Questions and Answers
- Annuities - Subsection 147.4(1) of the Income Tax Act (Act) and additional premiums
- Tax reporting of variable benefits
- Over-contribution to a registered pension plan (RPP)- Tax treatment of return to employee or employer
- Higher solvency requirements (Quebec) - Tax treatment of additional contributions
- Deductibility of transfer deficiency payments - Requirement for new valuation
- Report for transfer to purchaser's pension plan - Timing of approval by the Registered Plans Directorate (RPD)
- Converting excess contributions under the 50% cost-sharing rule into additional pension
- Maximum funding valuation assumptions for individual pension plans (IPPs)
- Designated plan change in status
- Designated plan - Termination funding
- Registration procedure for designated plans
- Issues arising out of the Monsanto case
- Surplus sharing agreements with a charity
- New Canadian Institute of Actuaries (CIA) commuted value standards (2005)
- Subsection 8303(6)of the Income Tax Regulations - Qualifying transfer to pension plan before registration
- Incorrect pension - over and under payments
- $1.50 Past service pension adjustment exemption
- Reversing a transfer to spousal registered retirement savings plan (RRSP) on marriage breakdown
- Pension adjustment reversal (PAR) for non-resident
- Quebec's indexing benefit - Lump-sum payment on tax deferred transfer
- Quebec civil unions, Nova Scotia domestic partnerships, and Manitoba registered common-law relationships
- Issues arising out of the Transamerica case
- Paragraph 8515(7)(c) of the Income Tax Regulations - Indexing assumptions
- Under-contributions to money purchase accounts - Foregone earnings
Question 1 - Annuities - Subsection 147.4(1) of the Income Tax Act (Act) and additional premiums
There appears to be an issue among the Industry concerning the interpretation of subsection 147.4(1) of the Income Tax Act. Some have concluded that when an annuity contract has been acquired under a registered pension plan (RPP) for the employer on behalf of his employees, only one premium is permitted. Therefore, any additional premiums made under the contract by the employer for the benefits of new or existing employees, would have to be made under a new annuity contract.
Example:
An employer who increases benefits under an RPP could not allow for an additional premium to be paid to the annuity in order to improve the benefits for those employees under that contract. The insurer would have to establish a second annuity and, therefore, pay the benefits out of each annuity contract.
Others interpret this subsection to allow for an additional premium to be made to the annuity in the case of new employees, but it would not be acceptable to allow for an additional premium in the case of existing employees under the contract.
Which is the correct interpretation?
Answer 1:
Subsection 147.4(1) of the Act applies when an individual acquires an interest in an annuity contract, in full or partial satisfaction of their entitlements under an RPP, and all the conditions of this subsection are met. Under paragraph 147.4(1)(c), it specifies that the annuity contract cannot permit for the payment of premiums after the contract has been purchased.
It is our understanding that an RPP annuity contract, as per subsection 147.4(1) of the Act, will only allow for one premium to be made to the annuity upon the purchase of the contract. If the employer wants to make any additional premiums, they would have to be made to a new contract and not to the existing one.
Question 2 - Tax reporting of variable benefits
On May 21, 2005, Regulations to the Income Tax Act relating to deferred income plans were published in the Canada Gazette. We understand the RRIF-type payment (or variable benefits) from a money purchase provision of a registered pension plan (RPP) is now in effect. What is the status on allowing the payout from a money purchase provision of an RPP in a RRIF-type fashion?
We would like confirmation on how the payments should be tax reported (i.e., on a T4RIF or T4A) because it will dictate whether withholding tax should be applied at source.
Answer 2:
On September 21, 2005, the Income Tax Regulations, including variable benefits payable from a money purchase provision, were published in Part II of the Canada Gazette. This means that the Regulations have officially been amended to include the changes with regards to money purchase provisions.
Registered pension plans can be amended to include the option of allowing for variable benefits to be paid from the money purchase provision. Question 17 of our Frequently Asked Questions on our Web site outlines the amendments required in order to permit for the payment of variable benefits from the plan.
Although we use the term "RRIF-type payments" the variable benefits that are paid from the provision are in fact amounts paid from a pension plan. Therefore, the taxation and reporting of any variable benefits would be the same as any other type of payments from a pension plan.
Question 3 - Over-contribution to a registered pension plan (RPP) - Tax treatment of return to employee or employer
Upon detection and correction of an error that resulted in an over-contribution to a registered pension plan (RPP), the employer or employee is subject to double taxation. If the plan administrator detects an error that led to an over-contribution to the plan, should there not be a mechanism to correct the error without incurring double taxation? Should the Canada Revenue Agency (CRA) not be encouraging plan administrators to detect and correct such errors instead of penalizing the employer and/or employee?
CRA's document number 9719235 discusses an administrative position concerning the refund of excess (non-deductible) contributions made to an RPP in error. Is this document still valid?
Answer 3:
CRA's position on employee contributions to an RPP is contained in paragraph 11 of Interpretation Bulletin IT-167R6, Registered Pension Funds or Plans - Employee's Contributions. Paragraph 11 of IT-167R6 states that, generally, any amount received out of or under an RPP must be included in income 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 (Act).
Document 9719235 discusses the return of non-deductible employee contributions made to an RPP. It confirms that amounts out of an RPP are taxable to the recipient in the year of receipt according to subparagraph 56(1)(a)(i) of the Act even if such amounts were not deductible from the contributor's income. Such amounts are reported on a T4A slip and are subject to source deductions.
This position will be enforced whenever, as part of our review or audit, it is determined that an excess contribution has been made. In these situations, no deduction will be allowed for the excess contribution and the employee will have to report the return of contribution as an income inclusion.
An exception will be made when the excess employee (non deductible) contribution was made as a result of a reasonable error, and the problem is identified by the employer or plan administrator who must then inform the appropriate authorities and take steps to withdraw the excess contribution as quickly as possible. In these cases, we will apply the administrative position developed by the Trust Accounts Division with respect to the refund of non-deductible contributions. The method of handling these situations is described in the above-mentioned document.
In situations when an employer made a non-deductible contribution, the amount of the over-contribution must be returned to the employer and taken into income. No alternate administrative position exists in these cases. The deduction will not be allowed and the return of contributions will result in an income inclusion in the year the refund is made.
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.
We have commenced a dialogue with the Department of Finance to determine if there is a better way to deal with situations when legitimate errors have been made and are simply being corrected.
Question 4 - Higher solvency requirements (Quebec) - Tax treatment of additional contributions
The Province of Quebec has put forward a proposal to require higher solvency requirements (up to 115 % of current level). Will the Canada Revenue Agency (CRA) allow such additional contributions to increase the benefit security for plan members to be tax deductible?
There is also the concept of a side fund that would be created for these additional contributions in order to clearly identify these additional contributions. Would CRA consider the tax status of such a side fund to be the same as that of a pension plan fund?
Answer 4:
CRA understands that the Department of Finance will discuss the possible tax implications of this matter further with the Régie des rentes du Québec once more details on the proposal become available. We invite you to contact the Department of Finance on this subject.
Question 5 - Deductibility of transfer deficiency payments - Requirement for new valuation
Assume that a valuation shows that a plan is fully funded on both a funding (going concern) basis and a solvency basis, and then the actuary subsequently determines (from revised economic conditions or a decline in assets) that there is a transfer ratio less than 0.9. Note that the Ontario Pension Benefits Act prohibits a payout of 100 % of a departing member's benefits if the actuary "knows or ought to know" that the transfer ratio has declined to less than 0.9, unless the employer remits the full amount of that member's transfer deficit to the plan fund. When that happens, are those payments automatically deemed to be "eligible contributions" under the Income Tax Act? Would they be eligible contributions only if a supplementary cost certificate or a new valuation (prior to triennial due date) confirms the solvency deficit and the transfer ratio?
Answer 5:
In the above situation, the employer contribution cannot automatically be deemed to be eligible without a new recommendation based on an actuarial valuation (e.g., a supplementary cost certificate).
Question 6 - Report for transfer to purchaser's pension plan - Timing of approval by the Registered Plans Directorate (RPD)
In the situation when a sale of a part of a business has occurred, and the purchaser has retained some of the employees and a transfer of the assets and liabilities for those employees will be made to the purchaser's existing pension plan (or a new plan), does the transfer report need to be filed and approved by the Canada Revenue Agency (CRA) prior to the transfer being made between the plans?
Answer 6:
It is not practical for every pension plan transfer situation of this type to be held up pending prior CRA approval. As soon as it is prepared, the transfer report, concerning the employees being picked up by the replacement pension plan, should be immediately filed with the CRA, as well as the respective provincial or federal pension benefit authority. However, the plan sponsor does not have to wait for the approval of the transfer by CRA before making the actual transfer of funds. If, at a later date, RPD identifies a compliance issue with the transfer report, or if something relating to the transfer does not conform to the Income Tax Regulations, we will contact the actuary to discuss the issue, and modifications to the originally filed report may be required.
As well, if there is an existing deficit on the transfer date, any employer amortization payments as recommended by the plan actuary may be made to the plan by the plan sponsor before receiving formal approval of the contributions from RPD. After receipt of the transfer report submission containing the request of approval of contributions, RPD will review the request and the transfer report and determine if the recommended funding amounts are reasonable and if so, we will mail a written approval letter to the plan sponsor, with a copy to the report submitter.
Question 7 - Converting excess contributions under the 50% cost-sharing rule into additional pension
If a member elects to apply excess contributions towards additional lifetime pension, is it acceptable for the additional pension to be determined using the same basis as the Canadian Institute of Actuaries Standard of Practice for Determining Pension Commuted Values? Alternately, would it be acceptable to base it on the going concern actuarial valuation basis? Is either method acceptable? If one of these methods is not acceptable, why not?
Answer 7:
Paragraph 8502(j) of the Income Tax Regulations requires that when assumptions are used to determine amounts under a registered pension plan, the assumptions used must be reasonable and acceptable to the Minister of National Revenue. The determination of whether an assumption or a set of assumptions is reasonable can only be made on the merits of each case and within the scope of the professional guidelines issued by the Canadian Institute of Actuaries.
When the member is to receive an additional amount in the form of a pension, as a result of the requirement of a designated provision of the law of Canada or a province, in principle the reasonable basis to be used to determine the underlying pension to a lump sum would be the funding assumptions, since they are chosen to place a value on the ultimate cost of the benefits under a defined benefit provision.
Question 8 - Maximum funding valuation assumptions for individual pension plans (IPPs)
The assumptions that must be used for plans such as individual pension plans (IPPs) are not realistic in relation to the Canadian Institute of Actuaries assumptions for other registered pension plans, particularly for the interest rate to be used. Accordingly, insufficient funding is occurring for many of these plans. Are there currently any plans to review the assumptions used for IPPs to make them more realistic?
Answer 8:
This matter was addressed in Question 8 of the 2003 RPP consultation session and there are still no plans to revisit these assumptions.
Question 9 - Designated plan change in status
Can a plan that is determined to be a designated plan in one year not be a designated plan in a subsequent year? For instance, in a situation when the plan sponsor no longer exists and the company's charter is cancelled, are the shareholders at the date of cancellation no longer considered to be shareholders for tax purposes?
Answer 9:
For the purposes of subsections 8515(5) and (9) of the Income Tax Regulations (Regulations), subsection 8515(2) provides that a registered pension plan that is a designated plan in 1991, or any subsequent year, continues to be a designated plan unless exempted by the Minister of National Revenue. The Minister generally grants such an exemption only when it appears unlikely that the plan will be a designated plan in the future according to subsection 8515(1) of the Regulations.
We would require more information to make a determination whether or not the Minister would waive the designated funding status in accordance with subsection 8515(2) of the Regulations.
Question 10 - Designated plan - Termination funding
Could the Canada Revenue Agency confirm what funding will be permitted in each of the following situations for a "designated plan":
- a plan being partially wound up in accordance with pension standards legislation;
- a plan being fully wound up in accordance with pension standards legislation; and
- a plan when a member terminates employment (other than a plan wind-up situation) and chooses a commuted value transfer.
If the answer changes depending on whether the plan is an individual pension plan or not (or on any other factors), please confirm that also.
Answer 10:
With respect to the three situations submitted:
For a plan that is being partially wound up in accordance with pension standards legislation, funding is permitted only to the limits specified in section 8515 of the Income Tax Regulations (Regulations).
For a plan that is being fully wound up in accordance with pension standards legislation, terminal funding of any existing deficit is permitted.
When a member terminates employment and chooses a commuted value transfer, funding is permitted only to the limits specified in section 8515 of Regulations. Please note that if the plan is an individual pension plan, this would be a full wind-up and terminal funding would be permitted.
