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:
How should "earnings" be defined in defined benefit pension plan.
Position:
May be defined to include all amounts identified as "compensation" in 147.1(1) of the Act or may be defined more restrictively.
Reasons:
Where term "earnings" is used to limit contributions that can be made, maximum benefits can accrue based on amounts that are "compensation" as defined in Act but there is nothing to stop plan from providing lesser benefits by using more restrictive meaning of "earnings".
XXXXXXXXXX 971173
Attention: XXXXXXXXXX
May 16, 1997
Re: Definition of "Earnings" in Defined Benefit Pension Plan
This is in reply to your facsimile transmission of May 1, 1997, in which you ask for our comments concerning an acceptable definition of "earnings" to be used in a defined benefit pension plan. You make reference to the definition of "remuneration" in paragraph 9(k) of Information Circular 72-13R8 and explain that one of the parties negotiating the terms of the plan has indicated that "earnings" on which contributions are to be based should not be defined.
In our view, any term used in the pension plan which does not have a plain meaning should be defined either in the plan or by reference to a defined term in the Income Tax Act (the "Act") or Income Tax Regulations (the "Regulations"). This will serve to assist the Department and the parties to the pension plan negotiations to understand the scope of the pension benefits to be provided and to ascertain if they satisfy the registration requirements under the Act.
Please note that Information Circular 72-13R8 is generally relevant for determining what service and contributions are acceptable for registered pension plans for periods before, for the most part, 1991. With respect to the rules relating to service and contributions after 1990, reference should be made to the Act and Regulations.
"Earnings" or "pensionable earnings" are not defined in the Act or Regulations but are terms commonly used in pension plans to limit the pension benefits to be funded and provided under the defined benefit formula.
With respect to the term "earnings", there are several registration requirements that should be kept in mind when deciding on a definition to be used in the plan document.
To explain, "pensionable service" is defined in subsection 8500(1) of the Regulations to mean the periods in respect of which lifetime retirement benefits are provided to the plan member. Subparagraph 8504(1)(a)(ii) of the Regulations limits the amount of lifetime retirement benefits to (for a person who is not "connected" to the employer) the amount determined by the formula F x G where
F is the lesser of
(A)2 percent of the member's highest average compensation ... for the purpose of the provision, indexed to the year of commencement, and
(B)the defined benefit limit for the year of commencement, and
G is the aggregate of all amounts each of which is the duration (measured in years, including any fraction of a year) of a period that is pensionable service of the member under the provision ....
"Compensation" is defined in subsection 147.1(1) of the Act and basically means 1) a Canadian resident individual's income from the employer in respect of an employment or office of the individual with the employer which is required to be included in the individual's income by section 5 or 6 of the Act, or 2) a non-resident's income from the employer which is required to be included in the individual's income by section 5 or 6 of the Act and is either from a Canadian-based office or employment or not tax-exempt because of a tax treaty.
"Eligible service" is a heading in subsection 8503(3) of the Regulations which contains the restrictions placed on benefits which may be provided under a defined benefit pension plan. One of these restrictions is that lifetime retirement benefits can only be provided "in respect of (certain) periods". The period of eligible service which is relevant to your query is described in subparagraph 8503(3)(a)(i) of the Regulations as follows:
a period throughout which the member is employed in Canada by, and receives remuneration from, an employer who participates in the plan.
"Remuneration" is not defined in the Act or Regulations but it is our view that the word in this context means those amounts which are included within the meaning of the word "compensation" in subsection 147.1(1) of the Act. Note that the definition of "remuneration" in Information Circular 72-13R8 contains basically the same items as the definition of "compensation" in the Act.
"Pensionable service" and "eligible service" are used in the Regulations to limit benefits that can be provided. They are maximums - in other words, a defined benefit pension plan can provide benefits for a shorter period of time and exclude periods that would otherwise qualify under the Regulations. Therefore, it is possible for your plan to restrict the number or duration of periods which qualify for benefits by giving a more restrictive meaning than is mandated by the Act or Regulations. For the same reason, if the pension plan defines "earnings" so as to limit the benefits which may accrue or the contributions that can be made, the definition is acceptable even though it may not include all types of compensation or remuneration recognized under the Act and Regulations.
However, if the intent of the parties is to include as broad an interpretation of "earnings" as possible in order to ensure maximum contributions and maximum benefits, we suggest that the plan document incorporate or make reference to the definition of "compensation" in subsection 147.1(1) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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