18 February 1997 Internal T.I. 9639946 - BENEFIT ACCRUAL RATES, OPTIONS

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:

Should a plan be registered if an optional benefit results in a benefit accrual rate exceeding 2%?

Position:

Yes

Reasons:

The Regulations have other provisions designed to limit pension benefits under a pension plan.

			February 18, 1997

	HEADQUARTERS	HEADQUARTERS
	Stella M. Black	M.P. Sarazin
	Director	957-3499
Registered Plans Division
Attention: J. Hollinger
			963994

8503(3)(g) of the Income Tax Regulations

This is in reply to your memorandum dated November 29, 1996, wherein you have requested our comments as to whether paragraph 8503(3)(g) of the Income Tax Regulations (the "Regulations") would prohibit a defined benefit provision of a registered pension plan ("RPP") from offering an optional form of pension benefit that may result in a benefit accrual rate, determined on an actuarial equivalent basis, exceeding 2%.

In order to qualify for registration, the terms of a pension plan must satisfy certain prescribed conditions, including the condition described in paragraph 8503(3)(g) of the Regulations. Where the amount of a member's retirement benefits under the pension plan is determined by reference to the member's remuneration, paragraph 8503(3)(g) restricts the benefit accrual rate to a maximum of 2%. Where the terms of a pension plan do not satisfy paragraph 8503(3)(g) because the benefit accrual rate or the equivalent benefit accrual rate under the particular plan exceeds the 2% maximum, the pension plan will not meet the conditions required for registration.

The amount of lifetime retirement benefits that can be provided under a defined benefit provision of an RPP is limited by paragraph 8504(1)(a), and also indirectly in the determination of the pension adjustment by paragraph 8302(3)(o) and subsection 8302(4). The Department of Finance has indicated that paragraph 8503(3)(g) was intended to facilitate the review of plans submitted for registration and was never intended to supersede these other provisions.

You described a plan where the normal form of benefit is a life annuity with a 10 year guarantee period, but having an optional form with no guarantee and a correspondingly higher pension. Where the benefit accrued under the optional form equated to a benefit that would have resulted from a rate exceeding a 2% benefit accrual rate you asked if this would violate the provisions in paragraph 8503(3)(g).

While there may be an argument that the rate under the optional form can be considered a benefit accrual rate or equivalent benefit accrual rate, it would seem that paragraph 8503(3)(g) was not intended to have been used in this fashion. Neither the technical notes nor discussions with the Department of Finance indicate the paragraph is applicable where a member can elect to forgo certain benefits and increase the annuity otherwise payable. Consequently, in our opinion the requirements of paragraph 8503(3)(g) are met if the normal form of the benefit meets the provision therein.

We trust the above comments will be of assistance to you.

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