Question 11 - Registration procedure for designated plans
Where there is a delay by the Canada Revenue Agency in notifying Financial Services Commission of Ontario (FSCO) that a new plan meets the definition of a designated plan, the plan sponsor is asked to complete an assessment and to prepare annual valuations. Can the Registered Plans Directorate review their registration procedures to address delays?
Answer 11:
Our current registration procedures for a new plan do not involve providing notification to FSCO, or any provincial authority, to inform them that a plan meets the definition of a designated plan.
Question 12 - Issues arising out of the Monsanto case
The following question was asked at the November 23, 2004, RPP Consultation Session. Given the recent decision in the Monsanto case requiring the distribution of surplus upon the partial wind-up of a registered pension plan, and given that during the period between the partial wind-up date and the resolution of the Monsanto case, surplus in an affected plan may have been substantially reduced, what is the Registered Plan Directorate's (RPD) position in the event that an employer needs to contribute to a registered pension plan in order to pay out the required surplus distribution?
RPD's response at the November 23, 2004, RPP Consultation Session : RPD stated that there are funding issues that need to be resolved before the required payments can be made to members of affected plans. RPD and the Legal Services section of the Canada Revenue Agency are currently working with the Province of Ontario to resolve these issues. We anticipate that we will have these issues resolved before the end of the year, and will have more information posted on our Web site when it is available.
What is the status of these discussions?
Additionally, in a "Monsanto" situation, once it is determined that plan members on a partial wind-up are entitled to surplus, making those funds no longer available to fund pension benefits, can a sponsor segregate those funds and prepare a fresh actuarial valuation report without reference to the segregated funds? Can this segregation of the funds and funding valuation report be updated retroactively if the partial wind-up was in a prior year?
Answer 12:
The participating employer's current surplus under the 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.
The Financial Services Commission of Ontario is dealing with proposed distributions of surplus resulting from the Monsanto decision on a case-by-case basis.
The issues of segregating surplus and retroactive reporting do not arise, because the participating employer's current surplus under the plan as a whole should be utilized to fund the liability for surplus entitlements on partial wind-up resulting from the Monsanto decision.
Question 13 - Surplus sharing agreements with a charity
Typically, payments made out of a registered pension plan are taxable to the recipient/beneficial owner of the funds paid out. In a bankruptcy situation, when the pension plan has surplus assets, surplus sharing agreements sometimes provide that the contingency reserve/remaining plan assets are to be transferred to a named charity at a certain date (such as when the last known plan member reaches age 65). Can this transfer be made to the charity by the plan trustee as a non-taxable payment?
Answer 13:
Subparagraph 8502(d)(vi) of the Income Tax Regulations (Regulations) permits a payment in full or partial satisfaction of the interests of a person in an actuarial surplus that relates to a defined benefit provision. It is a question of law whether or not a charity can have an "interest" in the RPP surplus.
Based on the information provided, we are unable to make a determination that a surplus sharing agreement can create an interest in surplus for a charity as contemplated by subparagraph 8502(d)(vi) of the Regulations. When an actual case is presented that includes the plan name, registration number and a copy of the surplus sharing agreement, we will consider the issue further.
Question 14 - New Canadian Institute of Actuaries (CIA) commuted value standards (2005)
Have the Income Tax Regulations (Regulations) been changed to reflect the new Canadian Institute of Actuaries (CIA) Commuted Value Standard?
Answer 14:
There is no direct reference in the Income Tax Act or Regulations to any specific CIA standard. Therefore, there is no need to amend legislation to accommodate the new CIA Commuted Value Standard.
Question 15a) - Subsection 8303(6) of the Income Tax Regulations - Qualifying transfer to pension plan before registration
When a pension plan member reaches December 31 in the year they turn age 69, and the pension plan has not yet been fully registered, how can they make the registered retirement savings plan (RRSP) qualifying transfer to the pension plan, prior to their RRSP assets being transferred to a registered retirement income fund (RRIF)? Would the Canada Revenue Agency (CRA) be prepared to fast track the registration process for such cases, or permit the RRSP qualifying transfer prior to final registration of the pension plan?
Answer 15 a):
Subsection 146(16) of the Income Tax Act (Act) provides for a transfer from an RRSP to a registered pension plan. A deemed registered pension plan is considered to be a registered pension plan (except for purposes of paragraphs 60(j) and 60(j.2) and subsections 147.3 and 147.4 of the Act) in accordance with subsection 147.1(3) of the Act. Therefore, a qualifying transfer of assets from an RRSP made in connection with a past service event can be made to a deemed registered pension plan.
The definition of a "qualifying transfer" in the Past Service Pension Adjustment Guide (T4104) includes a note that explains that no transfer of funds may be made to a plan that has not been accepted for registration. It further recommends that no arrangements be made for a qualifying transfer to an unregistered plan. This information is misleading and will be amended in the next release of the guide. There is, therefore, no need for the CRA to fast track the registration process for a new plan for the purpose of a qualifying transfer since such a transfer is permitted to a deemed registered pension plan.
Another option available to a member for the purpose of having a past service pension adjustment (PSPA) certified in relation to a past service event, is to do a qualifying withdrawal from their RRSP in accordance with subsection 8307(4) of the Income Tax Regulations (Regulations).
When the final determination made with respect to the application for registration is a refusal to register the pension plan, the Act shall apply as if the plan had never been deemed. Therefore, any amounts transferred into the plan in connection with a past service event would no longer be a qualifying transfer as described in subsection 8303(6) of the Regulations. Revised PSPAs may be required.
In addition, the plan would generally revert to a retirement compensation arrangement and all of the property held within the plan would be subject to the corresponding legislation.
Question 15 b) - Subsection 8303(6) Qualifying transfers from RRIF to RRSP
Once the registered retirement savings plan (RRSP) assets are transferred to a registered retirement income fund (RRIF), may an RRSP qualifying transfer be made from the RRIF?
Answer 15 b)
In accordance with subsection 8303(6) of the Income Tax Regulations, the amount of an individual's qualifying transfer made in connection with a past service event is an amount transferred to a defined benefit plan directly from an RRSP, a deferred profit sharing plan, or another registered pension plan. A qualifying transfer from a RRIF is not permitted.
Question 16 - Incorrect pension payments - over and under payments
Under certain circumstances, it is not possible to commence pension payments at normal retirement age, for instance, when the administrator does not have a current mailing address for the member. In addition, due to the complexities involved with calculating pension benefits, mistakes can occur. In such cases, can an adjustment be made to pensions in pay without violating the equal and periodic requirement? Can lump-sum payments be made for missed payments? Can overpayments go back to the plan?
Answer 16:
If pension benefits are being paid in an amount not provided for under the terms of the plan, the plan is in a revocable position. An adjustment to the pension in pay would further put the plan in a revocable position on the basis of the equal and periodic requirement. However, a request can be made to the Registered Plan Directorate (RPD) to make a one-time lump-sum payment and commence or correct the periodic pension. The registered status of the plan would not be affected upon approval of the lump-sum payment and late commencement or correction of the periodic pension.
To explain, when an administrator has made a legitimate error they may request RPD's permission to make a lump-sum retroactive payment from the plan. While a lump-sum payment of the missed pension payments would not be made in accordance with the plan as registered as it would violate paragraph 8503(2)(a) of the Income Tax Regulations (Regulations) and would not be a permissible distribution under paragraph 8502(d) of the Regulations, we may allow such payment, or, more correctly, we may choose not to revoke the plan's registration on account of such a payment, on a case-by-case basis as a form of administrative relief. A lump-sum payment of 1) missed pensions due to the absence of a mailing address (when the member terminated employment many years before the pension became due) or 2) as a result of underpaid pensions would in all likelihood meet RPD's requirement of a legitimate error on the part of the administrator and approval would be granted.
A lump-sum payment of missed payments that is made by December 31 of the year in which pension payments were due to commence would not need our approval.
There is no restriction in the Regulations that would prevent the plan administrator from recovering benefits from the pensioner if an overpayment has occurred. However, the contribution of the overpayment amount back into the plan would not be permitted, because it is not considered a permissible contribution under paragraph 8502(b) of the Regulations. The Income Tax Act does not require an administrator to recover an overpayment from a pensioner if they should choose not to do so. An administrator may request an advance income tax ruling concerning any proposed payment into the plan to determine if it is a contribution, and to obtain certainty concerning tax consequences. If a favourable tax ruling is obtained, the administrator must submit to RPD or request the Income Tax Rulings Directorate of the Canada Revenue Agency to copy RPD on the ruling before making the payment.
It would not be acceptable to pay a reduced payment over a period of time in order to account for previous overpayments, because this action would further place the plan in a revocable position by continuing to provide a benefit to the pensioner that is not in accordance with the terms of the plan as registered.
Question 17 - $1.50 Past service pension adjustment exemption
Consider either of a plan that offers the greater of a flat benefit rate and a career average or final average earnings benefit formula, or a plan with a combination money purchase/defined benefit where the flat benefit is a minimum guarantee. In those cases, when there is a negotiated increase in the flat benefit rate, can the plan sponsor use the $1.50 exemption provided for by paragraph 8303(5)(g) of the Income Tax Regulations (Regulations)? In other words, would the Registered Plans Directorate confirm that the examples given above meet the condition in subparagraph 8303(5)(g)(iv) of the Regulation that only one fixed rate is applicable?
Answer 17:
In each of these cases, whether the provisions of subparagraph 8303(5)(g)(iv) of the Regulations would be applicable would have to be determined on a member-by-member basis. Subparagraph 8303(5)(g)(iv) of the Regulations states that only one fixed rate is applicable in determining the lifetime retirement benefits of the individual. If, in the examples outlined above, the individual's lifetime retirement benefits were determined using only the flat benefit portion of the formula, then the $1.50 exemption would be applicable.
Question 18 - Reversing a transfer to spousal registered retirement savings plan (RRSP)on marriage breakdown
If a spouse received a transfer to a registered retirement savings plan (RRSP) after marriage breakdown according to a separation agreement, then a subsequent revised agreement or court order says the spouse will receive no assets from the member's registered pension plan (RPP) (or a lesser amount than has already been transferred), will the Registered Plans Directorate provide written approval (administrative relief) to reverse the transfer and restore the monies to the RPP?
Answer 18:
The Income Tax Act does not allow the transfer of funds held for an annuitant of an RRSP to an RPP when the annuitant is not a member of the RPP. Consideration will be given to allow such a transfer or a payment directly from the annuitant to the RPP, according to a court order, on a case-by-case basis upon receipt of a written request setting out all relevant information (plan name and registration number, name of the individual, as well as a copy of the court order requiring the transfer, or payment by the annuitant, from the spouse's RRSP to the RPP of the member).
We will not give consideration to allowing such a transfer or payment solely on the basis of an amended separation agreement.
Question 19 - Pension adjustment reversal (PAR) for non-resident
Assume that a member has foreign credited service and is a non-resident at the time of termination of membership, and has "unused RRSP deduction room" (defined in subsection 146(1) of the Income Tax Act) during the period of foreign service. If the member's specified distribution related to those years is less than the pension adjustments reported for those years, please confirm that the member's PAR includes those years of foreign service, despite the non-accumulation of RRSP room during those years.
Answer 19:
The A factor (pension credits) and C factor (specified distribution) of the defined benefit PAR calculation, have no bearing on the fact that the individual accumulated unused RRSP deduction room during the period of foreign service. Therefore, both of these factors would include the period of the member's foreign service. This would be no different than many situations when an individual is off on a period of disability.
Question 20 - Quebec's indexing benefit
The Quebec Supplemental Pension Plans Act regulations were recently amended to remove the requirement that the additional benefit on cessation of plan membership be provided via additional lifetime pension benefits, and to permit the payment as a cash lump-sum payment.
Has the Registered Plan Directorate's requirement for specific plan language (i.e., specify how the value of the additional termination benefit is converted to non-past service pension adjustment (PSPA) additional pension) been relaxed or eliminated?
Please confirm that the cash lump-sum payment to which a member is entitled as a result of the Quebec additional benefit rule may be transferred along with the commuted value of the member's basic benefit entitlement on a tax deferred basis, provided the total transfer amount is less than the applicable transfer limit of section 8517 of the Income Tax Regulations (Regulations) (i.e., similar to the method described in Newsletter 98-2 , Treating Excess Member Contributions Under a Registered Pension Plan for post-1990 member contributions under the 50% cost sharing rule).
