Questions and Answers
- Non-resident plan administrator
- Paying indexing from an RPP after annuity purchase
- Including stock options in compensation for pension plan purposes
- Self-annuitized money purchase plans
- Lump-sum payment of retroactive unpaid monthly benefits
- Alberta and British Columbia's pre-retirement death benefit
- Retroactive plan registration
- Employer contributions in a designated plan
- Industrial aggregate wage index
- Recognition of pre-reform service previously commuted
- Quebec's civil unions
- Notice of late-filed Annual Information Returns
- Seamless pension plans
- Extension of filing deadline for PSPAs exempt from certification
- Adjustments for actuarial equivalents in the event of late retirement
Question 1 - Non-resident plan administrator
What are your current requirements where there is a non-resident pension plan administrator?
Answer 1
As prescribed by subsection 147.1(6) of the Income Tax Act, there must be a person or body of persons that are ultimately responsible for administering a registered pension plan. Additionally, this body must be resident in Canada unless the Minister has permitted otherwise in writing.
The Minister will consider permitting a non-resident to be the plan administrator if the Minister can be assured that the non-resident administrator will be able to comply with the conditions required under the Act and Regulations. A non-resident administrator must confirm in writing that it, she, he, or the majority (where a body of persons is the administrator and the majority reside outside Canada) can comply with all of the conditions required by the legislation including filing information returns, pension adjustments, reversals, and past service pension adjustments (as required).
A non-resident plan administrator must also confirm in writing that the administrator will retain the books and records and make them available, upon request, for examination by the Canada Customs and Revenue Agency (CCRA) (either by submitting them to a Tax Services Office or by assuming the travel costs of a CCRA officer to the location of the books and records).
A letter of undertaking from the non-resident administrator confirming the above-noted matters must be provided before Ministerial permission can be granted.
Question 2 - Paying indexing from a DB plan after annuity purchase
Does the Income Tax Act (ITA) permit a defined benefit pension plan to provide lifetime retirement benefits (LRBs) by means of an annuity purchased from an insurance company and yet continue to pay to index those benefits from the registered pension plan (RPP)?
Answer 2
When an individual acquires an annuity in satisfaction of the individual's entitlement to benefits under a registered pension plan, the individual then becomes entitled to rights under the annuity contract. The Act allows pension plans to index a member's LRBs up to the change in the federal Consumer Price Index (CPI) in the years following pension commencement.
When a member's LRBs are provided by purchasing an annuity, paragraph 147.4(1)(g) of the Act specifies that these amounts are not considered to be paid from the registered pension plan for purposes of the registration rules. Therefore, there would be no LRBs remaining in the plan following the annuity purchase, so there would be nothing left to index. Furthermore, there is no provision in the Act for an RPP to provide for an individual's benefits to be indexed while they are paid under an annuity contract.
Furthermore, the flat rate 4% indexing provision permitted by paragraph 8503(2)(a) of the Income Tax Regulations (ITR) was specifically introduced by the Department of Finance to simplify the purchase of annuities for those individuals not restricted by the CPI maximum indexing provision as stipulated by paragraph 8504(1)(b) of the ITR.
Question 3 - Including stock options in compensation for pension plan purposes
Does the Income Tax Act (ITA) permit a registered pension plan (RPP) to include stock options in compensation for pension purposes?
Answer 3
We recognize that providing stock options is now a fairly common form of employee compensation. "Compensation" is defined under subsection 147.1(1) of the ITA and includes "the total of all amounts each of which is (a) an amount in respect of (i) the individual's employment with the employer, or (ii) an office in respect of which the individual is remunerated by the employer, that is required (or would be required but for paragraph 81(1)(a) as it applies with respect to the Indian Act) by section 5 or 6 to be included in computing the individual's income for the year..."
Paragraph 6(1)(a) of the ITA includes "benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office of employment" in income. Based on an opinion we have received from the Income Tax Rulings Directorate, a stock option benefit to which subsection 7(1) of the ITA applies would be required by section 6 of the Act to be included in income. Therefore, it would be included in the computation of compensation, as defined in subsection 147.1(1) of the ITA, for purposes of an RPP.
In light of this recent opinion, we are taking a look at how this may affect RPPs in general. If you have any specific concerns or thoughts on the issue, please send them to the Directorate in writing.
Question 4 - Self-annuitized money purchase plans
Paragraph 8506(2)(g) of the Income Tax Regulations (ITR) requires that retirement benefits payable under a money purchase provision of a registered pension plan (RPP) be provided either by means of annuities purchased from a licensed issuer of annuities or under an arrangement acceptable to the Minister. The technical notes to this paragraph state that it is expected that the Minister will accept a self-insured arrangement for paying retirement benefits where the arrangement is, in substance, similar to the purchase of annuities from an issuer of annuities.
