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• 3.1 147.2(1) – Deductible Employer Contributions
• 3.2 147.2(2) – Employer Contributions – Defined Benefit Provisions
• Example
• 3.3 147.2(3) – Filing of Actuarial Report
• 3.4 147.2(4) – Amount of Employee's Pension Contributions Deductible
• 3.4.1 147.2(4)(a) – Service After 1989
• 3.4.2 147.2(4)(b) – Service Before 1990, While not a Contributor
• 3.4.3 147.2(4)(c) – Service Before 1990, While a Contributor
• 3.5 147.2(5) – Teachers
• 3.6 147.2(6) – Deductible Contributions when Taxpayer Dies
• 3.7 147.2(7) – Letter of Credit
• 3.8 147.2(8) – Former Employee of Predecessor Employer

3.1 147.2(1) – Deductible Employer Contributions

An employer's contribution to an RPP is deductible in computing the employer's income for a taxation year ending after 1990, if:

• the contribution is made in the year or within 120 days after the end of the year;
• it was not deducted in computing the employer's income in a previous taxation year; and
• it satisfies certain other conditions that depend on whether the contribution is made under a MP or DB provision of a plan or under a SMEP.

Cross references:

Past service benefits – 147.1(10)
Plan as registered – 147.1(15)
Employer contributions – defined benefit provisions – 147.2(2)
Former employee of predecessor employer – 147.2(8)
Permissible contributions – 8502(b)
Qualifications as a SMEP – 8510(2) and (3)

3.2 147.2(2) – Employer Contributions – Defined Benefit Provisions

For the purposes of subsection 147.2(1) of the Act, a contribution made by an employer to a DB provision of an RPP is an eligible contribution, if:

• it is a prescribed contribution; or
• it complies with the prescribed conditions and is made based on an actuary's recommendation to ensure that the plan has sufficient assets to pay benefits under the DB provision of the plan; and
• the Minister has approved the recommendation in writing.

For the actuary's recommendation to be acceptable, it must be based on an actuarial valuation that meets the following conditions:

1. The effective date of the AVR is no more than 4 years before the day on which the contribution is made. For example, where the Minister has approved contribution levels recommended by an actuary and the relevant AVR has an effective date of December 31, 2013, contributions made based on that approval would be eligible contributions if they are made before December 31, 2017.
2. Actuarial liabilities and current service costs are based on a funding method that matches contributions with accrued benefits on a reasonable basis. This precludes the use of methods that may result in excessive advance funding of benefits or that do not generate a liability that is based, in a reasonable way, on accrued benefits. Actuarial liabilities based on the solvency funding requirements of the PBSA or provincial PBAs are considered reasonable. Also, where the plan is not subject to a PBA, or the PBA does not require solvency-based funding, actuarial liabilities may be based on the PBSA solvency funding requirements. This being said, funding a plan when there are benefits using a “pay-as-you-go method” does not meet the conditions of this subparagraph because that method does not produce a reasonable matching of contributions with accruing benefits.
3. All assumptions made at the time of the valuation are reasonable at that time and at the time the contribution is made. Assumptions that are unduly conservative, for example, would not be regarded as reasonable. Where assumptions that are initially reasonable become unreasonable a revised AVR will have to be prepared.
4. The valuation is prepared using generally accepted actuarial principles.
5. If applicable, the valuation complies with the designated plan valuation restrictions.
6. Where there is more than one employer participating in the plan, the assets and liabilities must be apportioned in a reasonable manner.
7. If the employer makes contributions to a designated plan to cover expenses, in addition to the cost of benefits, total contributions are subject to the maximum funding restrictions of subsections 8515(5), (6) and (7) of the Regulations.

Where the required assumptions for designated plans are inconsistent with conditions (3) or (4), the rules for designated plans apply.

The benefits taken into account in the AVR may include indexing and similar adjustments even if the terms of an RPP don’t require that those adjustments be made but it’s reasonable to expect that they will be made.

Where the plan has an actuarial surplus, paragraph 147.2(2)(d) of the Act permits a certain portion of it to be disregarded in determining eligible contributions. The calculation of a surplus is made with respect to the plan as a whole, excluding only the assets and liabilities belonging to the plan's MP provisions, if any. That is, the funding position of all DB provisions under the plan are examined to determine whether a surplus exists. An amount of surplus in excess of the amount that can be disregarded is referred to as an excess surplus.

An excess surplus can be:

• used to fund new or improved benefits;
• offset against the employer's obligation to fund benefits; and/or
• refunded to the employer or members.

Even when an excess surplus is being offset against the employer's obligation to fund benefits, there may still be a requirement for employer contributions.