Answer 20:
If a registered pension plan is amended to include the additional pension benefit required under Quebec's Supplemental Pension Plans Act, the plan terms must identify the possible upgrades that are permitted under the Income Tax Act (Act). Our position outlined in Question 15 of our Frequently Asked Questions on our Web site has not changed.
Paragraph 8503(2)(m) of the Regulations allows for the commutation of the member's benefit under a defined benefit provision. The payment cannot exceed the present value of the member's benefits. Paragraph 8503(2)(m) allows for the present value to be determined as if the benefits were indexed. If the present value of the member's benefits, including the additional pension benefits of Quebec, is in excess of the prescribed amount, the excess has to be paid directly to the member in cash. Only the amount up to the prescribed amount can be transferred under the Act.
Question 21 - Quebec civil unions, Nova Scotia domestic partnerships, and Manitoba registered common-law relationships
The Quebec Supplemental Pension Plans Act requires the recognition of civil unions, which include unions between same-sex partners. The Nova Scotia Vital Statistics Act requires specific survivor benefits under the Nova Scotia Pension Benefits Act to be provided to the parties in a domestic partnership who may be same-sex partners. The Manitoba Pension Benefits Act requires the recognition of common-law relationships registered under the Manitoba Vital Statistics Act. In each circumstance, the entitlement to survivor benefits does not require a minimum period of cohabitation. Since same-sex marriages are now permitted, will the Canada Revenue Agency give the same recognition to Quebec civil unions, Nova Scotia domestic partnerships, and Manitoba registered common-law relationships as is given to marriage, i.e., no minimum period of cohabitation?
Answer 21:
The Income Tax Act (Act) recognizes only legally married spouses or common-law partners who have cohabited for at least one year (or less with a common child). The Act reflects the federal standard, and our understanding is that the federal government has no immediate plans to change any laws to recognize these new relationships.
Until such time as the federal laws are changed, if they are changed, we will require an overriding clause in pension plans that recognize civil unions, domestic partnerships, or similar partnerships, stating that only spouses and individuals meeting the definition of common-law partner in subsection 248 (1) of the Act will be entitled to receive: survivor benefits; benefits in respect of the division of property on or after the breakdown of the partnership; and the registered retirement savings plan (RRSP) rollover of death benefits from the registered pension plan under subsection 147.3(7) of the Act.
Question 22 - Issues arising out of the Transamerica case
To avoid requiring a case-by-case review, will the Registered Plans Directorate be establishing a policy that describes the situations when segregated accounts would be permitted along with conditions that would apply in those circumstances?
Answer 22:
The requirement for segregated accounts, typically occurring in situations when a purchase and sale or merger occurs, is a relatively new development. Permission for this segregation is granted on an administrative, case-by-case basis only 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.
We will review our current policy to determine if our processes can be more streamlined.
Question 23 - Paragraph 8515(7)(c) of the Income Tax Regulations - Indexing assumptions
Assume a designated plan where all members are pensioners (not restricted funding members), and the plan has no post-retirement indexing.
When the actuary prepares the normal valuation results without indexing assumptions, can we compare it to a maximum funding valuation that assumes 4% consumer price index (CPI) post-retirement indexing? That is, does paragraph 8515(7)(c) of the Income Tax Regulations (Regulations) accommodate an assumption of 4 % post-retirement indexing for maximum funding valuation, whether or not the registered pension plan terms have any post-retirement indexing provisions?
Answer 23:
When a plan as registered provides for no indexation of benefits after retirement, the CPI assumption is 0% for non restricted-funding members (e.g., pensioners) when determining the contributions that may be made to a registered pension plan that is a designated plan under section 8515 of the Regulations.
It should be noted that a plan with only pensioners can apply for a waiver of the designated plan status.
Question 24 - Under-contributions to money purchase accounts - Foregone earnings
Under-contributions also sometimes occur and additional amounts must be contributed to the members' accounts. The Canada Revenue Agency does not currently allow the plan sponsor to add the lost investment earnings to the members' accounts, notwithstanding that such amounts would have been tax-deferred funds if the error had not occurred. Is there any intention to change that policy?
Answer 24:
No, there is no intention for a change in policy. If the employer wants to make up for lost investment earnings, plan contributions in subsequent years may be increased subject to the annual limits in subsection 147.1(8) and (9) of the Income Tax Act.
