NO.: 72-13R8 Date: December 16, 1988 Subject: EMPLOYEES' PENSION PLANS 1. This circular replaces and cancels Information Circular 72-13R7 dated December 31, 1981. Current revisions are designated by vertical lines. 2. The purpose of this circular is to incorporate changes made to the administrative rules for the registration of pension plans since the publication of IC72-13R7. This circular applies to all pension plans submitted for registration prior to March 28, 1988, and will generally continue to apply to benefits provided in respect of service before 1991 under defined benefit provisions. This is intended to be the final Circular in the 72-13 series and a permanent record of the administrative rules in effect as at March 27, 1988. Any rules required as a result of the introduction of legislation will be published in a new series. 3. Plans registered as at December 31, 1970, need not be amended to comply with 9(f) and 9(g) below unless the amount or cost of pension benefits under the plan are increased in 1971 or subsequent years. Nevertheless, for purposes of paragraph 20(1)(s) of the Act, a special payment will not be approved to the extent that it includes the cost of funding pension benefits in excess of the maximum permitted by Part I of this circular. 4. The material in the circular has been divided into four parts as follows: Part I - REGISTRATION (Paragraphs 5 to 16) Part II - SPECIAL PAYMENTS IN RESPECT OF CURRENT OR PAST SERVICES (Paragraphs 17 to 26) PART III - CURRENT SERVICE CONTRIBUTIONS BY EMPLOYERS (Paragraphs 27 to 35) PART IV - OTHER PENSION PLAN MATTERS (Paragraphs 36 to 43) PART I - REGISTRATION 5. Authority (a) Registration of an employees' pension plan for a year is provided for by subsection 248(1) of the Act. (b) Subsection 248(1) of the Act provides for the annual registration of an employees' pension plan. For administrative reasons, however, the Department will usually treat the initial registration as a continuing registration. In any case where the Department does not intend to do so, the employer will be so advised at the time of registration. Nevertheless, the Department reserves the right, when circumstances warrant it, to terminate registration after the initial year of registration. This action might be taken if the plan failed to meet registration requirements in a subsequent year or if the plan was not operated in accordance with its written terms. 6. Nature of an Employees' Pension Plan (a) Terms - An employees' pension plan is a definite arrangement established as a continuing policy by an employer or group of employers or by a union in conjunction with such employers. The terms and conditions must be set out in writing. (b) Purpose (i) Its primary purpose must be to provide pensions to retired employees in the form of life annuities. It must not be a scheme for diversion of profits or an employees' savings fund with the right of withdrawal of funds during coverage. (ii) It may provide for termination of the plan by the employer or for cessation of participation by a plan member; however, it may not provide for suspension of the plan by the employer (meaning interruption of all benefit accruals). This does not preclude the suspension of contributions by the employer when surplus is being applied for this purpose (See paragraph 39(a)). Consideration will be given to requests to permit individual members to suspend contributions to the plan or participation in the plan for a period of time not exceeding two years. However, it is not intended that members should have the right to suspend and renew contributions or participation at will. For example, suspension would be permitted for members who leave employment with the intention (of member and employer) that the member will return to employment after a short period of time. Suspension of member contributions would also be permitted where the plan is in part contributory and in part non-contributory and during the period of suspension the non-contributory benefits continue to accrue. (iii) Defined benefit plans, (described in 6(i) below) submitted for registration or amended after December 31, 1981 (other than multi-employer union plans) may not contain a provision which would reduce either accrued benefits or any right to a supplementary pension in accordance with 9(i) below in respect of those accrued benefits. The exception to the above rule is upon wind-up of the plan when, due to insufficient funds, a reduction in benefits is authorized by a federal or provincial jurisdiction administering a pension benefits act or by this Department. (c) Persons Covered - An employees' pension plan must not provide for benefits to be paid to persons other than employees who are members of the plan, their beneficiaries or their estate(s). (d) Employer Participation - The pension must be provided by the employer as consideration for services rendered by the employee. The plan may be non- contributory or may require members to contribute and may permit members to make voluntary contributions (see 11 below). (e) Funding Media - The pension plan must be funded through: (i) a contract for insurance with a company authorized to carry on a life insurance business in Canada, (ii) a trust in Canada governed by a written trust agreement under which the trustees are: A. a trust company, or B. individuals, at least three of whom reside in Canada and one of whom must be independent to the extent that the individual is neither a significant shareholder, partner, proprietor nor an employee of a participating employer (see also 6(g) below), For trusteed plans established in the Province of Quebec, evidence of a contractual arrangement between the employer or union and persons upon whom the arrangement imposes the duties, responsibilities and rights normally associated with a trustee, will be accepted in lieu of a written trust agreement. (iii) a pension corporation, (iv) an arrangement administered by the Government of Canada or by the government of a province of Canada, or by an agent thereof, or (v) combinations of the above funding media. In regard to foreign plans see 6(j) below. Where benefits in accordance with (i) above are to be provided under individual contracts, the contracts so issued must be held on the terms of an express trust. Such trust must have not less than two individual trustees or a corporate trustee. The contracts must be issued to or assigned to the trustees who must have power to deal fully with all such contracts including assignment or transfer of each contract to the applicable member on retirement or termination of employment. Where a funding vehicle of a plan is replaced and funds are being transferred to the new vehicle, the funding contracts or agreements must provide for the transfer and the transfer must be permitted under the plan rules. All documents in support of the change must be submitted promptly to Revenue Canada, Taxation for approval. Pension benefits are to be paid by, or the pension annuity is to be purchased by, the insurer, trustee, pension corporation or government through which the plan is being funded. However, the insurer, trustee or pension corporation may designate a participating employer to be its agent for the payment of benefits upon termination of employment or death. The insurer, trustee or pension corporation is responsible for ensuring that proper accounting of plan funds is maintained by its agent on its behalf, and for ensuring that information returns required by the Act or Regulations are properly filed. (f) Segregated Fund and Deposit Administration Contracts - A contract described as a segregated fund or deposit administration contract will be treated as a contract for insurance if: (i) benefits on retirement are to be provided through a life annuity contract, or (ii) benefits on retirement are to be provided by regular periodic payments out of the fund, and (iii) the contract prohibits the payment of amounts (other than the refund of a certified actuarial surplus and the payment of administrative costs) by the insurance company to a participating employer or to a person who was not an eligible member under the plan or the beneficiary of such member. A pension plan whose funds are invested under a segregated fund or deposit administration contract that fails to meet the above requirements must be funded as a trusteed plan. The contract must then be owned by the trust. (g) Administrators - A plan funded through a trust must have a designated administrator who is responsible for the overall operation and administration of the plan. Such administrator may be a participating corporate employer, a corporation resident in Canada that is in the business of rendering such administrative services, a committee of individuals the majority of whom reside in Canada, an insurance company authorized under the laws of Canada or a province to carry on in Canada an annuities business or a trust company registered under the trusts laws of Canada or a province. A corporate trustee or pension corporation governed by the plan may also be an administrator of the plan. An individual who is a trustee of a trust governed by the plan may also be a member of the plan's administrative committee. (h) Trust Accounting - The trust fund of a trusteed pension plan must have a fiscal year ending on December 31. (i) Type of Plan - The plan may be a defined benefit or a money purchase arrangement or a combination thereof. A money purchase plan means a plan under which the only benefits in respect of each member of the plan are benefits determined solely with reference to and provided by the contributions made under its terms by or on behalf of the member together with any earnings reasonably attributable thereto. A defined benefit plan means a plan under which benefits are determined in any way other than that described in the preceding sentence. Plans combining money purchase and defined benefit features will be considered defined benefit plans for purposes of this circular. (j) Consideration will be given to applications for registration of foreign employees' pension plans that have a foreign funding medium, provided that: (i) Canadian employers are contributing to the foreign plan but only on account of foreign nationals employed outside Canada by the Canadian employer, and (ii) the pension benefits provided to a member under the plan are no more beneficial than those benefits which could be provided under a registered pension plan funded or insured in Canada. Some deviations from the requirements of this circular may be permitted if it is established that the plan provision is customary in the applicable country. 7. Who May Institute a Plan (a) Any employer may institute a plan for his employees. A trade union or trade association may institute a plan in co-operation with subscribing employers in the industry. (b) The employer must be a contributor. A plan under which employees alone mutually agree to make provision of any kind for themselves or their beneficiaries, directly or indirectly (for example, a plan permitting employee voluntary contributions only) will not be accepted for registration as an employees' pension plan. 8. Eligibility (a) Coverage - The plan must state the class of employees to be covered, the requirements to be met for eligibility and whether or not participation is compulsory. (b) Persons Excluded - In considering employees to be covered, the following comments should be noted: (i) "Employee" does not include a person who is self-employed. (ii) A partner or proprietor is not an employee and cannot participate in a registered pension plan in respect of any period when such person was not an employee; however, participation may be permitted in respect of any prior period of eligible service during which the partner or proprietor had been an employee of a participating company but not a member of any pension plan in which that company participated. Benefits must be based on actual remuneration received in those years for such employment. Service as a partner or proprietor in a predecessor business cannot be included in eligible service. Such participation will not be permitted if the pension plan - or, in a multi- employer plan, if the funding by the partnership or proprietorship - is primarily for the benefit of the proprietor or partners and related persons. (iii) A spouse of a partner or proprietor may be a member if such spouse is treated as an employee for Canada Pension Plan or Quebec Pension Plan and income tax purposes and provided that the pension plan - or, in a multi- employer plan, the funding by the partnership or proprietorship - is not primarily for the benefit of the proprietor or partners and related persons. A money purchase type of pension plan which is primarily for the benefit of the spouse of a proprietor or partner may be registered, subject to the restrictions on significant shareholder contributions outlined in 11(a)(iii) and 11(b)(ii) below being applied to such spouse. (c) Personal Corporation - Service with a corporation in 1971 or prior years, while it was a personal corporation as defined in section 68 of the Act (prior to the December, 1971 amendments), by a shareholder of that corporation or the spouse or child of such a shareholder, cannot be included as eligible service. (d) Significant Shareholders - A "significant shareholder" is an individual who, alone or in combination with a parent, spouse or child, owns or has a beneficial interest, directly or indirectly, in shares that represent 10 per cent or more of the voting power attached to all shares of a company that is participating in the plan. A plan providing defined pension benefits must not be primarily for the benefit of significant shareholders of participating companies and/or related persons. Furthermore, under a multi-employer defined benefit plan, the benefits funded by a participating company must not be primarily for the benefit of significant shareholders of that company and/or related persons. For purposes of this circular, insofar as the term relates to a significant shareholder, partner or proprietor, "related person" means a parent, spouse, brother, sister or child of a significant shareholder, partner or proprietor. A pension plan is considered to be primarily for the benefit of significant shareholders and/or related persons if the present value of benefits purchased for or accrued to significant shareholders and related persons is in excess of 50 per cent of the present value of the total benefits purchased for or accrued to active members under all registered pension plans of the employer. Consideration will be given to requests to waive this rule if it can be determined that the corporation is not controlled by those plan members who are significant shareholders and/or related persons. Consideration will also be given to requests for waiver of this rule where the plan is a multi- employer plan and the significant shareholders and/or related persons are obliged to contribute to or be members of the plan as a condition of union membership that is a prerequisite to employment. Nevertheless, defined benefit plans primarily for the benefit of significant shareholders and/or related persons which were registered as such prior to October 1, 1968 or which were implemented during 1980 will not be terminated solely as a result of the fact that they are primarily for the benefit of significant shareholders and/or related persons. However, such plans may not be amended to increase the amount or cost of benefits to significant shareholders and/or related persons except that 1980 shareholder plans may be amended to allow a normal retirement age of no earlier than age 60. The Supplementary Rules Regarding Shareholder Pension Plans which were released on December 29, 1980, are not incorporated into this circular but continue to apply to plans implemented in 1980 primarily for the benefit of controlling shareholders and related persons. However, as of December 5, 1985, some of the Supplementary Rules were relaxed to permit plans to be amended as follows. (i) Normal retirement age may be as early as age 60. Any resulting unfunded liability is considered to be an initial unfunded liability. (ii) Benefits on retirement may be paid directly from the fund. (iii) The commuted value of the accrued pension entitlement may be transferred to a locked-in registered retirement savings plan on retirement, termination of employment prior to retirement and upon termination of the plan. (iv) With regard to actuarial assumptions for funding or long term assumptions for funding cost-of-living adjustments, any assumed rate of return which is reasonable and consistent with those used for regular employees' pension plans will be accepted. (v) The minimum amortization schedules initially imposed have been relaxed to permit an amortization schedule as certified by the plan actuary. Plans registered under the 1980 Shareholders Rules may not be amended to add participating employers or significant shareholder members or related persons who were not in the original plan. (e) Eligible Service (i) Eligible service must be service with an employer carrying on all or part of its business in Canada or otherwise operating in Canada and such employer must be a contributing employer under the plan or a proprietorship, partnership or corporation that was its predecessor. Such service must be service in Canada or service outside Canada directly related to the earning by the employer of income that is taxable in Canada or would be taxable except for an exempting provision of the Act or a Convention. Such service is subject to the restrictions imposed by 8(b) and (c) above. (ii) An exception to this rule will be permitted where a participating employer has a reciprocal agreement with another Canadian employer, or with a foreign employer that is an associated or affiliated company, to accept prior service with that other employer as eligible service under the participating employer's pension plan. Such reciprocity may be effected through a written agreement to which each participating employer is a party or by incorporation of equivalent clauses into the pension plan of each such employer. A conditional requirement would be that the member had been a member of the other employer's pension plan or had been in employment counting towards eligibility for membership in the other employer's pension plan. (iii) Consideration will also be given to the inclusion in eligible service of other relatively short periods of service (three years or less), inside or outside Canada with an employer that is associated or affiliated with a participating employer. (iv) Periods of paid leave and periods of sabbatical leave, educational leave, and maternity, paternity or adoption leave (paid or unpaid) may be counted as eligible service. Periods of active service in the Canadian Armed Forces or periods of active service with allied forces during World War II or the Korean war may also be included. Periods of leave due to total disability, as certified by a medical practitioner, may also be included in eligible service. For purposes of final or career earnings arrangements, earnings during such periods may be deemed to be A. at a per annum rate that is not in excess of the sum of the remuneration paid for the twelve months immediately prior to the total disability leave and increments warranted by increases in the Consumer Price Index or Average Industrial Wage, or B. the amount of benefits paid to the member under a sickness and accident insurance plan, including any amount under such plan indexing benefits to increases in the Consumer Price Index or Average Industrial Wage. (v) Subject to a three-year limitation, eligible service may include periods, with or without pay, of short-term appointment to federal or provincial governments, committees or commissions or loan to a union, educational institution or charitable organization where benefits do not accrue for such service under another pension plan. Other periods of unpaid leave (including lay off) not exceeding two years may be included in eligible service. (vi) Portability arrangements that include in eligible service all or part of periods of eligible service under a prior registered pension plan will be accepted, provided that: A. the funds associated with the accrued entitlement under the prior plan are transferred to the current plan, and B. such periods of eligible service were pensionable service under the prior plan and pursuant to the arrangement, are to be pensionable service under the current plan. Such portability arrangements must provide to terminating members rights that are equivalent to those provided under the arrangement to new members. (vii) A. Where a controlling shareholder becomes, after December 31, 1980, a member of a plan which provides for the accrual of a past service benefit, the plan must specifically exclude from the eligible service of such a member periods during which that member was a significant shareholder or a related person to whom a benefit accrued under a deferred profit sharing plan or another registered pension plan of the participating company or a related company. A controlling shareholder is a significant shareholder or related person who directly or indirectly or in conjunction with other members who are significant shareholders and persons related to them, controls the participating company. B. The above restriction does not apply if the controlling shareholder is obliged to be a member of the pension plan as a condition of union membership that is a prerequisite to employment and such shareholder or related person is subject to the same rights and conditions as all other members. C. Plans established prior to January 1, 1981, which included such service in eligible service of a member to whom the restriction applies, may continue to do so but may not increase benefits payable to the member on account of such service or accept from the member further additional voluntary contributions on account of such past service. D. For 1981 and subsequent years, service under a defined benefit plan will not qualify as eligible service, insofar as it pertains to a controlling shareholder, if remuneration paid to that member for the year is not reasonable in the circumstances. Remuneration of such a person will be considered to be reasonable if it is at least the lesser of $65,000 or 75 per cent of the average of the remuneration paid to the member for the prior best three consecutive years. 9. Benefits (a) Formula - The amount of the pension benefits to be provided, if not on a money purchase basis, must be in accordance with a definite formula set forth in the plan. (b) Life Annuity - Settlement on retirement (which includes any termination of employment after the earliest age at which a pension may become payable under the plan without adjustment by reason of early retirement, as well as retirement for disability and retirement pursuant to 10(a)(iii) below) must be in the form of an annuity payable in equal periodic amounts at least for life except when: (i) the annuity in the normal form at retirement age would be no greater than 4 per cent of the Year's Maximum Pensionable Earnings as defined by section 17 of the Canada Pension Plan. (ii) the member establishes, by a statement from a qualified medical practitioner, that he has only a short life expectancy (that is, a life expectancy materially shorter than shown on the Extracts from Canadian Life Table attached as Appendix A, or a successor table published by Statistics Canada); (iii) the portion of the benefits paid other than by a life annuity is settled by a single payment and is derived solely from additional voluntary contributions; (iv) the annuity is in part on account of supplementary pension benefits described in 9(i) below, in which event the annuity may be increased or decreased to reflect changes in the amount of the supplementary pension; (v) the annuity is integrated with benefits payable under the Canada Pension Plan, Quebec Pension Plan or Old Age Security Act to provide a level combined benefit from all sources after retirement. The commuted value at retirement of the portion of the benefits funded under the registered pension plan must not exceed the commuted value at retirement of the maximum pension permitted under 9(g) or 9(g.1) below; (vi) the basic pension is supplemented by a bridging benefit for all or part of the period of retirement prior to age 65 and such bridging supplement is reasonable in the circumstances and in relation to maximum social security benefits (OAS and CPP or QPP) payable to persons over age 65; (vii) benefits under a money purchase plan are being paid as a variable or escalating annuity for life; (viii) under a member option provision, the value of defined benefits accrued to date of retirement that would otherwise be paid as a life annuity is converted at date of retirement to a variable or escalating annuity for life or the value of the remaining life annuity at a date subsequent to retirement is similarly converted; or (ix) part of the member's own contributions and interest thereon is paid to the member pursuant to a provision in a federal or provincial pension benefits act. Furthermore, consideration will be given to a provision for a partial settlement in the form of a variable or escalating annuity, in other circumstances, when it is established that the cost or present value of the total pension payable to a member will not exceed the cost or total value of the maximum pension that may be paid to that member within the limitations of 9(g) or 9(g.1) below. The value of the pension benefit may be paid as a joint and last survivor annuity under which the amount paid to the survivor is equal to or less than the amount paid under that annuity to the member. A further option allows for the transfer of the commuted value of the accrued pension entitlement on retirement to a locked-in registered retirement savings plan (meaning a registered retirement savings plan which does not provide for a payment to the annuitant except by way of life annuity). (c) Commutation - Commutation otherwise than provided in 9(b) above may occur only on or after death, termination of employment or termination of the plan prior to the retirement of the member. Commutation may not occur when employment is terminating due to retirement, nor, where participation in the plan is compulsory, may it occur when termination is known by the administrator or trustee to be for the purpose of taking eligible employment with another employer participating under the plan. Further, commutation may not occur on account of voluntary termination of plan membership or due to transfer to employment (with the same employer) which is ineligible under the plan. The commutation of accrued pension benefits attributable to a member's spouse as a result of a marriage breakdown is permitted, provided it is pursuant to a written agreement, decree, order or judgment of a competent tribunal. Cash settlement while continuing in employment will be denied except on or after termination of the plan, when a short life expectancy has been established as per 9(b)(ii) above or when contributions on behalf of the member have been discontinued and the equity would purchase at normal retirement age, a life annuity in the normal form of no greater than 4 per cent of the Year's Maximum Pensionable Earnings (as defined by section 17 of the Canada Pension Plan) per annum. However, cash settlements by direct roll- over to registered retirement savings plans, while continuing in employment, will be permitted to the extent and in the circumstances described below; (i) a roll-over of members' voluntary pension contributions on a once-and-for- all basis following an amendment to the plan to deny members the right to make voluntary contributions, or (ii) a roll-over of members' required contributions on a once-and-for-all basis following an amendment to the plan to delete a requirement for contributions by members, without any reduction in accrued benefits, and to provide for the employer to bear the full cost of benefits under the plan. The Canadian Institute of Actuaries' minimum transfer value recommendation is an acceptable method of calculating the value of benefits (including bridging benefits and supplementary pensions) commuted pursuant to the provisions of this paragraph and paragraphs 9(b) and (l). Any other actuarial method used to calculate commuted amounts is subject to approval by the Department. Such commutations are also subject to the limitations of the Pension Benefits Standards Act, 1985 or provincial pension benefits legislation, if applicable. (d) Deleted (see 8(e)(iv) and 10(c)(ii)) (e) Death Benefits - The plan may provide a benefit on account of the member's death before retirement which is reasonable in relation to the service of the member and in relation to the plan's benefit formula. The commuted value of the death benefit may not exceed the accrued entitlement of the member except where a provision to refund to the beneficiary or estate the member's contributions plus interest, or, in a money purchase plan, the member's and employer's contributions plus interest, results in a refund in excess of the accrued entitlement. Nevertheless, a defined benefit plan may provide for a minimum death benefit, so long as it is reasonable in the circumstances. Examples of minimum death benefits which would be considered reasonable are: i) after a specified period of service, a lump sum payment of 50 per cent of the member's remuneration for the last twelve months of employment, and ii) a lump sum payment of $2,500 regardless of the remuneration level of the deceased. Death benefits after retirement, other than a return of the deceased member's contributions not used to provide pension benefits, plus interest, will not be permitted. The benefit payable to the beneficiary or estate upon the death of the member, either before or after retirement, may be (in whole or in part) by lump sum, by an immediate annuity for life or by a deferred annuity for life commencing before the beneficiary attains age 65. Such annuity may be guaranteed in accordance with 10(d) below. The beneficiary or estate may also receive the benefit in the form of immediate instalments or an annuity certain commencing immediately. The instalments or annuity certain must not exceed a period of ten years from the date of death. The treatment to be accorded a guaranteed annuity in the event of death after retirement is also explained in 10(d) below. (Such death benefits, whether paid in a lump sum or not, are superannuation or pension benefits as defined by subsection 248(1) of the Act and must be reported as such on information and tax returns.) (f) Dependants' Pension Benefits - A pension plan may provide for a reasonable pension to a spouse (including common-law) or to a parent, brother, sister or child provided that such persons were dependent on the member at the time of the member's death. The amount of the pension must be directly related to (but must not exceed) the accrued entitlement of the member at date of death except that a reasonable and moderate minimum pension may be provided, subject to a specified period of eligible service. As an example, a pension to a spouse of 60 per cent of the amount of pension accrued to the member at date of death would usually be considered to be a reasonable pension. (g) Maximum pension (i) Plans that are funded on a money purchase basis (except those terminally funded) and under which benefits are payable solely on a money purchase basis are not subject to these maximum pension rules. Plans providing pension benefits on a defined benefit basis or under a combination of a defined benefit and a money purchase benefit and plans terminally funded must specifically prohibit pension benefits out of or under the plan, paid in the normal form specified under the plan rules, from exceeding an amount that would be at an annual rate that is the lesser of: A. $1,715 times the number of years of pensionable service not exceeding 35, and B. the amount that is the product of (I) 2 per cent per year of pensionable service not exceeding 35 years, and (II) the average of the best three consecutive years of remuneration paid to the member by the employer; or, if paid in an optional form, from exceeding the actuarial equivalent of the amount that would otherwise be determined under the above formula. Where benefits are paid in a form which has a lower actuarial equivalent than the normal form under the plan, the restrictions set out in A & B above must be respected. The above rule applies to all pension benefits, including any distribution of surplus to members and any amount paid out to the member's spouse as a result of marriage breakdown, whether payable upon retirement, termination of employment or termination of plan. This rule will not apply to an annual pension of $300 or less per year of pensionable service nor will it apply to the portion, if any, of the pension derived from a member's additional voluntary contributions (either for current or past service) provided that the portion of the pension so derived is determined on a money purchase basis. Where a plan provides defined benefits for a specified period of past services and benefits on a money purchase basis for subsequent periods, the maximum pension rule need not apply to members whose only pension entitlement is to benefits determined under such money purchase basis. (ii) Where a bridging benefit is payable, where benefits are integrated with the CPP/QPP, OAS or both and where benefits are payable under an escalating annuity, the pension benefits payable under the plan may not exceed the commuted value of the maximum pension permitted under the above formulae, unless the basic pension after age 65 is $300 or less per year of service or amounts that are the equivalent value of such a pension. Where a bridging benefit is payable any excess bridging benefit must be included in the calculation of the commuted value. For this purpose an excess bridging benefit is that portion of a bridging benefit payable up to age 65 that is in excess of the sum of the basic Old Age Security Pension and the maximum CPP/QPP retirement pension payable at the time of determination and all of a bridging benefit payable after age 65. (iii) For the purpose of (B)II above, a maximum pension limitation using the best five years of remuneration rather than the best three consecutive years of remuneration will be accepted even though, for some members, it may produce higher benefits (subject to the limitations of (A)) than would otherwise be permitted. A benefit expressed as the greater of the two will not be accepted. (iv) If the plan so provides, dividends from participating policies of insured plans may be applied to purchase an additional pension provided that the total pension does not exceed the maximum pension set out above; otherwise, dividends must be applied to reduce the employer's contributions. (v) It is not intended that the above limitations should reduce a member's pension below that pension which could be purchased by an amount equal to the member's own contributions plus a reasonable rate of interest thereon. (vi) If a member will receive or has received benefits under more than one registered pension plan or previously registered pension plan of an employer or group of employers, the above limitations apply to the combined benefits paid or payable to the member or on the member's behalf under such plans. (vii) A defined benefit plan may increase the basic pension payable to retired members subject to the maximum pension rule stated above. (g.1) Maximum Pension - Special Situation Plans providing for benefits to be paid on the basis of the greater of a defined benefit and a benefit determined on a money purchase basis are subject to the following rules: (i) The defined benefit must not exceed the limitations set out above, (ii) Subject to (iii) below, the money purchase benefits must not exceed the greater of A. the benefits that could be purchased by an amount that is twice the amount of the required current service contributions made by the member (not exceeding $2,500 in any year up to and including 1975 and the amount deductible by the member as a current service contribution in any subsequent year) plus a reasonable rate of earnings thereon, and B. the benefits that could be purchased by the sum of the required current service contributions made by the member and the current service contributions made by the employer on behalf of the member (the latter not exceeding $2,500 in any year up to and including 1975 or the amount deductible by the employer as a current service contribution on behalf of the member in any subsequent year), plus a reasonable rate of earnings thereon, and (iii) Members' additional voluntary contributions (on account of past and current service) plus earnings thereon may be applied to provide benefits in addition to those permitted under (i) or (ii) above. (g.2) Definitions for purposes of 9(g): (i) A normal form of pension is a pension based on either a single life with or without an acceptable guarantee period or a joint and last survivor not exceeding 60 per cent to the survivor. (ii) Pensionable service is eligible service as defined in 8(e) above for which a pension is being provided, at least in part at some reasonable cost to the employer or a former employer in regard to each year of service, plus eligible service as defined in 8(e)(iii), (iv) or (v) above for which a pension is being provided solely at the member's expense. It also includes a year of deemed service in accordance with 10(c)(ii) below or pursuant to a provision, in accordance with 10(a)(iii) below, that has been accepted by the Department. (iii) For purposes of these maximum pension rules a year is normally a twelve month period and total pensionable service is to be calculated to a fraction of a year. (h) Minimum Pension - Notwithstanding the general limitation of 9(g) above, the plan may provide a moderate minimum pension benefit (not related to earnings or service) which, taking into account Old Age Security and Canada Pension Plan or Quebec Pension Plan benefits, is reasonable in the circumstances. For example, a minimum pension benefit under the plan of $250 per month at normal retirement age, after 10 years of eligible service, would be considered to be a reasonable minimum pension. (i) Supplementary Pension Benefits A defined benefit plan may include a provision for a supplementary pension, in recognition of increases in the cost of living after retirement or termination of employment. Supplementary pensions may be adjusted on a quarterly or less frequent basis. Where supplementary pensions are based on the excess earnings approach, the plan must specify the base rate, the formula for determining the earnings rate and a reasonable allocation. The earnings rate may be related to the investment earnings of the fund or to some external index. Such a supplementary pension is not restricted by the maximum pension rule in 9(g) above, provided that i) it is warranted by increases in the Consumer Price Index and ii) it does not become payable to a member before the later of the date the member attains age 60 and the date of retirement or termination of the member (except where retirement is on account of disability or pursuant to 10(a)(iii) below). Where a plan permits a supplementary pension to accrue to a member prior to age 60 as a result of retirement or termination of employment before age 60, the benefit payable at age 60, including the accrued supplement, must be limited in the plan to the maximum pension (9(g) above). Plans that were registered for purposes of the Act on January 21, 1980, and provided for the payment of supplementary pension benefits after retirement or termination at an age earlier than 60 may continue to do so. Such plans must prohibit the total of the pension benefits and supplementary pension benefits payable at age 60 or earlier from exceeding an annual rate of $1,715 times the number of years of pensionable service, not exceeding 35. After age 60 these total pension benefits may be increased by such additional supplementary benefits as are warranted thereafter. This restriction on the amount of supplementary pension benefits payable at age 60 or earlier does not apply to the payment of such benefits to a member's beneficiary. Where pension benefits at lower maximum pension levels formerly permitted were increased effective September 1, 1976, to the higher maximum under 9(g) above and supplementary pension benefits are payable under the plan, such supplementary pension benefits may only be based on increases in the Consumer Price Index after September 1, 1976. However, if the sum of the pension benefits under the former maximum pension limitations and the supplementary pension benefits under this paragraph, as at August 31, 1976, is greater than the pension benefits payable under 9(g) above as at September 1, 1976, then pension benefits and supplementary pension benefits may continue to be paid and indexed under the former provisions. Money purchase pension plans may use the excess earnings approach to provide pensions with a variable escalation. (j) Settlements - On or after termination of employment prior to retirement or on or after termination of the plan, benefits may be paid to the member in a lump sum, by instalments or annuity certain commencing no later than the earliest date from which a pension may be payable under the plan or as an annuity for life maturing before the member attains age 71, or any combination thereof. The instalments and annuity certain may not exceed a period of ten years from the date they commence. The commuted value of the benefits may also be transferred to another registered pension plan or to a registered retirement savings plan. The value of the benefits so paid may not exceed the value of the maximum pension permitted under 9(g) or 9(g.1) above, as applicable. (k) Remuneration - For purposes of this circular "remuneration" may include all salary, wages, bonuses, vacation pay, honoraria, directors' fees, commissions, taxable allowances, the value of taxable benefits and any other payments actually received by the member during the year for services during the year as an officer or employee of a participating employer that are reasonable in the circumstances. (l) Conversions - When a defined benefit plan is converted to a money purchase plan, a valuation report using transfer values which reflect the member's accrued entitlement under the defined benefit plan must be submitted to Revenue Canada, Taxation, addressed as specified in 14(a) below. The defined benefit may be increased prior to conversion to the maximum pension specified in paragraph 9(g) above. Any actuarial surplus which is not refunded to contributing employers after the conversion may remain in the plan to fund employer future service costs, provided that the money purchase plan text contains a provision permitting any surplus remaining upon termination of the plan to be refunded to contributing employers. Unless the surplus is allocated to a separate employer account to be used for the sole purpose of funding such future service costs, the plan text must also include the maximum pension rule applicable to those members who have accrued a benefit under the defined benefit portion. The combined defined benefit and money purchase pension accrual will then be limited by the maximum pension rule. 10. Retirement Age and Guarantee Periods (a) Normal Retirement Age (i) Normal retirement age for purposes of the plan should be defined and should not be before the first day of the month in which the member's 60 birthday occurs nor later than the day preceding the member's 71 birthday; however, when the plan is insured and retirement is based on the plan anniversary date, normal retirement age may be up to 183 days prior to the 60 birthday. A normal retirement age later than age 71 will be accepted only in regard to a specific individual when that person is retiring immediately after being brought into the plan. Retirement must constitute a factual termination of employment; however, after a member's 65 birthday the member may be deemed to have retired for purposes of the plan and the member may receive a whole or partial pension, even though remaining in employment. The payment of a whole or partial pension may commence prior to age 65 while the member remains in employment with a participating employer under the plan, if the member has reached normal retirement age under the plan and A. the pension payment is compensating for a reduction in earnings or B. further deferral would result in the basic pension exceeding the limitation stated in paragraph 9(g) above. No further benefits, including additional voluntary contributions, may accrue to a member who remains in employment or returns to employment with such an employer after a break in service while in receipt of a whole or partial retirement pension. (ii) Normal retirement age may be earlier than age 60 if such retirement is dependent on the completion of 30 years of service under the plan or if such retirement is dependent on the sum of retirement age plus years of service totaling 80 or more. (iii) Consideration will be given to the inclusion of a clause to provide a reduced normal retirement age, in individual cases at the discretion of the employer, when retirement is being imposed on members who are long-term employees, because of automation or failure of members to keep their knowledge in pace with advancement in technology. The provision may involve the payment of pensions at an earlier date without actuarial reduction and may also involve an additional credit of deemed years of service representing all or part of the period between actual retirement age and the normal retirement age otherwise specified in the plan. Such a provision must be reasonable in the circumstances. (b) Deferred Retirement - Plans may allow the payment of pension benefits to be deferred on an optional basis up to the day preceding the individual's 71st birthday. A member may continue in employment beyond age 71 while in receipt of pension benefits. Should the payment of pension benefits be deferred beyond age 71, the amount of the periodic instalments that