Example

The actuary recommends employer contributions of $100,000 for each of the plan years 2010, 2011 and 2012. An excess surplus of $100,000 appears to exist. However, further review of the AVR discloses that $75,000 of the excess surplus was used to fund improved benefits. In addition, the balance of $25,000 is being applied against the employer's obligation to make contributions for 2010. Therefore, in reality the actuary is recommending contributions of $75,000 for 2010.

If all or a portion of an excess surplus is used to fund new or improved benefits, such use has to be supported by an amendment. New or improved benefits include:

• recognition of service not previously pensionable;
• improving the benefit accrual rate;
• adding an ancillary benefit;
• upgrading an ancillary benefit;
• broadening of the definition of pensionable earnings to include additional remuneration.

Where a plan is amended during the inter-valuation period to upgrade past service benefits, the actuary has to apply any existing surplus against the new liability in determining whether the employer may make additional contributions to cover the cost of the benefit upgrade. This means that the actuary has to determine any funding requirements arising from the amendment based on the plan's net financial position.

Example

A valuation of the plan as of January 1, 2011 reveals the following:

On January 15, 2011, the plan is amended to upgrade past service benefits at a cost of $200,000. The actuary prepares an interim cost certificate reflecting the new liability. Assuming no other changes to the assets, liabilities, and current service costs, the actuary has to apply the existing surplus of $260,000 against the plan's total liabilities of $8,500,000 ($8,300,000 + $200,000) in determining whether additional contributions need to be made to fund the new liability. Since the plan is fully funded on a net basis at the date of the interim cost certificate, the employer may not make any additional past service contributions. In other words, a contribution for the new liability is not required for the plan to have sufficient assets to pay the promised benefits. The rule in paragraph 147.2(2)(d) of the Act does not allow the actuary to disregard the surplus assets that were revealed in the January 1, 2011 valuation in determining any funding requirements arising from the amendment.

If instead the cost of the amendment was $300,000, the actuary could recommend that the employer contribute an additional $40,000 to cover the unfunded liability ($8,560,000 - $8,600,000). Also, if the amendment increased the cost of current service benefits, the actuary could make a recommendation for additional current service contributions. As long as the actuary can make a reasonable determination of the plan's financial position at the date of the interim cost certificate, we would not require a new valuation in support of the recommendation.

Cross references:

Former employee of predecessor employer – 147.2(8)
Special rules for designated plans - 8515
Prescribed contributions – 8516
Newsletter No. 95-3, Actuarial report content

3.3 147.2(3) – Filing of Actuarial Report

An AVR must be filed with us whenever the employer is seeking the Minister's approval, under subsection 147.2(2) of the Act, of the actuary's recommendation for contributions. The report has to be prepared by an actuary and has to contain all the information set out in our Newsletter No. 95-3, Actuarial Report Content. In certain circumstances, we may require other information in addition to that outlined in the newsletter. For example, we may ask the actuary to submit a copy of the valuation working papers for our review.

In cases where employer contributions are made based on the existing AVR while the latest AVR is being prepared and the latest AVR when completed, discloses an excess surplus – we will consider on a case-by-case basis whether employer contributions during the interim period (after the effective date of the latest AVR) may be refunded or allowed to remain in the plan.

If an AVR is prepared during the three-year period for which the RPD's funding approval has already been given, and the results show that an excess surplus has emerged, either the plan must be improved to use up some of the surplus, the surplus must be refunded to the employer or members, or the surplus must be offset against the employer's funding obligation.

If no plan improvements or surplus withdrawals are made, employer contributions based on the old recommendation, made after the effective date of the new recommendation that do not take into account the extent of the excess surplus are not technically eligible because the surplus retention limit condition applicable to the new recommendation would not be satisfied.

The RPD has given administrative relief to employers that have stopped remitting contributions immediately after becoming aware of the existence of an excess surplus. In these cases, the employer has justified that the ineligible contributions had been made based on the previous actuarial recommendation and prior to becoming aware of the existence of the excess surplus.

If the last filed AVR revealed an excess surplus such that no employer contributions are allowed and, prior to the next valuation report, there is a deterioration in the plan’s funded status, the employer can start contributing again if the actuary prepares and submits an interim cost certificate showing the plan's financial position in support of any contribution requirements. The actuarial liabilities could be rolled forward from the last filed AVR if there has been no material change in plan membership or plan provisions since that time. A new balance sheet must show the reconciliation of plan assets as of the date of the interim cost certificate. The interim cost certificate would only be effective for the rest of the recommendation period covered by the last filed AVR.

