29 March 1995 Internal T.I. 9431086 - RPP BRIDGE BENEFITS IN LIEU OF OTHER BENEFITS

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: Can bridge bendfits under RPP be fully funded through forgone life time retirement benefits?

Position TAKEN: Yes

Reasons FOR POSITION: Regulation 8503(2)(b) limits the amount of benefits payable under that provision but not the source of their funding

			March 29, 1995

HEADQUARTERS HEADQUARTERS
Registered Plans Division W.C. Harding
S. M. Black 957-8953
Director
Attention: K.W. Smith
7-943108

Provision of Bridging Benefits under a Registered Pension Plan (an "RPP")
Your File HDL 8199-7

This is in reply to your memorandum of November 28, 1994 in which you requested our opinion on the mechanics of paragraph 8503(2)(b) and (l) of the Income Tax Regulations (the "Regulations")

In particular you asked us to consider and respond to the following example and questions:

Example:A member of an RPP is retiring at age 58 with more than 10 years of service under the plan. The plan does not provide any bridging benefits. However the plan will allow the member to forgo life time Benefits and receive a bridging benefit. The member wants $800 per month in bridge benefits.

Question 1: Does the plan have to first provide for a bridge which is limited by the members age and/or service before the member can receive a bridge benefit that is not so limited?

Question 2: If the member fully funds the bridge benefit by forgoing life time retirement benefits, is the limit on the bridge the amount under subparagraph 8503(2)(l)(i) or the amount in excess of what can be provided under paragraph 8503(2)(b)?

Paragraph 8503(2) of the Regulations details, for the purposes of paragraph 8502(c) of the Regulations, a number of benefits that may be paid under a defined benefit provision of an RPP subject to the conditions specified for each benefit. "Bridging benefits" are defined in Regulation 8500(1) as benefits payable under a pension provision to members of an RPP for a period ending no later than a date determinable at the time the benefits commence to be paid. Regulation 8503(2)(b) then provides that "bridging benefits" within the limits described therein may be paid while Regulation 8503(2)(l) provides that bridging benefits in excess of those permissible under paragraph (b) may be paid subject to the limits specified therein.

From the wording of paragraph (l) it is clear that bridging benefits can only be provided under that paragraph where they are in addition to amounts permissable under paragraph (b). However, this does not mean that a plan can not provide bridging benefits that are fully funded through forgone lifetime retirement benefits. This is because regulation 8503(2)(b) does not specify that bridging benefits can not be funded through forgone lifetime retirement benefits. That is, while regulation 8503(2)(b) provides bridging benefits can be provided in addition to other benefits provided under a defined benefit provision of a plan, it does not say that these benefits can not be made in lieu of those other benefits. Therefore, subject to the limitations provided in each paragraph, a plan can provide bridging benefits that are entirely funded through forgone lifetime retirement benefits with one portion of them being payable under paragraph 8503(2)(b) and the balance payable under paragraph (l).

With reference to your example and presuming a present value factor of 1 such that each dollar of bridging benefits under B is purchased with a dollar of future life time retirement benefits, the maximum permissable bridging benefit that may be provided under the provision under paragraph 8503(2)(b) would be calculated as follows:

Maximum permissable 8503(2)(b) benefit = A*(1-.0025*B) *C *(D/10)
					        = $752
	where

A = 800
B = 24
C = 1
D = 10

(please note that in your submission you referred to D as being 10 minus the member's pensionable service. D is actually the lesser of 10 and the members years of service.

The member's maximum permissable benefit under paragraph 8503(2)(l) would then be calculable as follows:

(1) bridging benefits permissable under (b) if the formula read A * C

		= $800

(2) "additional bridging benefit"

		= $48 ($800-$752).

In this case, the amount that may be paid under paragraph (b) is $752 and this may or may not be funded through forgone lifetime retirement benefits. The amount payable under (l) is $48. However, this must be funded through forgone lifetime retirement benefits.

To summarize, the answer to your first question is yes. A plan must provide a benefit under (b) before a benefit under (l) can be provided. However, the benefit under (b) can be paid in lieu of lifetime retirement benefits. The answer to your second question is that the limitation on benefits funded entirely by forgone lifetime retirement benefits is the sum of the amounts permissable under paragraphs (b) and (l).

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch