22 December 1992 External T.I. 9216975 F - RPP Regulations Pension Accrual Rate Limits

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Attention:    19(1)

December 22, 1992

Dear Sirs:

Re:  Income Tax Regulations for Registered Pensions

This is in reply to your letter of January 23, 1992, addressed to the Registrations Directorate of Revenue Canada - Taxation and referred to us for reply.

You have asked for our opinion on the application of certain of the above noted Income Tax Regulations (the "Regulations") and their interrelation with the provisions of the Income Tax Act (the "Act").  We shall address your concerns in the order presented.

I.     Regulation 8509(8)

You have asked us to confirm that Regulation 8509(8) applies only to career average, non-integrated, registered pension plans which contain the maximum pension rule set out in paragraph 9(g) of Information Circular IC 72-13R8.

Regulation 8509(8) exempts any plan from the 2% benefit accrual rate limitation if the plan is a "grandfathered Plan", as defined in subsection 8500(1) of the Regulations, or would be if the date for grandfathering were July 31, 1991 and not March 27, 1988; the date provided in the definition of an "existing plan" which is also defined in regulation 8500.  The relief provided, however, is limited by the provisions of the subsection as well as by other regulations.  In particular, while paragraph 8509(8)(a) exempts a grandfathered plan from the 2% cap imposed under paragraph 8503(3)(g) until 1994, subsection 8509(8)(b) denies that right if the plan is an integrated, best average or integrated, final average plan.  Therefore paragraph 8509(8)(a) only effectively removes the cap for career average plans and some non-integrated plans.  Furthermore, plans must also comply with the provisions of section 8504 of the Regulations which caps lifetime benefits that may be accrued after 1991 for most plans.  The overall effect is to limit subsection 8509(8) to non integrated career average plans.

II.     Interrelation of Regulation 8509(8) with Subsections 147.1(8) and (9)

You have questioned how a plan could provide a benefit accrual rate of greater than 2% given the limitations contained in these paragraphs. We shall address only one instance where this may occur and, for the sake of clarity, we will simplify the provisions of the Regulations which might apply to an actual situation.

Subsection 147.1(8) of the Act provides in part: "Except as otherwise provided by regulation, a registered pension plan (other than a multi-employer plan) becomes, at the end of a calendar year after 1990, a revocable plan where

(a)     the pension adjustment for the year of a member of the plan in respect of a participating employer exceeds the lesser of

(i)     the money purchase limit for the year, and

(ii)     18% of the member's compensation from the employer for the year;"

At the same time, subsections 8301(1) and (6) and section 8302 of the Regulations work together to limit an employee's PA under a plan for a year to:

9 times the annual accrual rate for maximum allowable benefits under a defined benefit plan less $1000. Therefore, if for example, we let compensation equal the maximum limit for tax assistance in 1994 ($86,111) and we let "a" equal the benefit accrual rate we can formulate when the provisions of the Act and the Regulations will be satisfied as follows:

.18 * 86111 = 9 * ( a * 86111) - 1000 or a =2.129%.

In this case subject to the limitations discussed above, Regulation 8509(8) will allow the greater benefit accrual rate. In other words, because of the grandfathering afforded existing plans, such plans can offer effective defined benefit rates which will absorb the $1000 RRSP room provided in the PA calculation.

III.     Relationship between subsections 8302(8), (9) and 8509(8)

Regulations 8302(8) and (9) again deal with PA calculations and the provision of rates in excess of 2% during the initial years of pension reform.  However, it appears to us that most of your concerns actually pertain to the latter provision and we will restrict our comments to that regulation.

The purpose of Regulation 8302(9) is to preserve the $1,000 window for RRSP contributions that would otherwise be eliminated by higher pension accrual rates allowed under the provisions discussed previously.  In our formulation in II above we showed that a pension accrual rate of 2.129% would absorb the 1,000 RRSP room in full in 1994 and it can be similarly shown that in 1991 this same rate would provide a PA of $12,306 (2.129% * $69,444 = $1,478.48.  $1,478.48 * 9 - $1000 = $12,306) so that, if no corrections were made, the RRSP room would be reduced to $194.

As noted, subsections 8302(9) of the Regulations was provided to ensure that during the initial years of pension reform, individuals would have the full $1,000 RRSP window. and the provision accomplishes this by limiting the benefit accrual to 2% for the purpose of determining an individual's pension credit. (2% * $69,444 = $1,388.88.  $1,388.88 * 9 - $1000 = $11,500.  $12,500 - $11500 = $1,000.)  The actual accrual rate however remains unchanged.

While it appears that the $1,000 window will only be maintained until 1991 when subsection 8302(9) of the regulations ceases to apply and that it will be reduced by accrual rates in excess of 2%, this is not the case.  The window will in fact be maintained by the application of regulation 8504 which sets out the limits on benefits which may be paid and which comes into full force for all plans in 1992.  Until then, the application of regulation 8504 to grandfathered plans was deferred to 1992 through the provisions of 8509(2) and this is why the statement was made in the technical notes that all plans will have to limit benefits after 1991.

In general, Regulation 8504 limits benefits after 1991 to a maximum of 2% of a member's "highest average compensation" and has application to all plans after 1991 even though regulation 8509(8) may, at the same time, allow a benefit accrual rate in excess of 2% until 1994.  To determine a defined benefit accrual in a year pursuant to subsection 8302(2) of the Regulations an individual's normalized pension accruing in a year must first be determined taking into consideration the effect of Regulation 8504 on the computation.  Regulation 8302, however, does not require a determination of the benefit accrual in the year based on the benefit accrual rate.  Instead, it requires a determination of the portion of the normalized pension that accrues in the year to the individual when it is computed following the rules provided in regulation 8302(3).  In turn, that provision provides that the individual's normalized pension must be determined on the basis of his remuneration for the year.  Therefore, Regulation 8504 will limit the normalized pension for a year to 2% of that year's remuneration and, in consequence, no matter what the stated benefit accrual rate might be, the benefit accrual for purposes of the PA calculation will not exceed 2%.

For years prior to 1992 when both the accrual rate and the benefit rates were grandfathered this result could not be accomplished solely through the combined effect of the two regulations and regulation 8302(9) was drafted to accomplish the same result.

These comments are based on our best understanding of the regulations as they apply in general and may or may not be applicable to a specific case.  They do not constitute an advance income tax ruling and they are not binding on the Department.

We trust these comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate