RPP Practitioners' Forum - 2009

Ottawa - June 2, 2009

Questions and Answers

1. Determination of normalized pension for a hybrid plan
2. Removed
3. Removed
4. Excess contributions to an RPP due to reasonable errors Updated
5. Removed
6. Reciprocal transfer involving a plan with an unfunded liability
7. Payment to an employee instead of a termination notice
8. Excess surplus issue
9. Maximum transfer value – section 8517 of the Regulations
10. Removed
11. Removed

Question 1 - Determination of normalized pension for a hybrid plan

This question relates to the application of section 8517 of the Income Tax Regulations for a hybrid plan where the amount of lifetime retirement benefits provided under the defined benefit (DB) provision of the plan is reduced by the benefits under the money purchase (MP) provision of the plan. We are seeking help in determining the normalized pension in subsection 8517(5) of the Regulations to calculate the prescribed amount. In particular, how does paragraph 8517(5)(e) of the Regulations apply to determine a reasonable estimate of the other benefits that affect the DB pension?

Answer 1:

The normalized pension for an individual under subsection 8517(5) of the Regulations must first be determined without regard to paragraph 8517(5)(e). For a hybrid plan, the impact of this paragraph of the Regulations is determined after.

Although other methods may be considered to be reasonable, the Registered Plans Directorate (RPD) considers the following method to determine the estimate of the MP offset to be reasonable:

MP offset = MP account / Factor

MP account = value of the individual's MP account at the time of transfer;

and

Factor = (B x C) / D

Where

B = applicable present value factor at the time of transfer
C = the lump sum value of the individual's total lifetime retirement benefit entitlements before MP offset
D = prescribed amount of the individual's total lifetime retirement benefit entitlements before MP offset

Other methods will be considered on a case by case basis.

Question 4 - Excess contributions to an RPP due to reasonable errors

The answer to question 16 of the 2008 RPP Practitioners' Forum states that an exception will be made when an excess contribution was made as a result of a reasonable error and the problem is identified by the employer or plan administrator in a timely manner. Will it be possible to explain what the RPD considers to be "reasonable errors"?

Answer 4:

The answer to question 16 stipulated "An exception will be made when the excess contribution was made as a result of a reasonable error, and the problem is identified by the employer or plan administrator. The error must be brought forward to RPD in order to rectify the situation in a timely manner. We will then review each individual case to determine if the error is reasonable, and work with the plan administrator or employer to resolve these situations in a fair and equitable manner to encourage compliance and reduce the burden of the error on the taxpayer."

Reasonable error means, first and foremost, that the excess contribution arose because of a mistake and that the taxpayer (employer) did not intentionally over-contribute. It has to be an error that an impartial person would consider likely to occur based on a particular set of circumstances. Extraordinary circumstances that hadn’t happen before or that were beyond the taxpayer's (employer's) control, and that led to the excess contribution, would, in most cases, show that the excess contribution arose due to a reasonable error. It should be noted that each case is reviewed by RPD, with an examination of the details of the particular situation, when making a determination on the reasonableness of the error.

Update:

Budget 2013 proposed amendments to subparagraph 56(1)(a)(i) of the Act that would exclude a return of contributions from being included in a taxpayer’s income to the extent that the contribution is not deducted in computing the taxpayer's income for the year or a preceding year. In situations where the contribution is deducted by the taxpayer, the payment must be included in the taxpayer’s income.

This amendment applies to a return of contributions permissible under paragraph 8502(d) of the Regulations or subsection 147.1(19) of the Act. Subsection 147.1(19) applies to contributions made as the result of a reasonable error that do not affect a plan’s registered status.

The definition of a reasonable error in answer 4 continues to apply but the RPD will not review each distribution from an RPP under subsection 147.1(19) of the Act to determine the reasonableness of the error. The RPD may audit distributions from a registered pension plan at a later date to determine whether the error was reasonable.

The amendment to subparagraph 56(1)(a)(i) of the Act applies to contributions made on or after January 1, 2014.

Question 6 - Reciprocal transfer involving a plan with an unfunded liability

In Quebec, the plan administrator must comply with sections 142 and 146 of the Supplemental Pension Plans Act (SPP Act) when the member's benefit entitlement is transferred from a plan with a transfer ratio under 100%. The SPP Act allows for an employer to fund this deficit with an immediate additional contribution or may wait up to five years. Our question lies where an employer was to wait until the end of the five year period.

Because of the eligible service definition under subparagraph 8503(3)(a)(v) of the Regulations and the definition of member under subsection 147.1(1) of the Act, among others, our understanding is that we are not allowed recognize service in another plan, even in part, until the employee is no longer a member in the previous plan under the Act.

Please confirm if, for a plan with an unfunded liability, we are allowed to recognize the service in another plan by way of a transfer agreement before the member's benefit entitlement has been fully satisfied. For example, by inserting a reference to the reciprocal transfer agreement, could we recognize the full service while considering that the value of the benefit entitlement will be transferred in two instalments under the reciprocal transfer agreement, or could we recognize part of the service immediately, by prorating the value of the transferred amount based on the full value of the benefit entitlement to be transferred and recognize the balance of the service at the time of the second instalment?

Answer 6:

Subparagraph 8503(3)(a)(v) of the Regulations does stipulate that in order to recognize a period of service from a former employer, the member must have ceased to be a member of the other plan. Also, a member that has only received a partial benefit entitlement, in a lump sum, because of the funding status of the plan, continues to be a member of the former plan, as defined in subsection 147.1(1) of the Act. Therefore, an employer could not recognize a member's service with a former employer if at the time the member has a right to further benefits within the former employer's plan.

