March 31, 1999

Table of contents

• Proportionality condition for pre-1990 pension benefits
• Proportionality condition
• Exceptions
• Administrative issues
• Plan terms accepted by us before May 15, 1998
• Plan terms submitted to us before May 15, 1998
• Plan terms submitted to us after May 14, 1998
• Acceptance of pre-1990 LRBs

Proportionality condition for pre-1990 pension benefits

On May 15, 1998, we issued a letter informing the pension industry that we were reviewing the policies for defined-benefit registered pension plans (RPPs) that provide a disproportionate amount of benefits in respect of pre-1990 service. We have now completed our review.

Most of the plans in question were established exclusively to provide key employees with a fixed-dollar amount of pre-1990 past-service benefits, without a corresponding commitment to provide ongoing pension benefits. It was apparent that many of these plans were designed to take advantage of the lack of a coherent limit system for pre-1990 benefits and that they were, in substance, past-service money purchase arrangements. As a result of these policy concerns, we are imposing a new condition. It is intended to ensure that only bona fide defined-benefit pension plans are allowed to provide for pre-1990 past-service benefits.

This condition is imposed under the authority of paragraph 8503(3)(e) of the Income Tax Regulations (the Regulations) and was developed in co-operation with the Department of Finance. The condition is in addition to any other conditions that we have imposed under paragraph 8503(3)(e) that have to be met for pre-reform benefits to be acceptable to us.

Proportionality condition

Subject to the exceptions listed below, it is a condition for registration of a pension plan that lifetime retirement benefits (LRBs) not become provided to an individual after 1989 under a defined-benefit provision of the plan in respect of a pre-1990 period, except to the extent that:

• present value (at the time the LRBs are provided) of the LRBs and any LRBs provided to the individual under the provision before that time in respect of pre-1990 periods (other than LRBs that are excluded LRBs in respect of the individual and the provision, as defined below in exception 3) does not exceed the present value (at that time) of LRBs provided to the individual under the provision before that time, on a current-service basis, in respect of post-1989 periods; and
• we have given written notice to the plan administrator that the LRBs are acceptable.

Exceptions

There are three possible exceptions.

1. The condition does not apply to a pension plan if:

• the plan has at least 50 active members in the year in which the LRBs are provided; and
• the ability to acquire benefits in respect of eligible pre-1990 service is available to the general membership of the plan.

2. The condition also does not apply to a pension plan if:

• the plan has less than 50 active members in the year in which the LRBs are provided;
• the plan is not primarily for the benefit of key employees;
• the ability to acquire benefits in respect of eligible pre-1990 service is available to the general membership of the plan; and
• we have waived in writing the application of the condition.

For the purpose of this exception, we consider an individual to be a key employee if:

• the individual is or was connected with an employer who participates in the plan, or
• in the year in which the LRBs are provided or in any preceding year, the individual's total remuneration from employers who participate in the plan (and from other non-arm's length employers) was greater than 2½ times the Year's Maximum Pensionable Earnings for the year.

3. Finally, the condition does not apply if the LRBs are excluded LRBs in respect of the individual and the provision. LRBs provided to an individual under a defined-benefit provision of a pension plan are excluded LRBs in respect of the individual and the provision if any of the following situations exist:

• The LRBs were provided under plan terms we accepted before May 15, 1998, as long as the individual was a member of the plan on or before May 15, 1998.
• The LRBs were provided under plan terms submitted to us before May 15, 1998, as long as the individual was a member of the plan on or before May 15, 1998, and the plan complies with paragraph 18(b) and section 19 of Information Circular 72-13R8.
• The LRBs are exempted, under subsection 8504(7) of the Regulations, from the application of subsection 8504(6) of the Regulations. In general terms, subsection 8504(6) restricts LRBs for a year of pre-1990 service to $1,150.
• The period in respect of which the LRBs are provided is a period in respect of which LRBs, that were not subject to the proportionality condition set out in this newsletter, were previously provided to the individual, under the provision or another defined-benefit provision of an RPP.