The CCRA was to determine the conditions that would be imposed for any money purchase provision to pay for the plan's pensions.
Where does this matter stand?
Answer 4
Our position regarding self-insured money purchase provisions remains the same. Such arrangements are not acceptable, except where they were established prior to March 27, 1988.
One of our main concerns regarding self-insured arrangements is that the Regulations do not permit additional funding for deficits resulting from experience losses. Therefore, we are not in a position to approve any additional funding of these arrangements. We are not aware of any instances in which RPD has approved deficit funding under a money purchase provision.
Currently, we are compiling information for the Department of Finance to assist in their review of self-insured arrangements. We are attempting to determine the number of plans of this kind that are presently registered. In addition, we are maintaining a record of the plans that are requesting additional funding because of the current market downturn. Once compiled, this information will be sent to the Department of Finance for their consideration.
Question 5 - Lump-sum payment of retroactive unpaid monthly benefits
While lump sum payments of unpaid pension amounts violate paragraphs 8503(2)(a) and 8502(e) of the Income Tax Regulations (ITR), the CCRA does give consideration to lump such payments when the delay is beyond the control of the employee.
In the interest of expediency and consistency, we ask that CCRA reconsider its position or ask the Department of Finance to amend the Regulations to permit lump sum catch up payments.
Answer 5
Since amending the Regulations to accommodate lumps sum catch up payments would add significantly to the complexity of already complex regulations, these payments have to be handled administratively. They are given high priority in the Registered Plans Directorate (RPD). Senior analysts from the enquiries group of the Registration Division review these requests. Every effort is made to ensure that these cases are considered on a consistent basis. Our Technical Services Section reviews all decisions before giving our response. As noted, favourable consideration is generally given when the delay in starting pension payments is beyond the control of the employee.
Our refusal letters state that if the information provided does not reflect the actual situation, the recipient should inform us so that we can reconsider the request. This measure is intended to provide an opportunity for further consideration if the facts are not as originally stated or are incomplete. It is not our practice to refuse a payment that is required pursuant to a court order.
To expedite the process in circumstances such as insolvency or bankruptcy, we would consider giving a general approval to make these payments out of a specific plan where several members are affected. While we may not require a specific request for each member, we would require a formal request to make catch up payments including an explanation of the circumstances and the number of members who are affected. We may request other information depending on the circumstances.
The Directorate will look for ways to alleviate the administrative burden that the current process places on both the industry and RPD.
If payment of benefits has not begun because the employee cannot be located, we would have no objection to the member's benefit being paid in a form permitted under the terms of the plan. The payments could be placed in an account on behalf of the member with the proper reporting being completed. This would meet the requirements of Regulation 8502(e). Once the delay is resolved, the lump sum payment could be made from the account maintained outside the plan, and the remaining payments could be made to the member. We strongly recommend using this option in appropriate circumstances. Otherwise, the plan administrator could be subject to penalty under subsection 162(7) of the Act for failing to administer the plan as registered.
Question 6 - Alberta and British Columbia's pre-retirement death benefit
Alberta's Employment Pension Plans Act and British Columbia's Pension Benefits Standards Act require that pre-retirement death benefits be payable to the beneficiary of a plan member's spouse in the event that both the plan member and the plan member's spouse are deceased. The Income Tax Act and Regulations do not address such payments; however, RPD has recently provided confirmation that the provision for plan members employed in these provinces is acceptable provided the payment to the spouse's beneficiary is a lump sum payment. Can this benefit be extended to plan members employed in other provinces where those other jurisdictions do not require this benefit in their legislation?
Answer 6
As noted, the Regulations do not explicitly address the payment of a death benefit to the beneficiary of a plan member's spouse. However, we will accept a plan provision providing for such a payment provided the payment is made in a lump sum.
We can confirm that such a benefit can be extended to plan members employed in other provinces where the jurisdiction does not require this benefit in their legislation.
Question 7 - Retroactive plan registration
Under certain circumstances, the Canada Customs and Revenue Agency (CCRA) will consider an effective date before the year of application for registration. At the 2001 consultation session, the CCRA advised that they would recommend to the Department of Finance that they reconsider legislative changes to accommodate these specific circumstances. What is the status of this issue?
Answer 7
Under the legislation, in order for a plan to be given an effective date of registration in a particular year, prescribed documents must be submitted by the end of that calendar year.
Our position regarding earlier effective dates still stands. Requests are considered on a case-by-case basis. An earlier date is only granted in the very limited circumstance in which there is no break in pension coverage from an existing plan to a new plan.
We have approached the Department of Finance on this matter to discuss a legislative change to accommodate these specific circumstances. As there are a limited number of such cases, no legislative change is anticipated at this time.
Question 8 - Employer contributions in a designated plan
An employer contribution that is required to fund a solvency deficiency when a plan is a designated plan is not an eligible contribution under subsection 8516(8) of the Income Tax Regulations (ITR). It seems that this potential conflict between the ITR and provincial legislation of Quebec has been resolved but has it been resolved in other provinces? Does the condition in ITR paragraph 8516(8)(d) prohibit employer contributions from being made to a designated plan so that the plan is funded on a going-concern basis (including any deficit)?
Answer 8
A contribution made by an employer to a registered pension plan (RPP) as part of a defined benefit provision is an eligible contribution if it complies with prescribed conditions under Income Tax Act (ITA) subsection 147.2(2) and ITR section 8515 for a designated plan, or if it is a prescribed contribution under ITR section 8516. Therefore, an employer contribution required by pension benefits legislation to fund a designated plan on a going-concern basis and made in accordance with ITA subsection 147.2(2) and ITR section 8515 is an eligible contribution. However, additional employer contributions required by pension benefits legislation (for example, to fund a solvency deficiency) are not eligible contributions under ITR subsection 8516(8) when the plan is a designated plan.
This potential conflict between the ITA and pension benefits legislation was raised before the enactment of ITR subsections 8516(7) and 8516(8). At the time, the position was taken that the contributions prescribed by these regulations would not apply to designated plans. Since then, pension benefits legislation in several jurisdictions was amended to either not legislate designated plans with connected persons or/and to specify that an employer required to make contributions under a designated plan shall not be required to make a payment to the pension fund (or to an insurance company, as applicable) that is not an eligible contribution under the ITA. Therefore, this potential conflict was often avoided before it would occur. For example, conflicts appear to have been resolved by Alberta regulation 48(22), British Columbia regulation 2(2)(c), Ontario regulation 909 subsection 4(2.1) and Quebec section 39.1 of the Supplemental Pension Plans Act.
Whether particular provinces still require funding in excess of what is permitted by the ITA limits should be pursued with the provinces. However, the Minister of National Revenue may revoke the registration of any pension plan that permits or provides for contributions in excess of the maximum limits established under the ITA.
Paragraph 8503(4)(c) of the Regulations requires an RPP with a defined benefit provision, which is not exempted by virtue of subsection 8509(10.1), to include a stipulation permitting contributions under the provision to be returned where the return is necessary to avoid revocation of the plan's registration. The regulations provide that the return of contributions is subject to the approval of the authority administering the pension benefit legislation. Whether or not a plan is required to contain this stipulation, the plan administrator will have to deal with the non-compliance if registration is to be maintained. Note that several pension benefits acts were amended to resolve the conflict between their requirements and those of the Income Tax Act and Regulations respecting return of contributions by providing pension plans with exemptions from specific sections of the pension benefits acts, subject to the satisfaction of identified conditions.
Question 9 - Industrial aggregate wage index
Since Statistics Canada discontinued the Standard Industrial Classification of 1980 (SIC) Industrial Aggregate effective December 31, 2000, how should one calculate the increase in average wage measure from 1984 to 2002?
Answer 9
When calculating the increase in average wage measure from 1984 to 2002, one should first calculate the increase using the SIC Industrial Aggregate up to and including 2001, and then calculate the increase using the North American Industrial Classification System (NAICS) Industrial Aggregate from 2001 onwards.
This method ensures consistency as (1.) previously determined Years Maximum Pensionable Earnings (YMPEs) are unlikely to be re-determined and (2.) the trend for the annual averages at the Canada level for the industrial aggregate from 1991 to 2000 on NAICS System has remained similar to the one previously published on the SIC80 System.
Question 10 - Recognition of pre-reform service previously commuted
When recognizing pre-reform service that was previously commuted, would it be acceptable for the plan sponsor to ask the member to transfer from an RRSP an amount equal to the benefit received, plus accrued interest, in order to fund the benefit?
Answer 10
Pension Reform Update 92-12 requires that, if a member has previously commuted their pre-reform benefits and wishes to buy back that service, the plan must state that the amount necessary to fund the pre-reform benefit must be transferred directly from a registered retirement savings plan (RRSP), a deferred profit sharing plan (DPSP), or another registered pension plan (RPP).
Paragraph 8503(3)(e) of the Income Tax Regulations (ITR) requires that all pre-reform benefits be acceptable to the Minister. Paragraph 8502(j) of the ITR also 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.
Consequently, the amount transferred back into the plan must relate to the cost of the benefit being restored and not linked to the cost of the benefit previously paid out.
Question 11 - Quebec's civil unions
Quebec's Supplemental Pension Plans Act (SPPA) now requires recognition of civil unions between same-sex partners; however, the Income Tax Act (ITA) does not recognize these unions and qualifies same-sex partners only through its definition of "common-law partners." How do you propose to reconcile the two acts where a plan member dies and his or her surviving partner qualifies as the member's partner under SPPA's definition of civil union but does not qualify under the ITA's definition of common-law partner?