would otherwise have been paid from age 71 to actual commencement of pension may not be deferred or used to increase benefits paid after retirement. Service after the 71 birthday may count for eligibility for coverage but additional benefits cannot accrue for such service. (c)i) Early Retirement (Other than for disability) - There may be provision for voluntary retirement prior to normal retirement age but in that event, the present value of the pension (including excess bridging benefits as referred to in 9(g)(ii) above) payable to a member at actual retirement may not exceed the limitation set out in 21 below. (ii) Early Retirement (Disability) - Unreduced early retirement pensions due to total and permanent disability which is certified as such by a medical practitioner (disability pensions) may be provided under a plan. The pension paid may be based on actual service plus the period of disability up to the normal retirement age specified in the plan. A lesser disability pension, such as is reasonable in the circumstances, may be paid where disability is such as to permit employment, but only at lesser levels of remuneration. Normally, the sum of the remuneration and the disability pension should not exceed the total disability pension that would have been payable had the individual been totally disabled. A member in receipt of a disability pension is considered to have retired for purposes of the pension plan. (d) Guarantee Period - The maximum acceptable guarantee period for both regular and optional life annuities to a member is the lesser of: (i) fifteen years, and (ii) the period from the date of retirement of the individual to the day before the date on which the individual's 86th birthday would occur. In the event of death of the annuitant prior to the expiry of the guarantee period, the annuity contract may provide either for commutation of the benefits for the balance of the guarantee period for payment to the estate or to a designated beneficiary, or for the remainder of the annuity payments to be made to a designated beneficiary. In the case of a joint and last survivor annuity, there can be no guarantee of payments on the death of the second life other than for the unexpired term of the guarantee on the first life. Where, upon the death of a member, a benefit becomes payable to a beneficiary in the form of a life annuity (other than as the last survivor under a joint and last survivor annuity), the maximum acceptable guarantee period is the lesser of: (iii) fifteen years, and (iv) the period from the date of death of the member to the day before the date on which the beneficiary's 86th birthday would occur. 11. Contributions (a) Required Contributions (i) Unless the plan requires terminal funding it must contain an obligation for future service contributions by the employer. It may also contain an obligation for future or past service contributions by members. (ii) If the plan is a money purchase plan the formula for contributions, which must be set out in the plan, must provide for an employer contribution in each year of at least 1 per cent of the remuneration of participating employees for that year. Contributions must be limited by the plan to amounts deductible under the provisions of paragraphs 20(1)(q) and 8(1)(m) of the Income Tax Act. (iii) Unless 11(e) below applies, a money purchase plan that is primarily for the benefit of significant shareholders or related persons must restrict an employer's contributions on account of such a member to the lesser of A. $3,500, and B. 20 per cent of the remuneration paid to such member by the employer in the year, and must restrict the annual contributions of such a member to the lesser of C. $3,500, and D. 20 per cent of the earned income of such member for the year. Where related companies participate in one or more pension plans which are primarily for the benefit of significant shareholders or related persons, or where each such company's participation in the plan is primarily for the benefit of significant shareholders or related persons, the combined contributions on behalf of such persons may not exceed the limits set out above, based on the combined remuneration paid by the related companies. (b) AVC's (i) Subject to the limitations of (ii) below, additional voluntary contributions to a plan on account of current and past service may be permitted in respect of service that is eligible service as defined in 8(e) above, to the extent that such contributions are deductible under paragraph 8(1)(m) of the Act. If, pursuant to a reciprocal agreement or portability arrangement, eligible service includes service that was eligible service under a prior registered pension plan, the plan must restrict additional voluntary contributions to amounts that would be deductible under paragraph 8(1)(m) of the Act if such service had been service with the current employer and contributions made under a prior plan in respect of such service had been contributions under the current plan. (ii) Unless (e) below applies, a plan that is primarily for the benefit of significant shareholders or related persons must deny to such persons the right to make additional voluntary contributions on account of past service. (iii) In the event of a transfer from one pension plan to another of funds derived from additional voluntary contributions, the funds will retain the status of additional voluntary contributions unless they are applied by the member to pay contributions that are required under the new pension plan. (iv) Where a member elects to purchase past service benefits and in doing so becomes obligated to satisfy a determinable indebtedness (normally, where benefits are defined), the contributions on account of such indebtedness are required contributions, not additional voluntary contributions. (c) Special Payments - Special payments by employers on account of past service (including terminal funding) must be approved by the Minister pursuant to paragraph 20(1)(s) of the Act. If any portion of current service contributions are not deductible under paragraph 20(1)(q), approval of the total current service contributions for the year may be sought under paragraph 20(1)(s). The requirements that must be met to secure such approval are contained in Part II of this circular. (d) Partners and Proprietors - Subject to the limitations contained in 8(b)(ii) above, a partner or proprietor may contribute to a plan on account of past service as an employee (see 8(b)(ii) above) to the extent that such amounts are deductible under subparagraph 8(1)(m)(ii) of the Act. (e) The restrictions in (a)(iii) and (b)(ii) above may be waived by the Department if the corporation is not controlled by the members who are significant shareholders or related persons. A waiver may also be granted where significant shareholders or related persons are obliged to be members of a multi-employer plan as a condition of union membership that is a prerequisite to employment. 12. Assignments and Loans (a) No right or interest of a plan member, including those resulting from employee voluntary contributions, may be capable of assignment or alienation except as specifically required or permitted under the Income Tax Act, Pension Benefits Standards Act, 1985, or a provincial pension benefits act or, in the event of a splitting of accrued pension benefits on or after the breakdown of a marriage, pursuant to a decree, order or judgment of a competent tribunal or in accordance with a written separation agreement relating to a division of property between the member and the member's spouse or former spouse in settlement of rights arising out of their marriage. (b) The plan may not provide loan privileges. Nevertheless, it is not intended that trustees should be prohibited from investing in mortgages under which a plan member is the mortgagor, provided that the mortgage bears a reasonable rate of interest and such investments are made within the limitations set for such investments in the Pension Benefits Standards Act, 1985, or a provincial pension benefits act or regulations there under. (c) Trustees are not to be given power to borrow moneys, except occasionally on a short-term basis to (i) provide funds for the current payment of benefits or purchase of annuities without resort to a distress sale of assets of the fund, or (ii) make additional investments, provided that the assets of the fund are not pledged as security against the loan and the total indebtedness of the pension fund in respect of such borrowing does not exceed at any time the sum of the required current service contributions to and reasonable earnings of the fund in the immediately subsequent twelve month period. Note: Item (ii) above may not be acceptable to some jurisdictions administering a pension benefits act. 13. Investments (a) Unless a trusteed plan is registered under either The Pension Benefits Act of the Province of Ontario, The Employment Pension Plans Act of the Province of Alberta, The Pension Benefits Act of the Province of Saskatchewan, The Pension Benefits Act of Manitoba, The Pension Benefits Act of Nova Scotia, The Supplemental Pension Plans Act of Quebec, the Pension Benefits Act of Newfoundland, an act of another province that similarly controls plan investments or the federal Pension Benefits Standards Act, 1985, the plan must contain a requirement that all investments and re-investments will conform to the investment requirements of section 9 of the Pension Benefits Standards Act, 1985 and section 6 and Schedule III of the Pension Benefits Standards Regulations, 1985. (b) Failure to comply with the above investment requirements at the time of application for registration or subsequent thereto will result in denial or termination of registration, as applicable. 13.1 Use of Surplus (a) A plan must not provide for a surplus on wind-up of the plan, or at any other time, to be payable to an employees' welfare fund or to any fund except the fund of another registered employees' pension plan and then subject to the advance approval of such payment by Revenue Canada, Taxation. A request for permission to effect such a transfer should be directed to: Registered Pension and Deferred Income Plans Division Revenue Canada, Taxation Ottawa, Ontario K1A 0L8 The request should be accompanied by a current actuarial report and certificate, prepared in accordance with generally accepted actuarial principles, presenting the funded status of each plan participating in the transfer transaction, such resolutions and plan amendments as may be required and evidence of approval by a provincial or federal jurisdiction, if applicable. b) A defined benefit plan may not permit the distribution to a member, upon termination of the plan or at any other time, of any portion of a surplus in the fund that would result in benefits to the member being in excess of the maximum permitted under 9(g) or 9(g.1) above, as applicable. Therefore, the plan must contain a provision permitting an actuarial surplus to be refunded to contributing employers upon termination of the plan (Also see 39 below). 