Administrative issues

Where the terms of a defined-benefit pension plan allow pre-1990 LRBs to be provided to an individual on a past-service basis, the following rules apply.

Plan terms accepted by us before May 15, 1998

No amendment is required if it is reasonable to expect that the provision of pre-1990 LRBs will always be exempt from application of the condition, because of one of the exceptions listed earlier.

In any other case, the plan must be amended as soon as an individual joins the plan (other than an individual who has no eligible pre-1990 service or who was a member of the plan on or before May 15, 1998). The amendment should clearly indicate that any pre-1990 LRBs may only be provided on a past-service basis to the extent permitted by this newsletter.

Plan terms submitted to us before May 15, 1998

We will review plan terms submitted before May 15, 1998, and verify whether pre-1990 benefits comply with the rules published in Information Circular 72-13R8 (in particular paragraph 18(b) and section 19). Those plans that do not satisfy the rules of the Information Circular will be examined to determine if they meet one of the exceptions listed earlier.

If not, we will contact you to find out if you want to submit detailed calculations that demonstrate compliance with the present-value test for each individual member provided with LRBs that are subject to the condition, and make amendments to the submission to meet the requirements of this newsletter.

As stated above (see "Plan terms accepted by us before May 15, 1998"), an amendment may be required later, when a new member joins the plan.

Plan terms submitted to us after May 14, 1998

If it is reasonable to expect that the provision of pre-1990 LRBs will always be exempt from application of the condition because of one of the exceptions listed earlier, no mention of the proportionality condition is required. In any other case, the plan terms should clearly indicate that pre-1990 LRBs may only be provided on a past-service basis to the extent permitted by this newsletter.

Acceptance of pre-1990 LRBs

To satisfy the proportionality condition described in this newsletter, pension plan administrators must submit, for each member provided with LRBs that are subject to the condition, detailed calculations specifically identifying the years of service for which the LRBs are provided, and clearly demonstrating compliance with the present-value test.

As a minimum, this information must be included when requesting the approval of the actuary's recommendation through the triennial actuarial valuation report (AVR). Our approval of the actuary's recommendation and of the crediting of pre-1990 LRBs, for each of the 3 years, will be given at the same time.

In addition, if an AVR would not normally be submitted to the Canada Revenue Agency due to the funded status of the plan, we will require an AVR providing all of the above information before giving written notice that the pre-1990 LRBs are acceptable.

We will also require information demonstrating compliance with this newsletter on plan wind-up and whenever any of the key employees terminate participation in the plan.

Example

On January 1, 1999, ABC Co. established a pension plan for Pierre, a senior manager earning more than $100,000. Pierre has been employed with the company since 1985 and has never participated in an RPP. The plan provides benefits on a current-service basis at a rate equal to the maximum permitted under the income tax rules. In addition, the plan terms explicitly allow the crediting of pre-1990 LRBs to the extent permitted in this newsletter. Pierre is also credited with past-service benefits for his post-1989 service. Pierre withdraws a sufficient amount from his RRSP to allow us to certify the resulting past service pension adjustment. The plan cannot, as yet, credit Pierre with any pre-1990 LRBs, as it does not satisfy the present-value test.

On July 3, 2001, the employer asks the plan actuary whether it is possible to credit Pierre with past-service benefits for the rest of his service ($1,150 per year for 5 years of pre-1990 service). The actuary determines that the value of Pierre's LRBs, on July 3, 2001, is:

• $38,500, for the 2½ year period from 1999 to 2001 (i.e., the post-1989 benefits accrued on a current-service basis); and
• $51,500, for the pre-1990 period (i.e., the pre-1990 past-service benefits).

Subject to our approval, the plan may provide up to $38,500 worth of pre-1990 past-service benefits (approximately 3.7 years).

Alternatively, on January 1, 1999, the employer could ask the plan actuary to calculate how much pre-1990 past-service benefits could be credited to Pierre every year and include the request with the initial triennial AVR. Our approval of the actuary's recommendation will also indicate whether the requirements set out in this newsletter have been satisfied.