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- 3 147.2 – Pension Plan Contributions
3 147.2 – Pension Plan Contributions
3.1 147.2(1) – Deductible Employer Contributions
An employer's contribution to an RPP is deductible in computing the employer's income for a taxation year ending after 1990, if:
- The contribution is made in the year or within 120 days after the end of the year;
- It was not deducted in computing the employer's income in a previous taxation year; and
- It satisfies certain other conditions that depend on whether the contribution is made under a MP or DB provision of a plan or under a SMEP.
Cross References:
Permissible Contributions – 8502(b)
Qualifications as a SMEP – 8510(3)(e) & (f)
3.2 147.2(2) – Employer Contributions – Defined Benefit Provisions
For the purposes of subsection 147.2(1) of the Act, a contribution made by an employer to a DB plan is an eligible contribution, if:
- It is a prescribed contribution; or
- It complies with the prescribed conditions and is made based on an actuary's recommendation to ensure that the plan has sufficient assets to pay benefits under the DB provision of the plan; and
- The Minister has approved the recommendation in writing.
For the actuary's recommendation to be acceptable, it must be based on an actuarial valuation that meets the following conditions:
i) The effective date of the valuation report is no more than 4 years before the day on which the contribution is made. For example, where the Minister has approved contribution levels recommended by an actuary and the relevant valuation report has an effective date of December 31, 1990, contributions made based on that approval would be eligible contributions if made before December 31, 1994.
Note – Actuarial reports are not required for legislated plans if the funds are held in a federal or provincial consolidated revenue account. However, where a legislated plan has set up a trust fund or other funding media outside of the consolidated revenue account, a report has to be filed for contributions to that fund.
ii) Actuarial liabilities and current service costs are based on a funding method that matches contributions with accrued benefits on a reasonable basis. This precludes the use of methods that may result in excessive advance funding of benefits or that do not generate a liability that is based, in a reasonable way, on accrued benefits. Actuarial liabilities based on the solvency funding requirements of the PBSA or provincial PBAs are considered reasonable. Also, where the plan is not subject to a PBA, or the PBA does not require solvency-based funding, actuarial liabilities may be based on the PBSA solvency funding requirements. This being said, funding a plan when there are benefits, using a pay-as-you-go “method”, does not meet the conditions of this subparagraph because that method does not produce a reasonable matching of contributions with accruing benefits.
iii) All assumptions made at the time of the valuation are reasonable at that time and at the time the contribution is made. Assumptions that are unduly conservative, for example, would not be regarded as reasonable. Where assumptions that are initially reasonable become unreasonable a revised valuation report will have to be prepared.
iv) The valuation is prepared using generally accepted actuarial principles.
v) If applicable, the valuation complies with the designated plan valuation restrictions.
vi) Where there is more than one employer participating in the plan, the assets and liabilities must be apportioned in a reasonable manner.
vii) If the employer makes contributions to a designated plan to cover expenses, in addition to the cost of benefits, total contributions are subject to the maximum funding restrictions of subsections 8515(5), (6) and (7) of the Regulations.
Where the required assumptions for designated plans are inconsistent with conditions (iii) or (iv), the rules for designated plans apply.
Where the plan has an actuarial surplus, paragraph 147.2(2)(d) of the Act permits a certain portion of it to be disregarded in determining eligible contributions. The calculation of a surplus is made with respect to the plan as a whole, excluding only the assets and liabilities belonging to the plan's MP provisions, if any. That is, the funding position of all DB provisions under the plan are examined to determine whether a surplus exists. An amount of surplus in excess of the amount that can be disregarded is referred to as an excess surplus.
An excess surplus can be:
- Used to fund new or improved benefits;
- Offset against the employer's obligation to fund benefits; and/or
- Refunded to the employer or members.
Even when an excess surplus is being offset against the employer's obligation to fund benefits, there may still be a requirement for employer contributions.
Example
The actuary recommends employer contributions of $100,000 for each of the plan years 2000, 2001 and 2002. An excess surplus of $100,000 appears to exist. However, further review of the AVR discloses that $75,000 of the excess surplus was used to fund improved benefits. In addition, the balance of $25,000 is being applied against the employer's obligation to make contributions for 2000. Therefore, in reality the actuary is recommending contributions of $75,000 for 2000.
If all or a portion of an excess surplus is used to fund new or improved benefits, such use has to be supported by an amendment. New or improved benefits include:
- Recognition of service not previously pensionable;
- Improving the benefit accrual rate;
- Adding an ancillary benefit;
- Upgrading an ancillary benefit;
- Broadening of the definition of pensionable earnings to include additional remuneration.
Where a plan is amended during the inter-valuation period to upgrade past service benefits, the actuary has to apply any existing surplus against the new liability in determining whether the employer may make additional contributions to cover the cost of the benefit upgrade. This means that the actuary has to determine any funding requirements arising from the amendment based on the plan's net financial position.
Example
A valuation of the plan as of January 1, 2001 reveals the following:
|
Assets |
$8,560,000 |
|
Liabilities |
$8,300,000 |
|
Surplus (not an excess) |
$260,000 |
|
Annual employer current service costs |
$500,000 |
On January 15, 2001, the plan is amended to upgrade past service benefits at a cost of $200,000. The actuary prepares an interim cost certificate reflecting the new liability. Assuming no other changes to the assets, liabilities, and current service costs, the actuary has to apply the existing surplus of $260,000 against the plan's total liabilities of $8,500,000 ($8,300,000 + $200,000) in determining whether additional contributions need to be made to fund the new liability. Since the plan is fully funded on a net basis at the date of the interim cost certificate, the employer may not make any additional past service contributions. In other words, a contribution for the new liability is not required for the plan to have sufficient assets to pay the promised benefits. The rule in paragraph 147.2(2)(d) does not allow the actuary to disregard the surplus assets that were revealed in the January 1, 2001 valuation in determining any funding requirements arising from the amendment.
If instead the cost of the amendment was $300,000, the actuary could recommend that the employer contribute an additional $40,000 to cover the unfunded liability ($8,560,000 - $8,600,000). Also, if the amendment increased the cost of current service benefits, the actuary could make a recommendation for additional current service contributions. As long as the actuary can make a reasonable determination of the plan's financial position at the date of the interim cost certificate, we would not require a new valuation in support of the recommendation.
Cross References:
Eligible Contributions – 8515(5)
Funding Restrictions – 8515(6)(e)
Eligible Contributions – 8516
Newsletter No. 96-1, Changes to Retirement Savings Limits
Newsletter No. 95-3, Actuarial Report Content
3.3 147.2(3) – Filing of Actuarial Report
An actuarial report must be filed with us whenever the employer is seeking the Minister's approval, under subsection 147.2(2) of the Act, of the actuary's recommendation for contributions. The report has to be prepared by an actuary and has to contain all the information set out in our Newsletter No. 95-3, Actuarial Report Content. In certain circumstances, we may require other information in addition to that outlined in the newsletter. For example, we may ask the actuary to submit a copy of the valuation working papers for our review.
In cases where employer contributions are made based on the existing AVR while the latest AVR is being prepared and the latest AVR when completed, discloses an excess surplus – we will consider on a case-by-case basis whether employer contributions during the interim period (after the effective date of the latest AVR) may be refunded or allowed to remain in the plan.
If an actuarial valuation report is prepared during the three-year period for which the Agency's funding approval has already been given, and the results show that an excess surplus has emerged, either the plan must be improved to use up some of the surplus, the surplus must be refunded to the employer or members, or the surplus must be offset against the employer's funding obligation.
If no plan improvements or surplus withdrawals are made, employer contributions based on the old recommendation, made after the effective date of the new recommendation that do not take into account the extent of the excess surplus are not technically eligible because the surplus retention limit condition applicable to the new recommendation would not be satisfied.
The Agency has given administrative relief to employers that have stopped remitting contributions immediately after becoming aware of the existence of an excess surplus. In these cases, the employer has justified that the ineligible contributions had been made based on the previous actuarial recommendation and prior to becoming aware of the existence of the excess surplus.
3.4 147.2(4) – Deductible Employee Contributions
Subsection 147.2(4) of the Act provides 3 separate rules for the deductibility of employee contributions:
- Service after 1989
- Service before 1990 while not a contributor
- Service before 1990 while a contributor
3.4.1 147.2(4)(a) – Service After 1991
Paragraph 147.2(4)(a) allows employee contributions that are made after 1990 under a MP or DB provision of an RPP, in respect of service after 1989, to be deductible in computing the individual’s income.
3.4.2 147.2(4)(b) – Service Before 1991, While not a Contributor
Paragraph 147.2(4)(b) applies to contributions made by an employee for years prior to 1990, where the employee was not a contributor to an RPP. The deduction is limited to lesser of:
- The amount of the contribution (excluding AVCs and prescribed contributions) made by the individual in the year or previous year less those contributions already deducted;
- $3,500; and
- $3,500 for each year before 1990 where the individual was not a contributor to any RPP (must be eligible service) less any previous deductions in respect of those contributions and less any deductions claimed under subparagraph 8(l)(m)(ii) of the Act in respect of AVCs.
3.4.3 147.2(4)(c) – Service Before 1991, While a Contributor
Paragraph 147.2(4)(c) allows an individual to deduct the contributions made to an RPP in respect of years of service prior to 1990 while a contributor to an RPP. The maximum deduction permitted in a year is equal to or lesser of:
- The amount of the contribution (excluding AVCs and prescribed contributions) made by the individual in the year or previous year less those contributions already deducted; and
- $3,500 less the total of amounts deducted by reason of paragraph 147.2(4)(a) and (b) of the Act.
The previous limits on deductibility of employee contributions to MP plans have been replaced by the PA limits (subsection 147.1(8) and 147.1(9) of the Act). See also paragraph 8503(4)(a) - Limits on Employee Contributions to DB provisions.
3.5 147.2(5) – Teachers
Subsection 147.2(5) of the Act provides a special rule with regards to teachers. The rule applies to teachers, who were or are employed by her Majesty, who makes or has made contributions to an RPP for service prior to 1990 allowing them to deduct (if not previously done) contributions after 1990 and before 1995. This rule enables a teacher to take advantage of an additional annual $3,500 deduction.
3.6 147.2(6) – Deductible Contributions when a Taxpayer Dies
Subsection 147.2(6) of the Act allows for contributions of a deceased member to be deductible for the year that they died, as well as the preceding year.