14. Application for Registration (a) Method and Documentation - Send one copy of completed form T510 (Application for Registration of Employees' Pension Plan), together with a copy of any applicable insurance contract, plan text or trust agreement, such pertinent by-laws or resolutions as may exist and any other material documents to: Registered Pension and Deferred Income Plans Division Revenue Canada, Taxation Ottawa, Ontario K1A 0L8 Copies of Form T510 may be obtained from any Revenue Canada, Taxation District Office. (b) Registration under Other Jurisdiction - If the pension plan is subject to registration under the Federal Pension Benefits Standards Act, 1985, The Pension Benefits Act of Ontario, The Employment Pension Plans Act of Alberta, The Pension Benefits Act of Saskatchewan, The Pension Benefits Act of Manitoba, The Pension Benefits Act of Nova Scotia, The Pension Benefits Act of Newfoundland or similar legislation of any other province, the registration number under the Act is to be submitted with the T510 application or as soon thereafter as it becomes available. If the pension plan is subject to registration under the Supplemental Pension Plans Act of Quebec, a copy of the certificate of registration under the act or of the letter that accompanied the certificate is to be submitted with the T510 application or as soon thereafter as it becomes available. When a plan is subject to registration under one of the above-named Acts, registration under subsection 248(1) of the Act will not be effected until the above-mentioned evidence of registration is submitted. (c) Specimen Plans - (i) In order to simplify and expedite the registration process, standardized components of plan documentation (specimens) may be submitted to the address shown in (a) above for approval in principle. Specimens may consist of either the entire standardized plan including the plan provisions and funding contract, or separate plan components. Certain variables, such as contribution rates, vesting schedules and retirement age, are permitted but these must be specifically identified as such in the specimen. A specimen plan number is issued when the specimen has been approved in principle. (ii) Where a plan conforms to an approved specimen plan, the application for registration will consist of the completed T510 application form, a description of the actual terms provided under the permitted variables, if any, and any other required documentation not included in the specimen. (iii) If a plan that conformed to a specimen plan at the time of application is subsequently amended so that it no longer conforms, complete plan documentation must be submitted to the address shown in (a) above. 15. Amendments or Revisions (a) All amendments or revisions to the insurance contract, plan text or trust agreement, including those provided under the permitted variables of a plan conforming to a specimen, must be submitted promptly to Revenue Canada, Taxation, as specified in 14(a) above. The submission should identify the nature of the changes. (b) Such submissions may not be acknowledged and confirmation of their acceptability and continuation of registered status may not be given. Exceptions will be made where there is an extensive revision to or replacement of a plan, where acceptance is conditional or where approval of a special payment on account of past service is sought in conjunction with the amendment. Correspondence will ensue in regard to unacceptable or questionable amendments. (c) A registered pension plan that is amended or revised retains its registered status unless advice of termination of registration is given to the participating employer(s), or union or agent thereof. 16. Termination of Plan If an employer terminates a registered pension plan, terminates his participation in such a plan or places such a plan on a paid-up basis, Revenue Canada, Taxation must be so advised. Prior approval of this Department is not required. For defined benefit plans, the Department must be advised of the current position of the plan fund and a wind-up actuarial valuation report, prepared in accordance with generally accepted actuarial principles must be submitted. If a trust fund is wound-up for any reason, the Department should be informed of that fact and of the application of all funds, including the purchase of deferred annuities, and whether such annuities were purchased in accordance with paragraph (a) or (b) of section 254 of the Act. PART II - SPECIAL PAYMENTS IN RESPECT OF CURRENT OR PAST SERVICE 17. General (a) Paragraph 20(1)(s) of the Act permits the deduction of special payments by an employer on account of an employees' superannuation or pension fund in respect of current or past services of members if the payment is approved by the Minister of National Revenue on the advice of the Office of the Superintendent of Financial Institutions (formerly the Superintendent of Insurance). Section 67 of the Act states that in computing income no deduction shall be made in respect of an outlay or expense otherwise deductible except to the extent that the outlay or expense was reasonable. Special payments will be approved only within the limitations set out in the succeeding paragraphs of this part and only in regard to registered plans. (b) It should be noted that special payments must be irrevocably vested in or for the fund or plan except that there should be a provision permitting a refund of an actuarial surplus to the contributing employer (See 13.1(b) above). (c) An application for approval under paragraph 20(1)(s) of special payments on account of current service must cover all employer payments to any one plan in the year on account of service of its employees in the year. The application cannot be restricted to payments on behalf of employees for whom current service contributions exceed $3,500 for the year. (d) "Actuary" means a Fellow of the Canadian Institute of Actuaries (For foreign plans, submissions by other actuaries may be accepted). 18. Defined Benefits (a) If current or past service is to be funded as provided by paragraph 20(1)(s) of the Act, there must be defined and precisely stated benefits for the period for which benefits are being so funded. The special payment must be one to ensure that the obligations of the fund or plan to the employees may be discharged. This means that there must be a defined benefit provision in the plan and an obligation upon the employer to fund those benefits. An obligation of an employer to make contributions for services on a money purchase basis does not meet the requirements of this part. (b) Except where an employee has retired or is about to be retired or employment is to cease, a plan will not be approved where it only provides for pensions on account of past service, without any future service contributions. It is not reasonable to provide a pension based solely on past service when the service is not terminating at that time. 19. Proportionate Benefits (a) If a plan provides defined benefits for both past and future service, the portion of the pension referable to past service normally must not be greater than the proportion thereof that the number of years of past service is of the lesser of: (i) the total number of years of past service and potential future service to normal retirement age, and (ii) the total number of years of past service and potential future service until a total pension of 70 per cent is accrued, e.g., 35 years for 2 per cent per annum accrual or 40 years for 1 and three quarters per cent per annum accrual. For purposes of this rule, members' voluntary contributions on account of past and future service to provide additional benefits need not be considered in determining the pension. (b) Notwithstanding (a) above, consideration will be given to requests for approval of special payments to plans that provide for the accrual of greater benefits on account of a year of past service, than for a year of future service or that provide for defined benefits for past service and money purchase benefits for future service, on condition that: (i) both past and future service benefits are reasonable in the circumstances and benefits to be accrued or contributions required on account of future service are not merely nominal, (ii) benefits for past service are not accrued at a rate in excess of 2 per cent per annum applied to average final earnings that are not in excess of the best three consecutive years of remuneration paid to the member by the employer, and (iii) the total pension payable under the plan is subject to the limitations of 9(g) or 9(g.1) above. 20. Maximum Pension Benefits The benefits being funded must be under the plan and must not exceed the benefits permitted by 9(e) to 9(i) above, inclusive. 21. Maximum Value The value of the pensions (including excess bridging benefits as referred to in 9(g)(ii) above) payable to a member at retirement as a single life or a joint and last survivor annuity must not exceed the value of a maximum pension, as specified in paragraph 9(g) above, payable as a single life annuity guaranteed for ten years or a 60 per cent joint and last survivor annuity respectively, at the earliest of age 60, normal retirement age or age at date of disability. 22. Salary Projection (a) In cases of plans which provide for pension benefits based on best or final average earnings at retirement, these benefits may be funded on the basis of anticipated increases in salaries which reflect promotional, productivity and economic increases, provided that the long term assumption adopted for the salary scale is at least 1 per cent less than the long term assumption concerning the rate of return on assets. (b) In projecting remuneration for significant shareholders (as defined in 8(d) above) the following rules will apply: (i) The base for the projection of remuneration must be no greater than the average of the remuneration paid to the individual in the best three consecutive years prior to the year in which the past service payment was made, unless the plan requires that benefits be based on the average remuneration of a greater number of years, in which event remuneration for that number of prior years must be used to determine the base. (ii) There must be evidence of an increase in remuneration during the immediately prior five or more years and a reasonable expectation that such increases will continue. Such evidence, duly certified by the employer, must be submitted with the application for approval. Fluctuations within the period are acceptable so long as a trend of increasing remuneration is established. A substantial increase in remuneration in the last one or two years will not by itself establish an increasing trend. (iii) If a projection of remuneration is not warranted in the circumstances, the past service liability must be determined from the remuneration base defined in (i) above rather than from current remuneration. 23. Supplementary Pension Benefits Supplementary pension benefits in accordance with 9(i) above may be funded on the basis of anticipated long-term increases in the Consumer Price Index or the excess earnings, as the case may be, in future years in regard to active, retired and terminated members provided that the plan specifically defines the employer's funding obligation. The long-term funding assumption concerning the rate of return on assets normally must exceed, by at least 3 per cent, the long-term assumption adopted for the funding of supplementary pension benefits. Supplementary pension benefits based on excess earnings do not create an obligation upon the employer to fund for such benefits and therefore such benefits under a money purchase plan are not grounds for approval of a special payment under paragraph 20(1)(s) of the Act. 24. Apportionment of Special Payments Between Employers If a plan covers employees of two or more employers who are assuming past service liabilities or current service costs in excess of the amount deductible under paragraph 20(1)(q), whether or not they are subsidiary, associated or affiliated companies, the cost must be apportioned on a reasonable basis, having regard to the length of service and the remuneration paid. However, where a plan covers employees of two or more divisions of the same employer, special payments are not to be subdivided. Costs must also be apportioned if one individual has had eligible past service with more than one participating employer or has current service with more than one participating employer. 