Answer 11
We understand that Quebec's Civil Code recognizes civil unions between same-sex spouses, which may result in benefits being provided to individuals who are not entitled to such benefits under the ITA. We also understand that other jurisdictions may recognize relationships similar to Quebec's civil unions.
The ITA, like all other federal legislation, recognizes only legally married spouses or common-law partners who have co-habited for at least one year (or less with a common child). The ITA reflects the federal standard, and our understanding is that the federal government has no immediate plans to change any laws, including the ITA, to recognize these new relationships. However, this issue has been referred to the House of Commons Standing Committee on Justice and Human Rights, as part of the broader question of marriage and legal recognition of same-sex unions. In November 2002, the Honourable Martin Cauchon, Minister of Justice, asked the Standing Committee to study possible policy approaches to this issue, to hear from Canadians, and to provide him with recommendations on possible legislative reform by March 31, 2003. For more details on this issue, including a discussion paper, refer to the Justice Canada Web site (http://canada.justice.gc.ca/en/news/nr/2002/doc_30730.html).
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, or similar partnerships, stating that only spouses and individuals meeting the definition of common-law partner in subsection 248(1) of the ITA 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 RRSP rollover of death benefits from the registered plan under subsection 147.3(7) of the ITA.
Question 12 - Notice of late-filed Annual Information Returns (AIR)
Please update us on steps taken by the CCRA to resolve this past summer's problem of Notices of Late-Filed AIRs, which were incorrectly sent to some plan administrators.
Answer 12
Notices of Late Filed AIRs were incorrectly mailed to all Quebec plans in late August. As this was the first year of harmonization with the province, the information sharing had not been completed in time and notices were automatically released. The situation has been rectified, and Quebec plans that filed with the province should not receive any further notices for this filing period.
Question 13 - Seamless pension plans
Please provide an update on the CCRA's review of using Registered Pension Plan (RPP) surplus to satisfy supplemental (excess over Income Tax Act (ITA) limits) pension liabilities.
Answer 13
This question is an update of a question asked at our previous consultation session on December 6, 2001 (www.cra.gc.ca/tax/registered/rpp_cqa01-e.html#q8).
At the time of our response last year, the Registered Plans Directorate was refusing to register such an arrangement. Based on our interpretation of subsection 147.1(2) of the ITA, we felt that there was a requirement that the same plan be registered both federally and provincially. As the province would be registering a more extensive and, therefore, different document than the CCRA, we would not accept the RPP portion of the larger plan.
Since the industry showed significant interest in pursuing these arrangements, we re-examined our position in consultation with the Department of Justice. We have determined that we may be able to register plans that do not contain the same documents as those registered provincially. As mentioned in our previous response to this issue, we are now drafting conditions under subsection 147.1(5) of the ITA to address our concerns with these arrangements. We are drafting these conditions in consultation with the Department of Finance and the Department of Justice, and we will seek feedback from the industry before finalizing the conditions.
Question 14 - Extension of filing deadline for Past Service Pension Adjustments (PSPAs) exempt from certification
Can the filing deadline on the T215 form for Past Service Pension Adjustments (PSPAs) exempt from certification be extended beyond the currently required 60 days?
Answer 14
In 2001, new legislation was implemented to allow past service events to affect an individual's registered retirement savings plan deduction room for the following calendar year instead of the year of the past service event. The new legislation was based on numerous requests of pension plan administrators to the Canada Customs and Revenue Agency (CCRA) to change the event date. This was especially true for PSPA events that occurred in the last quarter of the year.
We understand that it is very time consuming to file the T215 return for large plans within 60 days of the event date as stipulated in subsection 8402(1) of the Income Tax Regulations. Fortunately, the implementation of the lag year may provide greater leeway on the filing deadline. The CCRA supports a proposal to extend the deadline by an additional 60 days. This would make the filing deadline 120 days from the event date. We intend to pursue changes to the Regulations to this effect.
Since amending the T215 filing deadline is a legislative issue, we have approached the Department of Finance, and they seem very receptive to the proposal. We have drafted a memorandum to the Legislative Policy Directorate of CCRA advocating our support for an extension to the T215 filing deadline. We will provide an update on the legislative change at the next Consultation Session.
Question 15 - Adjustments for actuarial equivalents in the event of late retirement
In the event of late retirement after the normal retirement age of 65, can a plan text provide that lifetime retirement benefits be adjusted by an actuarial equivalent for service accrued after (as well as before) age 65, even if the limit of $1,722.22 has been reached?
Answer 15
Please take note that the answer to question 15 on adjustments for actuarial equivalents in the event of late retirement that was initially provided at the Registered Pension Plan consultation session held November 21, 2002 and that was subsequently posted on our web site has been withdrawn. The question is the subject of further consultations and an answer will be posted as soon as it becomes available.