The CRA has been informed, in December, 2012, that the Department of Finance Canada is proposing an amendment to paragraph 8503(3)(a) of the Regulations to allow the importing plan to recognized pro-rated past service of a member when the member’s full benefit entitlement can’t be transferred in cases where the pension standards legislation requires a two-stage transfer of the benefit entitlement because the exporting plan is underfunded. Based on this information, the CRA will allow pension plan administrators to act upon this recommendation before the law is passed, as long as the following rules are followed.

With each partial asset transfer, the importing plan will be allowed to recognize any part of past service not more than the ratio of the assets transferred divided by the commuted value of the member’s benefit entitlements under the exporting plan. However, the existing framework of tax rules concerning pension adjustment reversals (PAR) and past service pension adjustments (PSPA) will continue to apply.

In these two-stage transfer cases, the administrator of the exporting plan should not calculate and report a PAR (if any) until the full commuted value has been transferred (which might be five years after the first transfer).

The administrator of the importing plan should calculate and report a PSPA (if any) at the time of each separate transfer where pro-rated past service is recognized.

Question 7 - Payment to an employee instead of termination notice

The pension adjustment (PA) rules in section 8300 of the Regulations currently do not contemplate a scenario in which an employer elects to make a lump sum payment in lieu of its obligation to provide reasonable notice of termination of employment. As a result, providing pension accruals for the period of notice for which the lump sum payment relates would, in scenarios where the period of notice extends beyond the end of a calendar year, place the plan's registration in a revocable position. To alleviate this situation, would CRA approve, or give consideration to approving, an application by the employer to the Minister under subsection 8310(2) of the Regulations to "deem" a part of the lump sum payment to be "compensation" in the year for which it is pensionable earnings under the terms of the pension plan for the PA rules?

Answer 7:

It is proposed that the Minister use his authority under subsection 8310(2) of the Regulations to allow a part of a lump sum payment, made instead of a period of termination notice that extends beyond the end of a calendar year, to be deemed as compensation for pension accrual and PA purposes. Subsection 8310(2) of the Regulations states that should the rules in Part LXXXIII of the Regulations (which deal with PAs and PSPAs) require the determination of an amount in a way that is not appropriate having regard to the provisions of that Part read as a whole and for the purposes for which the amount is determined, the Minister may permit the amount to be determined in a way that, in the Minister's view, is appropriate.

It is important to note that the Minister's authority under subsection 8310(2) is used under very limited circumstances and should apply only where the related service is pensionable service. To be considered as pensionable service, a period of time must first qualify as a period of eligible service under the Act. Whether or not a period of time for which payments to an individual are made instead of termination notice will qualify as eligible service for pension purposes under the Act will depend on the facts of a particular situation. A period throughout which a salary continuation arrangement exists might qualify as a period of pensionable service (such as in a pre-termination leave with pay situation) if the employer/employee relationship stays intact during the arrangement. However, to provide continued pensionable service accruals after the termination of an employer/employee relationship for a period of termination notice for which either a series of payments or a lump sum payment is made instead would not be allowed under the Act. The post-employment period would not qualify as eligible service; therefore we do not foresee the Minister's authority under subsection 8310(2) of the Regulations being used as proposed. Also, there are already acceptable ways, such as the aforementioned salary continuation arrangement, in which more pensionable service could accrue, so employers are not without options.

A similar question and answer on severance payments, salary continuation arrangements, and compensation, was discussed at the 2004 RPP Consultation Session. For more information see Question 10 on the RPD website at www.cra.gc.ca/tx/rgstrd/cnslttns/rpp_cq04-eng.html#q10.

Question 8 - Excess surplus issue

A DB pension plan revealed a large surplus according to the last filed valuation report such that employer contributions are not allowed under subsection 147.2(2) of the Act. However after the recent market turmoil there is an indication by the pension regulator or plan administrator that the plan's solvency position has deteriorated. Although the pension regulator does not require the filing of a new valuation until it is due, any asset transfer out of the pension fund would require a prior consent from the regulator. What is the filing requirement by CRA that would warrant an earlier funding schedule than the one stated in the last filed valuation report, if any.

Answer 8:

The actuary must prepare an interim cost certificate showing the plan's financial position in support of the contribution requirements. The actuarial liabilities could be rolled forward from the last filed AVR if there has been no great change in plan membership or plan provisions since the last AVR was filed. 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.

Question 9 - Maximum transfer value – paragraph 8517 of the Regulations

When a commuted value is not paid in a single lump sum due to the transfer ratio of the pension plan that is less than 100%, what is the proper application of paragraph 8517 of the Regulations limit?

Answer 9:

Assume the normalized pension is $15,000, the commuted value of the pension is $100,000 and that the pension plan has a solvency ratio of 70%. For the first payment, under regulation 8517(1) of the Regulations, the variable A (the lifetime retirement benefit commuted) is $10,500. This value is multiplied by variable B (that is, the factor based on the member's age at the time of the first payment) to determine the prescribed amount limit for the initial payment.

For the next payment(s), the variable A is the normalized pension being commuted (an amount up to the remaining normalized pension that has not been previously commuted) at the following time(s). This value is multiplied by the variable B (that is, the factor based on the member's age at the time of the later payment) to determine the prescribed amount limit for the next payment(s).

Date modified:

2016-02-10