3.4 147.2(4) – Amount of Employee's Pension Contibutions Deductible

Subsection 147.2(4) of the Act provides for the deduction of employee contributions for a taxation year after 1990 of an amount equal to the total contribution amount for:

• service after 1989 under paragraph 147.2(4)(a)
• service before 1990 while not a contributor under paragraph 147.2(4)(b)
• service before 1990 while a contributor under paragraph 147.2(4)(c)

3.4.1 147.2(4)(a) – Service After 1989

Paragraph 147.2(4)(a) of the Act allows employee contributions that are made to an RPP, for a period of service after 1989, to be deductible in computing the individual’s income for a taxation year ending after 1989, as long as it was made in line with the plan as registered.

Cross references:

Pension adjustment limits – 147.1(8)
Pension adjustment limits – multi-employer plans – 147.1(9)
Member contributions for unfunded liability – 8501(6.1)
Prescribed eligible contributions – 8501(6.2)
Defined benefit provisions – 8503
Maximum benefits – 8504

3.4.2 147.2(4)(b) – Service Before 1990, While not a Contributor

Paragraph 147.2(4)(b) of the Act applies to contributions made by an employee for years prior to 1990, where the employee was not a contributor to an RPP. The deduction is limited to lesser of:

• The amount of the contribution (excluding AVCs and prescribed contributions) made by the individual in the year or previous year less those contributions already deducted;
• $3,500; and
• $3,500 for each year before 1990 where the individual was not a contributor to any RPP (must be eligible service) less any previous deductions in respect of those contributions and less any deductions claimed under subparagraph 8(l)(m)(ii) of the Act in respect of AVCs.

Cross references:

Additional voluntary contribution – 248(1)
Prescribed contribution – 8516(1)

3.4.3 147.2(4)(c) – Service Before 1990, While a Contributor

Paragraph 147.2(4)(c) of the Act allows an individual to deduct the contributions made to an RPP in respect of years of service prior to 1990 while a contributor to an RPP. The maximum deduction permitted in a year is equal to or lesser of:

• The amount of the contribution (excluding AVCs and prescribed contributions) made by the individual in the year or previous year less those contributions already deducted; and
• $3,500 less the total of amounts deducted by reason of paragraphs 147.2(4)(a) and (b) of the Act.

Cross references:

Pension adjustment limits – 147.1(8)
Pension adjustment limits – multi-employer plans – 147.1(9)
Limits on employee contributions to DB provisions – 8503(4)(a)

3.5 147.2(5) – Teachers

Subsection 147.2(5) of the Act provides a special rule with regards to teachers. The rule applies to teachers, who were or are employed by her Majesty (or a person exempt from tax for the year under section 149 of the Act), who make or have made contributions to an RPP for service prior to 1990 allowing them to deduct (if not previously done) contributions after 1990 and before 1995. This rule enables a teacher to take advantage of an additional annual $3,500 deduction.

3.6 147.2(6) – Deductible Contributions when Taxpayer Dies

Subsection 147.2(6) of the Act modifies paragraphs 147.2(4)(b) and (c) for the year in which a taxpayer dies and for the year before by allowing you to disregard the $3,500 annual limit when determining the amounts that can be deducted under paragraphs 147.2(b) and (c). However, it does not change the total limit on deductions under paragraph 147.2(4)(b).

This way, RPP contributions that a taxpayer couldn’t deduct before death because of the annual $3,500 limit can generally be deducted on death.

Cross references:

Service before 1990, while not a contributor – 147.2(4)(b)
Service before 1990, while a contributor – 147.2(4)(c)

3.7 147.2(7) – Letter of Credit

Subsection 147.2(7) of the Act provides additional rules for the deductibility of contributions to RPPs. It applies where, as a result of a default or failure under the terms of a letter of credit, the issuer of the letter of credit pays an amount to an RPP. This subsection generally treats the payment as if it had been an employer contribution end entitles the employer to a deduction for the amount of the payment.

Subsection 147.2(7) applies only to the extent that the payment would have otherwise been an eligible contribution under subsection 147.2(2) if it had been made directly to the RPP by the employer. For this subsection to apply, the use of the letter of credit must be allowed by the PBSA or a similar law of a province.

Cross references:

Employer contributions – defined benefit provisions – 147.2(2)
Designated laws – 8513

3.8 147.2(8) – Former Employee of Predecessor Employer

Subsection 147.2(8) of the Act allows an employer to deduct eligible contributions made to an RPP to fund benefits of a predecessor employer’s former employees. For example, as part of a business purchase agreement, an employer takes on the predecessor employer’s (vendor) RPP that has a DB provision. In applying this subsection, the new participating employer can now appropriately deduct the contributions that may need to be made to the RPP to fund the benefits for the predecessor employer’s former employees.

This subsection deems the predecessor employer’s former employees to be the participating employer’s former employees for eligible contributions in relation to the RPP that the participating employer may have to make to fund the former employees’ benefits. The former employees’ benefits must be for periods of employment with the vendor.

Cross reference:

Deductible employer contributions – 147.2(1)