transferred in accordance with subsection 147.3(4.1) of the Act.

New subsection 8301(4.1) permits the Minister to approve a method of determining the pension credit of a particular individual which takes into account amounts allocated to the particular individual but made with respect to another individual. Previously the Regulations required that an employer contribution be paid "with respect to a particular member" (paragraph 8506(2)(b)) and that the member's pension credit include the amount of the employer's contribution "made...with respect to the individual" (paragraph 8301(4)(a)(ii)).

New paragraph 8506(2)(b.1) requires that each employer contribution be allocated to the member with respect to whom it is made but the requirement may be waived by the Minister pursuant to subsection 8506(2.1) where employer contributions are allocated to members "in a manner acceptable to the Minister". Where the Minister waives the requirement, amounts may be paid out of the plan in accordance with new subparagraph 8502(d)(viii).

Paragraph 8506(2)(c) is amended to prohibit both employer contributions and transfers into the plan under 147.3(4.1) of the Act if there is 1) a surplus or 2) an amount relating to unallocated pre-1990 forfeitures retained in the plan (i.e. forfeitures which are not paid to the employer).

New subparagraph 8506(2)(f)(iii) and amended paragraph 8506(3)(b) permit post-1989 forfeitures to be used to cover the plan's administrative, investment or similar expenses as an alternative to either paying them to the employer or allocating them to the members; the Minister's discretion to extend the time to comply with paragraph 8506(2)(f) may be exercised not only where the forfeited amounts will be reallocated to members but also if it is intended that they be used instead to cover plan expenses.

A. Employer Contributions When Both Surplus and Forfeitures Exist

It was our view that the offset of employer contributions by the allocation of forfeitures to the employees is not prohibited when there is a surplus in the plan.

The above-noted proposed amendments do not affect this opinion. Forfeitures are still required to be allocated unless the employer chooses to pay them to itself or use them to cover plan expenses. An allocation of forfeitures, however, will now be considered an employer contribution for purposes of the pension credit provisions so that the amount of the employer contribution is actually increased by the amount of allocated forfeitures. This will result in an employer being able to satisfy its contribution obligations under the plan as registered even though it does not actually make a contribution. The allocation will not offend the prohibition in paragraph 8506(2)(c) since it is not deemed to be an employer contribution for purposes of Part LXXXV.

B. Plan Expenses Paid from Surplus

It was our view that surplus could not be used to cover plan expenses because then it would not be available to satisfy employer obligations to make contributions in accordance with subsection 147.3(8) of the Act. In our view, the surplus to which XXXXXXXXXX was alluding was that which arose on conversion of a defined benefit to a money purchase plan, and not surplus which is required to be allocated to members pursuant to subsection 147.3(4.1) of the Act. (Note the amendments provide specific recognition for the allocation of (4.1) type surplus with the addition of subparagraph 8300(8)(a)(iii) and subparagraph 8301(4)(b)(ii.1)).

Although the proposed amendments will permit unallocated forfeitures to be used to cover plan expenses, none of the amendments affect our position that the requirement in subsection 147.3(8) of the Act cannot be met if surplus is applied for plan expenses. Furthermore, the amendment concerning forfeitures supports our position that using an amount to satisfy employer obligations to make contributions and using an amount to cover plan expenses are mutually exclusive uses. In order to be used as an employer contribution, the amount must be allocated (see paragraphs 8506(2)(b.1) and 8300(8)(b)); a forfeiture may be either allocated or used to cover plan expenses (see subparagraph 8506(2)(f)). An allocation of an amount, in other words, precludes using that same amount to cover plan expenses.

for Director
Financial Industries Division
Rulings Directorate
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