25. Period and Duration of Approval (a) Past Service - As a convenience to taxpayers the Department normally gives approval under paragraph 20(1)(s) of the Act to special payments on account of unfunded liability that comply with the requirements of that paragraph for the three taxation years following the valuation date. Payments of such approved amounts will be deductible in the taxation year in which the payment was made, provided that: (i) such payment was made subsequent to the date of the actuary's recommendation, (ii) such payment was made either in the taxation year in which the recommendation was made or in one of the three immediately following taxation years, and (iii) the actuarial assumptions were still valid at the time of payment. Special payments that do not meet these conditions are not deductible under paragraph 20(1)(s) of the Act. (For example, if a projection of remuneration or anticipation of cost of living increase are revealed by subsequent experience to be unacceptable, no deduction under paragraph 20(1)(s) may be made.) (b) Current Service - Approval of special payments on account of current service may be applied for annually or for a three-year period following a valuation date. In the case of annual approvals, the application may be submitted after the end of the period when the actual amount and date of the contribution has been determined, - provided that the payments were made pursuant to a recommendation by an actuary. Such approvals are also subject to the conditions and limitations set out in (a) above (See 26 below on application procedures). 26. Application for Approval of Special Payments (a) Application for approval of an amount pursuant to paragraph 20(1)(s) of the Act must be made in writing by the employer or its authorized representative, stating the amount for which approval is requested and, if applicable, showing current service and past service payments separately. If approval of other than a lump sum payment in respect of past service benefits is requested, both the amount of the deficit at the actuarial valuation date and the proposed schedule of payments (based on the employer's taxation year), each as recommended by an actuary, should be stated. The schedule of payments may contain a reasonable provision for interest to date of the request, as recommended by the actuary. The actuary's recommendation for payments on account of current service may be expressed as a percentage of members' remuneration but the application under paragraph 20(1)(s) must be for specific dollar amounts for each year. If the plan is registered under the Pension Benefits Standards Act 1985 or under a similar pension benefits act of a province, the employer (or his representative) is to confirm that the same actuarial certificate, report and recommendation to the employer (as required by this paragraph) have been filed, for purposes of that Act, with the supervisory authority under that Act. (b) Where benefits are provided through the use of an allocated funding instrument (meaning where the contributions are applied at the time they are made to purchase benefits for the individual participants), a statement must be furnished giving the following data with respect to each member, namely: (i) name or number, (ii) sex, (iii) date of birth, (iv) date of employment, (v) remuneration upon which benefits are based. If possible, the members should be listed in order of their birth dates, males and females separately. The statement must be certified by the employer - by an officer of the company if the employer is a corporation. The certificate should be substantially in the following form: "I hereby certify that the information given hereon (or on the attached sheets, as the case may be) is accurate and complete to the best of my knowledge and belief and is in accordance with our records as the employer of the members concerned." (Signature) ^ (Position or rank of officer) ^ (c) Where benefits are provided through the use of an unallocated funding instrument (meaning, where some or all of the contributions are accumulated in an unallocated fund to be used to meet benefit payments as they come due or to purchase annuities for participants at retirement or on earlier termination of service with a vested right), the full valuation report of the actuary must be furnished giving the following data: (i) a brief history of the fund, (ii) a description of the benefits provided by the plan as at the valuation date, (iii) a statement, for both liabilities and assets, of the bases upon which the valuation was made. With respect to liabilities, the statement should include a description of the valuation method, the rate of interest, the actuarial assumption with respect to death, disability, withdrawal, retirement, etc., the remuneration scale, the relative ages of members and spouses, etc. With respect to assets, in addition to the description of the valuation method, both the market value and book value of the fund should be stated. Where applicable, the actuary should identify areas where changes have been made since the last valuation, e.g. funding method, valuation of assets, interest assumption, termination rates, etc., (iv) detailed summaries of the members covered, showing for each age grouping (e.g. quinquennial) the number of members, the remuneration upon which benefits are based and the number of years of past service, if applicable, or a two-dimensional grid showing remuneration paid for each age and year of service cell, (v) such detailed summaries of the results of the valuation as may be practicable (at least the valuation balance sheet on which the recommended funding has been determined). As far as possible, the actuary should reconcile the condition of the fund as shown by this valuation with that shown by the last preceding valuation. The employer must submit a statement certifying that the data submitted to the actuary were accurate and complete. (d) If benefits are to be provided for only a few employees, either through the use of an allocated or unallocated funding instrument, a copy of the working papers should be submitted with the valuation report. Revenue Canada, Taxation or the Office of the Superintendent of Financial Institutions (formerly the Superintendent of Insurance) may request the working papers, or samples thereof, for other pension plans. When significant shareholders are participating in the pension plan, a statement of the remuneration of at least five immediately prior years must be provided in regard to each such member. (e) The actuary must append a certificate recommending the amount and timing of payments and certifying that such payments are sufficient to ensure that all the obligations of the plan in respect of current or past service of members may be discharged in full. Where part of the current service cost or unfunded liability is with respect to benefits or costs that exceed the applicable limits, including cases where current service costs and unfounded liabilities at the valuation date are with respect to projected or actual pension benefits in excess of the maxima permitted by Parts I and II of this circular, the actuary must indicate the amount of such excess and the method by which this amount was arrived at. The Department will approve only that portion of the current service cost or unfunded liability that is in regard to benefits and costs that comply with applicable limits in this circular. All reserve and surplus accounts should be eliminated in the determination of the unfunded liability. (f) Supplementary Approvals - If current service contributions have been approved in advance of payment (see 25(b) above) and, due to remuneration exceeding expectations, the contributions exceed the approved amount, the employer may apply for a supplementary approval to cover the additional amount. The employer may secure such approval by applying in writing stating the additional amount for which approval is being requested, the taxation year in which such amount was paid and the amount of remuneration paid in the year in question and certifying that the contributions are in accordance with the actuary's recommendation as previously submitted. (g) Approval After Payment - If approval of current service contributions is being sought annually after payment has been made (see 25(b) above), the submission for the first year following a valuation date must be a full submission in accordance with the above instructions. The applications for the second and third years may be made by the employer or his authorized representative and need not include valuation reports or actuarial certifications. Such application must be made in writing stating the amount for which approval is being requested, the taxation year in which such amount was paid and the amount of remuneration paid in the year in question and certifying that the contributions are in accordance with the actuary's recommendation as previously submitted. PART III - CURRENT SERVICE CONTRIBUTIONS BY EMPLOYERS 27. The amount of an employer's current service contribution to a registered pension plan that is deductible without Ministerial approval is limited by the provisions of paragraph 20(1)(q) of the Act and section 2700 of the Regulations. 28. In the case of a registered pension plan under which the employer's contribution, on behalf of each member, is identifiable as a dollar amount or an amount determined pursuant to a formula or schedule in the plan or contract, the amount deductible in respect of any one member is the identifiable amount in respect of that member or $3,500, whichever is less, as provided for in subparagraph 20(1)(q)(i) of the Act. Such plans will usually, but not necessarily, be money purchase type plans. 29. In the case of all other registered pension plans, the amount deductible will be determined under subparagraph 20(1)(q)(ii) of the Act and section 2700 of the Regulations. 30. In section 2700 of the Regulations, "employer's contribution" refers to his actual payment to or under the plan in respect of services of his employees rendered in the year. This is of significance in connection with those plans under which the effect of withdrawal credits may mean that the amount paid in respect of current service is less than the gross cost for such current service. Thus, the amount paid may fluctuate from year to year depending on how withdrawal credits arise. 31. As an example of the application of section 2700 of the Regulations, suppose that the total payroll of all employees included in the plan was $1,000,000 and that the employer's actual payment in respect of services of employees rendered in the year under the plan was $85,680. The determination of the portion of this payment that may be claimed for tax deduction purposes in the year would be carried out as follows: A Total payroll of covered employees $1,000,000 B Actual contribution of employer for current service $85,680 C Ratio that B is of A .08568 D Maximum limit on earnings - $3,500 divided by C $40,850 In respect of each employee, multiply the lesser of actual earnings or D ($40,850) by C (.08568) and the aggregate amount is the amount allowable as a deduction under subparagraph 20(1)(q)(ii) of the Act. 32. Because most earnings will not in fact likely exceed the maximum limit, it may be simpler to calculate the aggregate of the amounts by which individual earnings exceed item D and multiply the result by item C. Suppose that in the above example one employee received a salary of $41,850, meaning, an excess of $1,000, and another employee's salary was $46,350, meaning an excess of $5,500, and that no other employee's salary exceeded $40,850. The amount not deductible as a pension contribution would be $6,500 multiplied by .08568 or $556.92. 33. It should be pointed out that for the purpose of section 2700 of the Regulations, "total payroll" includes all salaries, wages, commissions, bonuses, etc., paid to an employee covered by the plan even if part of these are not taken into account for pension purposes. For example, where some of the employees are being paid salaries plus commissions and the plan only provides for pension contributions based on salaries, the commissions paid to persons covered by the plan will be included in determining "total payroll". Likewise, if an employee is paid up for pension purposes, but is still covered by the plan, the employee's salary will be included in determining "total payroll". 34. As an option, the taxpayer may identify the actual cost for each member for benefits under the pension plan in respect of services rendered by that member in the year, in which case the taxpayer may derive the "amount determined in prescribed manner" by summing the amounts, each of which is $3,500 or the amount identified with each member as described above, whichever is less. 35. If an employer is contributing to more than one plan and each employee's participation is restricted to one plan, the above calculations are to be made independently in regard to each plan to which section 2700 of the Regulations applies. PART IV - OTHER PENSION PLAN MATTERS 36. Life Insurance Adjoined to Pension Plan There may be adjoined to an insured pension plan, a provision for certain life insurance benefits to be paid in the event of death prior to retirement. The portion of the payment which is applied to purchase the life insurance benefits must be segregated from the cost of the pension benefits and charged as a separate insurance cost in the records and financial statements of participating employers. The life insurance provision is not part of the registered pension plan and any life insurance benefits derived from the life insurance provision are not superannuation or pension benefits. However, any death benefit paid under the pension plan (whether a return of contributions or a minimum death benefit) must be reported as a pension benefit. 37. Deductibility of Contributions (a) That portion of contributions by an employer to a registered pension plan that is in excess of the maximum deductions permitted by paragraph 20(1)(q) of the Act or that was not approved under paragraph 20(1)(s) of the Act is not deductible in determining income for the year for purposes of the Act. (b) Contributions on account of current or past service made by an employer to an employees' pension plan that is not registered under the Act will not be approved pursuant to paragraph 20(1)(s) of the Act and, therefore, are not deductible in determining income for the year of contribution for purposes of the Act. (c) Contributions, whether on account of current or past service, by a member to an employees' pension plan that is not registered under the Act are not deductible in determining the member's income for purposes of the Act. 38. Transfers to Other Plans Paragraph 60(j) of the Act permits deduction from income, in designated circumstances, of pension benefits that are reinvested in another registered pension plan or registered retirement savings plan. Information Circular 79- 8R2 gives information regarding the forms and procedures pertaining to transfers and the waiving of withholding tax on the benefits paid. 39. Refund of Surplus to Employer (a) Insofar as this Department is concerned, a surplus in a pension plan, as certified by an actuary if the plan is a defined benefit plan, may be refunded to the contributing employer at any time. Where the surplus exceeds the contributions that would otherwise be required to be made by that employer on account of current service of employees in the following 24-month period, the portion of the surplus which is in excess of such contributions is considered by this Department to be excess surplus. The excess surplus must be eliminated by one or a combination of the following means: (i) refund to the employer (ii) application against the employer's obligations for contributions on account of current service in the current and subsequent years, or (iii) improvement of benefits under the plan (where permissible). (b) A refund to an employer is a superannuation or pension benefit pursuant to subsection 248(1) of the Act and must be reported on forms T4A Supplementary and T4-T4A Summary. Such amounts must be included in the income of the employer. 40. Section 254 of the Act (Deferred Annuities) In certain circumstances, the benefits payable out of or under a pension plan may be paid out of or under a separate deferred annuity or other contract that has been entered into for the purpose of paying the pension benefits. Paragraph 254(a) of the Act provides that, if the rights under the deferred annuity or other contract are those set out in the pension plan, the payment out of the pension plan to acquire the deferred annuity or other contract will be deemed not to be a pension benefit at that time. However, the payments subsequently made under the deferred annuity or other contract will be deemed to be payments out of the pension plan and will be income of the recipient when received. It should be noted that the deferred annuity or other contract substituted for a registered pension plan must not contain cash settlement provisions other than those which are acceptable under a registered pension plan, as specified in 9(b) and (c) above. 41. Income of Trust (a) Paragraph 149(1)(o) of the Act provides that the income of a trust established solely for the administration of a registered pension plan will be exempt from taxation under Part I of the Act. (b) A trust which holds foreign property at the end of any month may be subject to tax under Part XI of the Act. Consult your local district taxation office for additional information. (c) Each pension trust and pension corporation is required to file an annual return (form T3P) within 90 days of the end of each year. These forms are available at Revenue Canada, Taxation District Offices. 42. Employees' Past Service Contributions Employees' contributions on account of past service can only be deducted in determining income of the year to the extent permitted or required by the plan and within the limitations of subparagraphs 8(1)(m)(ii) and (iii) of the Act, as augmented by subsection 8(8). The plan may only permit or require past service contributions on account of eligible service as described in 8(e) above. 43. Personal Information Banks The Income Tax Act stipulates that information obtained by the Department for purposes of the Act must be kept strictly confidential. Only the taxpayer who is the subject of the information and persons properly authorized by law or by that taxpayer have a right of access to such information. The Privacy Act and the Access to Information Act reinforce that right. APPENDIX A EXTRACTS FROM CANADIAN LIFE TABLE, 1980-82 AGE 25 LIFE EXPECTANCY MALE 48.78 LIFE EXPECTANCY FEMALE 55.22 AGE 26 LIFE EXPECTANCY MALE 47.86 LIFE EXPECTANCY FEMALE 54.25 AGE 27 LIFE EXPECTANCY MALE 46.92 LIFE EXPECTANCY FEMALE 53.27 AGE 28 LIFE EXPECTANCY MALE 45.99 LIFE EXPECTANCY FEMALE 52.30 AGE 29 LIFE EXPECTANCY MALE 45.05 LIFE EXPECTANCY FEMALE 51.33 AGE 30 LIFE EXPECTANCY MALE 44.11 LIFE EXPECTANCY FEMALE 50.36 AGE 31 LIFE EXPECTANCY MALE 43.17 LIFE EXPECTANCY FEMALE 49.39 AGE 32 LIFE EXPECTANCY MALE 42.22 LIFE EXPECTANCY FEMALE 48.42 AGE 33 LIFE EXPECTANCY MALE 41.28 LIFE EXPECTANCY FEMALE 47.45 AGE 34 LIFE EXPECTANCY MALE 40.34 LIFE EXPECTANCY FEMALE 46.48 AGE 35 LIFE EXPECTANCY MALE 39.39 LIFE EXPECTANCY FEMALE 45.51 AGE 36 LIFE EXPECTANCY MALE 38.45 LIFE EXPECTANCY FEMALE 44.55 AGE 37 LIFE EXPECTANCY MALE 37.52 LIFE EXPECTANCY FEMALE 43.59 AGE 38 LIFE EXPECTANCY MALE 36.58 LIFE EXPECTANCY FEMALE 42.63 AGE 39 LIFE EXPECTANCY MALE 35.65 LIFE EXPECTANCY FEMALE 41.68 AGE 40 LIFE EXPECTANCY MALE 34.72 LIFE EXPECTANCY FEMALE 40.73 AGE 41 LIFE EXPECTANCY MALE 33.80 LIFE EXPECTANCY FEMALE 39.78 AGE 42 LIFE EXPECTANCY MALE 32.88 LIFE EXPECTANCY FEMALE 38.84 AGE 43 LIFE EXPECTANCY MALE 31.97 LIFE EXPECTANCY FEMALE 37.90 AGE 44 LIFE EXPECTANCY MALE 31.06 LIFE EXPECTANCY FEMALE 36.97 AGE 45 LIFE EXPECTANCY MALE 30.16 LIFE EXPECTANCY FEMALE 36.04 AGE 46 LIFE EXPECTANCY MALE 29.27 LIFE EXPECTANCY FEMALE 35.11 AGE 47 LIFE EXPECTANCY MALE 28.39 LIFE EXPECTANCY FEMALE 34.19 AGE 48 LIFE EXPECTANCY MALE 27.52 LIFE EXPECTANCY FEMALE 33.28 AGE 49 LIFE EXPECTANCY MALE 26.66 LIFE EXPECTANCY FEMALE 32.37 AGE 50 LIFE EXPECTANCY MALE 25.81 LIFE EXPECTANCY FEMALE 31.47 AGE 51 LIFE EXPECTANCY MALE 24.97 LIFE EXPECTANCY FEMALE 30.57 AGE 52 LIFE EXPECTANCY MALE 24.14 LIFE EXPECTANCY FEMALE 29.68 AGE 53 LIFE EXPECTANCY MALE 23.33 LIFE EXPECTANCY FEMALE 28.80 AGE 54 LIFE EXPECTANCY MALE 22.52 LIFE EXPECTANCY FEMALE 27.93 AGE 55 LIFE EXPECTANCY MALE 21.73 LIFE EXPECTANCY FEMALE 27.06 AGE 56 LIFE EXPECTANCY MALE 20.95 LIFE EXPECTANCY FEMALE 26.20 AGE 57 LIFE EXPECTANCY MALE 20.18 LIFE EXPECTANCY FEMALE 25.35 AGE 58 LIFE EXPECTANCY MALE 19.43 LIFE EXPECTANCY FEMALE 24.51 AGE 59 LIFE EXPECTANCY MALE 18.69 LIFE EXPECTANCY FEMALE 23.68 AGE 60 LIFE EXPECTANCY MALE 17.96 LIFE EXPECTANCY FEMALE 22.85 AGE 61 LIFE EXPECTANCY MALE 17.25 LIFE EXPECTANCY FEMALE 22.03 AGE 62 LIFE EXPECTANCY MALE 16.56 LIFE EXPECTANCY FEMALE 21.22 AGE 63 LIFE EXPECTANCY MALE 15.88 LIFE EXPECTANCY FEMALE 20.42 AGE 64 LIFE EXPECTANCY MALE 15.21 LIFE EXPECTANCY FEMALE 19.63 AGE 65 LIFE EXPECTANCY MALE 14.57 LIFE EXPECTANCY FEMALE 18.85 AGE 66 LIFE EXPECTANCY MALE 13.93 LIFE EXPECTANCY FEMALE 18.09 AGE 67 LIFE EXPECTANCY MALE 13.32 LIFE EXPECTANCY FEMALE 17.33 AGE 68 LIFE EXPECTANCY MALE 12.72 LIFE EXPECTANCY FEMALE 16.59 AGE 69 LIFE EXPECTANCY MALE 12.14 LIFE EXPECTANCY FEMALE 15.86 AGE 70 LIFE EXPECTANCY MALE 11.58 LIFE EXPECTANCY FEMALE 15.14 AGE 71 LIFE EXPECTANCY MALE 11.03 LIFE EXPECTANCY FEMALE 14.44 AGE 72 LIFE EXPECTANCY MALE 10.49 LIFE EXPECTANCY FEMALE 13.75 AGE 73 LIFE EXPECTANCY MALE 9.98 LIFE EXPECTANCY FEMALE 13.08 AGE 74 LIFE EXPECTANCY MALE 9.48 LIFE EXPECTANCY FEMALE 12.42 AGE 75 LIFE EXPECTANCY MALE 9.00 LIFE EXPECTANCY FEMALE 11.78 AGE 76 LIFE EXPECTANCY MALE 8.53 LIFE EXPECTANCY FEMALE 11.15 AGE 77 LIFE EXPECTANCY MALE 8.09 LIFE EXPECTANCY FEMALE 10.54 AGE 78 LIFE EXPECTANCY MALE 7.66 LIFE EXPECTANCY FEMALE 9.95 AGE 79 LIFE EXPECTANCY MALE 7.25 LIFE EXPECTANCY FEMALE 9.39 AGE 80 LIFE EXPECTANCY MALE 6.85 LIFE EXPECTANCY FEMALE 8.84 AGE 81 LIFE EXPECTANCY MALE 6.48 LIFE EXPECTANCY FEMALE 8.32 AGE 82 LIFE EXPECTANCY MALE 6.12 LIFE EXPECTANCY FEMALE 7.82 AGE 83 LIFE EXPECTANCY MALE 5.78 LIFE EXPECTANCY FEMALE 7.34 AGE 84 LIFE EXPECTANCY MALE 5.45 LIFE EXPECTANCY FEMALE 6.88 AGE 85 LIFE EXPECTANCY MALE 5.14 LIFE EXPECTANCY FEMALE 6.45 AGE 86 LIFE EXPECTANCY MALE 4.85 LIFE EXPECTANCY FEMALE 6.04 AGE 87 LIFE EXPECTANCY MALE 4.57 LIFE EXPECTANCY FEMALE 5.65 AGE 88 LIFE EXPECTANCY MALE 4.30 LIFE EXPECTANCY FEMALE 5.28 AGE 89 LIFE EXPECTANCY MALE 4.05 LIFE EXPECTANCY FEMALE 4.93 AGE 90 LIFE EXPECTANCY MALE 3.82 LIFE EXPECTANCY FEMALE 4.60