RPP Practitioners' Forum - Questions from the Industry June 3, 2008

Questions and Answers

1. Removed
2. Removed
3. Removed
4. Removed
5. Segregated Accounts within a Pension Fund
6. Pension guarantee in Pension Adjustment Reversal and Past Service Pension Adjustment calculations
7. Retroactive application of Monsanto
8. Removed
9. Removed
10. Removed
11. Removed
12. Removed
13. Terms and conditions, and responsibility, regarding an individual pension plan funding deficit at termination
14. Removed
15. Removed
16. The Canada Revenue Agency's position on over-contributions Updated

Question 5 - Segregated Accounts within a Pension Fund

In answer to Question 22 of the 2005 Consultation Session, the Registered Plans Directorate (RPD) replied that in order to segregate accounts within a registered pension plan the provincial regulator must sanction the segregation or there must be a court order requiring such segregation.

The Financial Services Commission of Ontario's (FSCO's) published position is that it will not approve a merger of defined benefit assets, involving a trusteed plan, unless it can be proven that the plan documentation allows for it. This involves a time consuming and costly review of all historical plan texts and funding agreements including any predecessor plans from which funds originate. However, when a plan administrator wants to voluntarily segregate assets, FSCO has been slow to provide a written response confirming the need for segregation; yet this, or in the alternative a court order, is what is required by RPD.

The response to Question 22 states that RPD would review its policy to determine if its processes could be streamlined. Given FSCO's published position on merging plan assets, and the costs and time involved in preparing a merger application, it's time for such a review. Permission to segregate assets should be granted in all mergers when a provincial regulator has a published position similar to FSCO's.

Answer 5:

The requirement for segregated accounts, typically occurring in situations when a purchase and sale or merger occurs, is a relatively recent development. Requests for permission for this segregation are granted on an administrative, case-by-case basis since it is not otherwise permissible under the Income Tax Act. Our present policy requires that, in order for a request to be considered, there must be written evidence of the provincial regulator requirement to segregate accounts in the particular circumstances. We will also consider such requests when there is a specific court order requiring segregation of funds.

There is presently no plan to expand the criteria under which we will consider such requests. Therefore, voluntary segregation of funds, when there is no corresponding provincial requirement or court order in the particular circumstances, is not permitted. We will continue, however, to monitor the nature and number of such cases. Once we have more real-life situations to study, we will consider developing new policies and procedures if warranted.

Question 6 - Pension guarantee in Pension Adjustment Reversal and Past Service Pension Adjustment calculations

Two defined benefit pension plans, Plan A and Plan B, are sponsored separately by two affiliated companies. The lifetime pension formula in each plan is based on final average earnings, with an offset for the Canada Pension Plan (CPP). The percentage offset for CPP in Plan B is slightly greater than in the Plan A, otherwise the plans and formulae are identical.

The two companies entered into a reciprocal agreement to facilitate the transfer of employees between employers. The agreement provides for the transfer of pensionable service between Plan A and Plan B, with the following conditions:

• compensation under the exporting plan is deemed to be recognized in the importing plan for final average earnings calculation as of the date of transfer; and
• pension guarantee: lifetime pension provided for the transferred service in the importing plan must be not less than the pension accrued for the same service in the exporting plan.

A post-1989 transfer of an employee from Plan A to Plan B under the reciprocal transfer agreement is a past service event that requires calculating and certifying a past service pension adjustment (PSPA).

What are the PSPA/pension adjustment reversal (PAR) implications in this situation?

Answer 6:

Section 8504 of the Income Tax Regulations (the Regulations), permits only the earnings from an employer who participates in the pension plan to be used when determining the pension benefit. Therefore, compensation under the exporting plan cannot be recognized under the importing plan for the final average earnings calculation.

In the event an employee transfers to another plan pursuant to a reciprocal transfer agreement, a PSPA must be calculated for the benefits provided under the importing plan, and a PAR must be calculated under the exporting plan.

When the reciprocal transfer agreement includes a guarantee that the lifetime retirement benefit (LRB) provided for the transferred service in the importing plan will be at least equal to the LRB accrued in the exporting plan for the same service, the guaranteed pension would be included when calculating the individual's PSPA. In accordance with paragraphs 8303(5)(d) and (e) of the Regulations, the redetermined pension credit should be based on the earnings the member actually received in each of the prior years being recognized under the new plan, and the year's maximum pensionable earnings in each of those years.

On a transfer to a less generous plan, the benefit entitlement in the importing plan for past service will be equal to the benefit in the exporting plan due to the pension guarantee. In this situation, the redetermined pension credit under the importing plan would be equal to the redetermined pension credit under the exporting plan. As a result, the PSPA determined within the importing plan would be nil.

An individual's PAR is equal to the total of all pension credits and grossed-up PSPAs, minus any specified distributions and the pension adjustment (PA) transfer amount. The PA transfer amount is equal to the lesser of the redetermined pension credits that are calculated under the importing plan and the redetermined pension credits under the exporting plan. Since the PA transfer amount would be equal to or greater than the total pension credits and grossed-up PSPAs actually reported, the PAR determined under the exporting plan at the time of the transfer would also be nil.

Question 7 - Retroactive application of Monsanto

The retroactive application of the Monsanto case will require the distribution of surplus from plans that currently do not have surplus or have an insufficient amount of surplus. Will the Registered Plans Directorate allow additional amounts to be contributed to the plan so that these amounts can then be paid through benefit enhancements or lump-sum distributions? Consider the following alternative scenarios:

• The Superintendent, Financial Services Tribunal, or a court has issued an order requiring the employer to distribute surplus based on the amount of surplus that would have been available if the surplus that existed at the effective date of the partial windup had been preserved and grown with a fund rate of return.
• No order has been issued but the employer wants to contribute the funds and distribute the surplus, in expectation that the Superintendent is likely to require it anyway.

Answer 7:

As indicated in our answer to Question 12 of the 2005 Consultation Session, any current surplus under a defined-benefit pension plan as a whole should be fully utilized before any additional contributions are permitted to fund the liability for surplus entitlements on partial wind-up resulting from the Monsanto decision.

As an example, a requirement of 6 million dollars but a surplus of only 5 million results in the ability to request 1 million in funding. If the surplus was 5 million but the requirement was only 4 million then there is no need or ability to request additional funds.

When no order has been issued, there must be written evidence from the Financial Services Commission of Ontario that the plan's situation is similar to that of the Monsanto case. When the surplus entitlements are paid out through benefit enhancements, a plan amendment is required.

Question 13 - Terms and conditions, and responsibility, regarding an individual pension plan funding deficit at termination

Can the plan text of a registered pension plan (e.g., an individual pension plan) for a connected person, provide for reduced annuities in the event of a funding deficiency at termination? Can we limit the employer's responsibility regarding a funding deficiency at termination?

Answer 13:

Subsection 147.1(7) of the Income Tax Act (the Act) requires that the pension plan administrator administer the plan as registered. Based on this requirement, the administrator must ensure that members receive the benefits to which they are entitled under the plan, and that these benefits are paid in accordance with the plan terms. However, although subsection 147.2(2) of the Act allows an employer to fund a deficit at termination, it does not require it.

As long as other legislation that is applicable to the plan does not prevent it, the plan may provide for a reduction in benefits in the event of a deficit at termination. Please note that in such a case the administrator must submit an amendment under subsection 8512(2) of the Income Tax Regulations. In cases where provincial and federal legislation conflict , the requirement for said amendment may be waived only after reviewing each individual situation on its own merit.

Question 16 - The Canada Revenue Agency's position on over-contributions

Further to Question 3 of the 2005 Consultation Session and its corresponding answer, we have been advised that the Canada Revenue Agency has rescinded Income Tax Rulings Directorate Document 9719235 (for details to obtain this document, go to www.cra-arc.gc.ca/tx/txprfssnls/srvcs/dssmntn/menu-eng.html) and its position regarding the refund of employee over-contributions. As a result, it would appear that the answer to Question 3 is no longer accurate. Could you please provide an updated response to Question 3?

Answer 16:

The Registered Plans Directorate's (RPD) position regarding ineligible contributions made to a pension plan has not changed. Paragraph 11 of Interpretation Bulletin IT-167R6 - Registered Pension Funds or Plans - Employee's Contributions, states that, generally, any amount received out of or under a registered pension plan must be included in income. It must be included even though an amount contributed to the plan may not have been deductible because it was in excess of the allowable deduction by reason of subsection 147.2(4) of the Income Tax Act (the Act).

The position will be enforced whenever, as part of our review or audit, we determine that an excess contribution has been made. In these situations, no deduction will be allowed for the excess contribution and the contributor will have to report this amount removed from the plan as an income inclusion.

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.

The impact of disallowing contributions and forcing the refund of the amount out of the plan, and into income, is not considered double taxation under subsection 248(28) of the Act. Please refer to Income Tax Rulings Directorate Document 9605827 for more information.

For more information, see Question 4 of the 2009 RPP Practitioners' Forum.

Update:

Budget 2013 proposed amendments to subparagraph 56(1)(a)(i) of the Act that would exclude a return of contribution 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 in error that do not affect a plan’s registered status where the conditions in that subsection are met. Where a return of contributions is made that does not fall under paragraph 8502(d) or subsection 147.1(19), we will continue to apply the same administrative procedures as noted above for voluntary disclosures. An example would be a return of contributions made in error later than December 31 of the year following the year in which the contribution was made.

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

Date modified:

2016-02-10