1 May 1995 Internal T.I. 9502906 - 50% FUNDING RULE AND EXCESS RPP CONTRIBUTIONS

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:

The Pension Benefit Standards Act or provincial equivalent require pensions to be 50% funded by employers. Where a member's contribution exceeds 50% of the value of the pension, the benefits must be increased by the excess. Is this amount a benefit or a return of contributions for purposes of transfers under 147.3(4) and (6).

Position TAKEN:

Benefit, not a return of contributions.

Reasons FOR POSITION TAKEN:

Legislation defines it as a benefit under the plan as registered.

								May 1, 1995

	HEADQUARTERS					HEADQUARTERS
	Registered Plans Division			D. Duff
	Stella Black					(613) 957-8953
	Director
	Attention:  Kevin Smith, Sharon Yetts

								7-950290

50/50 Funding Rule and Excess Contributions

This is in reply to your memoranda of January 31 and February 10, 1995, requesting our opinion on the transfer of the Excess Contributions, defined below, resulting from the application of what you have referred to as the 50/50 rule in the Pension Benefits Standards Act ("PBSA") or provincial equivalent. Our response refers only to the PBSA and we have not examined any of the provincial acts with respect to pensions.

Definition of 50/50 Rule and Excess Contributions

The 50/50 rule is the provision in subsection 21(2) of the PBSA, which basically requires a pension to be 50% funded by the employer. This provision in the PBSA applies where a member dies or retires, ceases to be a member of a plan after being a member for two years, or the plan is wholly or partially terminated. Basically, it provides that where the member's contributions after 1986, plus earnings thereon, exceeds 50% of the "pension benefit credit" related to the same period, the member's "pension benefit" shall be increased by the amount that can be provided by the excess. Subsection 2(1) of the PBSA defines the pension benefit basically as the periodic pension to which the member is entitled and the pension benefit credit basically as the aggregate value of all of the benefits under the plan at a particular time. You refer to this excess as the Excess Contributions.

Excess Contribution as a Benefit

Subsection 147.1(15) of the Act defines the term, "a pension plan as registered," to include a requirement of the PBSA whether or not it is stated in the plan documents. Subparagraph 8502(c)(iii) of the Regulations, with Regulation 8513, specifically refers to the requirement in subsection 21(2) of the PBSA as a permissible benefit for an RPP. In our opinion, the Excess Contribution is a benefit of the plan as registered, and falls under the definition of a defined benefit provision in subsection 147.1(1) of the Act. It is a provision that places a guaranteed minimum on the total benefit that a member will receive from the plan. Although this minimum guarantee is based on contributions it is still a benefit and is not a return of contributions in the situation where it is paid out of the plan.

Return of Contributions and subsection 147.3(6) Transfers

Paragraph 8502(d) of the Regulations lists permissible distributions from an RPP. Subparagraph 8502(d)(i) lists a payment of benefits in accordance with the plan as registered while subparagraphs 8502(d)(iv) and (v) refer to a return of contributions and related interest resulting from an amendment reducing the required contributions of the member. The return of contributions is not a benefit of the plan as registered. If it was it would be a permissible distribution pursuant to subparagraph 8502(d)(i) and there would be no need for subparagraph 8502(d)(iv). The Technical Notes to subparagraphs 8502(d)(iv) and (v) make a reference to the transfers of part of such amounts pursuant to subsection 147.3(6).

Subsection 147.3(6) permits the transfer of a return of contributions made by a member under a defined benefit provision of a plan before 1991. The intention of this provision pursuant to the Technical Notes is to allow the transfer of such contributions when the plan is amended retroactively to reduce member contributions. Although the term, return of contributions in subsection 147.3(6) is not defined, in our opinion, it refers to the amounts described in subparagraph 8502(d)(iv). An amount must meet the criteria for a permissable distribution in subparagraph 8502(d)(iv) before it can be paid from the plan. Thereafter, if it also meets the criteria in 147.3(6) it can be transferred as stated therein.

It should be noted that although a return of contributions is not a payment of benefits from the plan as registered, it is superannuation or pension benefits as defined in subsection 248(1) of the Act and must be included in income pursuant to subparagraph 56(1)(a)(i) of the Act. The definition in subsection 248(1) is very broad and includes both payments in accordance with the plan as registered and payments resulting from amendments to the plan.

Responses to Your Questions

Transferring Excess Contributions pursuant to 147.3(6)

In your memorandum of January 31, 1995, you asked if Excess Contributions, as described therein, could be transferred pursuant to subsection 147.3(6). In our opinion, they cannot. As discussed above, Excess Contributions constitute a benefit under a plan as registered, not a return of contributions.

Transferring Excess Contributions pursuant to 147.3(4)

Subsection 147.3(4) provides for the transfer of an amount paid in satisfaction of the member's entitlement to defined benefits of the plan as registered. As stated above, it is our opinion that Excess Contributions are benefits of a plan as registered. Also, they would not meet the definition of a money purchase provision in subsection 147.1(1) because the Excess Contributions are not determined solely by reference to the balance in a member's account. They would be defined benefits because, by the definition in subsection 147.1(1), a defined benefit provision is basically any benefit that is not a money purchase provision. Therefore, they can be transferred under subsection 147.3(4). Even it they were considered to be money purchase benefits they could still be transferred pursuant to subsection 147.3(1).

Using Excess Contributions to Enhance Benefits

In your memorandum of February 10, 1995, you requested our opinion on whether the Excess Contributions could be used to enhance the member's benefits under the plan. As noted in the definition of the Excess Contributions above, pursuant to the PBSA, the member's pension benefit shall be increased by the amount that can be provided by the excess. Subsection 2(1) of the PBSA defines the pension benefit basically as the periodic pension to which the member is entitled. Pursuant to subparagraph 8502(c)(iii) and Regulation 8513 the requirement of subsection 21(2) of the PBSA is a permissible benefit under the plan. As such it would seem that the Excess Contributions can be used to enhance the benefits of the member. Where a provincial act applies instead of the PBSA, it will depend on the provisions of that particular act.

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