18 June 1992 Administrative Letter 9216996 F - Eligible Contributions To Defined Benefit Pension Plan

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.

June 18, 1992

Registered Plans DivisionFinancial Industries Division

Mrs. Stella Kotlar, Director     

Eligible Contributions to Defined Benefit Plan

We are in receipt of a letter of December 17, 1991, from 24(1) (copy enclosed) which requests your comments on the matters outlined therein.  We are returning the letter to you with our views on certain of the matters raised and ask that you respond directly to the firm.

FACTS

A registered pension plan contains the following statement concerning contributions by the employer:

24(1)

ISSUES

1.     Whether the provisions relating to permissible contributions contained in paragraph 8502(b) of the Income Tax Act Regulations (the "Regulations") are prescribed conditions for registration.

2.     Whether the terms of paragraph 8502(b) of the Regulations limit the contributions that the employer may deduct and/or prohibit the payment of employer contributions.

3.     If the clause as set out under "Facts" above is not amended to force the employer to take a contribution holiday when there is an actuarial surplus, will the plan registration be revoked?

4.     If the answer to 3 is yes, when must the employer desist from making contributions where an actuarial surplus exists; do the transition rules in section 8516 of the Regulations apply?

ANALYSIS

Reference is made to the issue numbers above.

1.     In accordance with paragraph 147.1(2)(a) of the Act, the Minister shall not register a plan unless it complies with prescribed conditions for registration.  These prescribed conditions are contained in subsection 8501(1) of the Regulations, one of which (in paragraph (d)) is that there is no reason to expect the plan may become a revocable plan pursuant to subsection 8501(2).  Paragraph 8501(2)(a) of the Regulations states that a registered plan becomes a revocable plan any time it fails to comply with a condition in paragraph 8502(b).  Therefore, in our opinion if the plan documents indicate that contributions may be made in contravention of paragraph 8502(b) of the Regulations, the plan does not meet the prescribed conditions for registration.

2.     Subsection 147.2(1) of the Act governs the deductibility of employer contributions to a registered pension plan.  In the case of a defined benefit provision of a plan, the contribution must be an eligible contribution.  Eligible contributions are defined in subsection 147.2(2) of the Act and include prescribed contributions or contributions which comply with prescribed conditions (only relevant to designated plans) and those conditions listed in subsection 147.2(2).  One of the conditions in subsection 147.2(2) is that the contribution be made pursuant to a recommendation by an actuary who believes that the contribution is required to fund the benefits.  Further conditions in subsection 147.2(2) restrict the recommendation which can be made by an actuary in situations where there is a certain level of actuarial surplus in respect of the employer (see 4 below).

Paragraph 8502(b) of the Regulations prescribes conditions for the continued registration of a plan and does not directly affect deductibility of employer contributions.  If a contribution is not eligible within the meaning of subsection 147.2(1), then it is not deductible.  If a contribution is not eligible, it is not a permissible contribution under subparagraph 8502(b)(iii), and if the contribution is made by the employer, the plan becomes a revocable plan in accordance with paragraph 8501(2)(a) of the Regulations.

3.     As this issue deals with the Minister's discretion, we refer it to you for your direct response to the firm.

4.     We are providing our views on this issue on the assumption that your answer to issue 3 could be yes.

The firm's letter implies that any funding in the face of an actuarial surplus would make the contribution ineligible.  Actually, the conditions respecting eligible contributions in subsection 147.2(2) permit employer funding even where there is a surplus, so long as the surplus does not exceed a certain amount (i.e. the least of the amounts calculated in accordance with subparagraphs 147.2(2)(d)(ii) and (iii)).  Further concessions are made under the rules for prescribed contributions described below.

The conditions concerning prescribed contributions (which are eligible contributions in accordance with subsection 147.2(2) of the Act) are contained in subsections 8516(2) through (6) of the Regulations. 

Subsection 8516(2) permits the actuarial surplus in excess of those amounts excepted by one of subparagraphs 147.2(2)(ii) or (iii) to be amortized in equal amounts over the period 1991 through 1994 as if such amounts were employer contributions.  In other words, the employer contributions plus 1/4 of the "excess" actuarial surplus in each of those years will be eligible contributions provided they meet all the conditions in subsection 147.2(2) of the Act and the actuary's recommendation for funding ignored the surplus.  The calculation of the "excess" is affected if the actuarial valuation occurs before 1991 to the extent that the excess is reduced by employer and employee contributions made before 1991 which were less than the current service funding required by the plan.

Lastly, subsection 8516(6) of the Regulations is relevant to the plan under discussion since it grandfathers employer contributions in circumstances where the terms of the plan require employer contributions even if an actuarial surplus exists. 

In these circumstances, an employer contribution before 1994 is a prescribed contribution if it would be an eligible contribution if the surplus were ignored, and the contribution is acceptable to the Minister.

Comments concerning what contribution would be acceptable to the Minister in these circumstances would be more appropriate coming from your division.

We trust these comments assist.for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs