Registered Plans Directorate Newsletter, no. 91-4
October XX, 1991

Registration Rules for Money Purchase Provisions

Table of contents

Part A - Introduction

Part B - Registration rules for money purchase provisions

1. Introduction
2. Eligible service
3. Contributions
4. Transfers and conversions
5. Benefits
6. Summary of prescribed registration conditions (draft Regulation section 8501)
7. Conclusion

Part A - Introduction

1. This Pension Reform Update is the sixth in a series of newsletters issued by the Registered Plans Division of Revenue Canada, Taxation. The newsletters outline the administrative policies and procedures that have been developed because of income tax changes relating to pension reform.

2. This Update will let plan administrators, pension consultants and employers know about the Department's registration requirements for plans that provide benefits under one or more money purchase provisions.

Note: Rules relating to money purchase provisions in specified multi-employer plans will be dealt with in a future Update.

3. The information contained in this newsletter is based on the provisions of Bill C-52 which received royal assent on June 27, 1990, and on the related draft Regulations released by the Minister of Finance on July 31, 1991.

Note: The numbering of certain sections of the draft Regulations has changed from the December 1989 release. We have used the references in the July 1991 release in this newsletter.

4. We have made every effort to explain what the legislation requires in plain language. However, because of the technical nature of the subject, we could not avoid some technical explanations. If you need to refer to the exact wording, you must consult the references in the Income Tax Act (the Act) and draft Regulations that apply.

Part B - Registration rules for money purchase provisions

1. Introduction

5. According to subsection 147.1(1) of the Act, a money purchase provision generally means the terms of the plan which require that a separate account is established for each member into which are credited the member's and the employer's contributions for the member, plus any other amounts allocated to the member. The only payments or benefits that are payable to the member are those which can be provided by the amount in the member's account.

6. All money purchase provisions are subject to the legislative requirements that govern them. This not only applies to "stand- alone" money purchase plans where an employer provides retirement benefits solely on a money purchase basis, but also to defined benefit plans which have one or more money purchase provisions (for example, defined benefit plans that permit additional voluntary contributions).

7. In this newsletter, when we refer to a money purchase "plan," please keep in mind that we also mean any money purchase "provision," whether it forms part of a money purchase plan or a defined benefit plan.

8. All money purchase plans must comply with the legislation effective January 1, 1989, regardless of when they were submitted to the Department for registration. However, some legislative provisions do not take effect until January 1, 1991.

9. "New plans" (plans submitted for registration after March 27, 1988, and before royal assent) were registered on the condition that they would be administered according to the legislation once it received royal assent. Although the legislation received royal assent on June 27, 1990, the related Regulations have yet to be promulgated. Consequently, benefits may have been paid out of such plans, as well as out of other plans, after December 31, 1988 which, under the draft Regulations, would cause the plan to become revocable. Subsection 8509(10) has been added to allow benefits that are derived from contributions made before 1992, to be paid out of a money purchase plan. See paragraph 27 below.

10. Because of the delay in making the draft Regulations law, money purchase plans will have one year after the Regulations are made law to be amended to comply with the new legislation.

11. Effective immediately, the Department will review plan amendments which have been prepared for compliance with the revised Income Tax Act, and draft Regulations released in July of 1991. Our approval of these amendments will be subject to the applicable draft Regulations being passed into law as per the July 1991 release.

2. Eligible service

12. The extent to which service with a participating employer is considered pensionable service under a money purchase pension plan is directly related to whether or not the earnings received from the employer for that period of time are included in the definition of "compensation" under subsection 147.1(1) of the Act. This definition generally includes salary, wages and other remuneration including gratuities received in the year or the value of taxable benefits required to be included in the income of the individual. It also includes remuneration received for foreign service during which the individual was resident in Canada as long as the remuneration is taxable in Canada. Remuneration by a non-resident may be included if it is either related to services rendered in Canada, or is taxable in Canada.

13. For paid leaves of absence under the legislation, as long as the earnings received during the period complies with the definition of "compensation," all such periods may be included in eligible service, and contributions may continue to be made during the period.

14. The definition of "compensation" also includes a "prescribed amount". This amount is essentially deemed earnings and it is only used under certain circumstances to allow contributions to continue during periods when actual earnings are not enough to support a contribution.

14.1. For unpaid leaves of absence during an "eligible period of temporary absence" or a "period of disability" as defined in draft Regulation 8500(1), if the period is to be included in pensionable service after 1990, earnings upon which contributions are based, must include a "prescribed amount". This will prevent the plan becoming revocable because the pension adjustment limits have been violated. Please note that a leave of absence for parental leave following the birth or adoption of a child is included in the definition "eligible period of temporary absence".

14.2. Similarly, if contributions are permitted to continue unreduced during an "eligible period of reduced pay" after 1990 [as defined in draft Regulation 8500(1)], earnings must also include a "prescribed amount" so that the plan does not become revocable because the pension adjustment limits have been violated [147.1(8),(9), 8507].

14.3. The pension adjustment limits are based on compensation. As a result, the extent of pensionable service that may include any such periods is related to the amount and limit of the "prescribed amount". The "prescribed amount" may not include any period of time when the individual works for another employer and is an active member of that other employer's separate registered pension plan (RPP) or deferred profit sharing plan (DPSP).

14.4. The limit on the "prescribed amount" for eligible periods of temporary absence and reduced pay is five years' worth of full-time remuneration from the employer (including non arm's- length employers and other participating employers). The limit on the "prescribed amount" for parental leave is twelve months following the birth or adoption of a child to a maximum of three years' worth of full-time remuneration [8507].

14.5. Starting January 1, 1991, connected persons (see paragraph 15 below) may not include any eligible periods of temporary absence or reduced pay in pensionable service [8507].

15. Please note that the concept of a "person connected with an employer," (connected person) and thus the individuals to whom this term applies, is much broader than the term used in Information Circular 72-13R8 (the Circular) to describe significant shareholders and related persons. Not only does it include individuals who own 10% or more of the issued shares of any class of the employer or related corporation, it also includes individuals who are connected by blood relationship, marriage, or adoption [8500(3)].

3. Contributions

16. Starting with contributions made from January 1, 1991, whether or not employer and employee contributions to a registered pension plan are deductible is governed by the provisions of subsections 147.2(1) and 147.2(4) of the Act respectively. These subsections in part state that a contribution is deductible to the extent that it was made according to the plan as registered. Thus, the limits on the amount of deductible contributions that may be made to a money purchase plan are no longer specifically determined by the Act, but by the terms of the plan.

17. As a prescribed condition for registration (and continuing registration), there must be no reason to expect that the plan may become a revocable plan because the pension adjustment limits of subsections 147.1(8) or (9) of the Act have been violated. Consequently, the plan terms may not provide for contribution levels after 1990 that would cause a member's pension adjustment to exceed those pension adjustment limits. Should these limits be unintentionally violated, the legislation requires each plan to explicitly provide for the return of both employer and employee contributions to the contributor to avoid the revocation of the plan's registration [8506(2)(d)].

18. As a general administrative rule, in a "stand-alone" money purchase plan, the employer must contribute at least 1% of each member's earnings, but not more than the money purchase limit for that year.

19. If the contribution formula under the plan is based solely on a percentage of each member's earnings from the employer for the year, the maximum acceptable percentage is 18%, but not more than the money purchase limit for that year.

20. If the contribution formula is based solely on a specific dollar amount, that amount may not be more than the lesser of 18% of the member's compensation from the employer for the year, and the money purchase limit for the year.

21. If any forfeited amounts (excluding pre-1990 forfeited amounts allocated in 1990) or surplus funds are to be allocated to the member's account in the year (or transferred under section 147.3 of the Act), they must be included in the total contributions made to the plan for the member. The total contributions including allocations and transfers, are used to determine the member's pension credit from the employer for the year, which in turn forms part of the member's pension adjustment. The pension adjustment is subject to the pension adjustment limits of subsections 147.1(8) or (9) of the Act. The definitions of "forfeited amount" and "surplus" are defined in subsection 8500(1) of the draft Regulations.

22. If the plan requires or permits employer and/or employee contributions to be made during a period of disability, temporary absence or reduced pay (see paragraph 14 above), the plan's definition of annual earnings used to determine the contributions must include terms such as either "a prescribed amount", or "prescribed compensation" as described in the Income Tax Act and Regulations.

22.1. According to the provisions of subsections 8308(5) and (6) of the draft Regulations, contributions can be made after these periods end. The contributions must either be made within the time limits described in subsection 8308(5), or the employee can enter into a written commitment to make the contributions later. This written commitment must be made within the same time limits. For purposes of calculating the individual's pension adjustment, the contribution relating to each of the previous years is deemed to have been made in those previous years, not in the year that it is actually made. The pension adjustment for each previous year (which now includes the amount of the contribution), may not be more than the pension adjustment limits for that year, or the plan becomes revocable at that time.

23. When contributions are allowed during a period of foreign service, if the employee is resident in Canada, the earnings from this period must be taxable in Canada. If contributions are allowed to be made by an individual who is a non-resident, the earnings from this period must either be taxable in Canada, or related to services rendered in Canada. These requirements should be reflected in the plan's definition of annual earnings upon which the contributions are based. In all other cases, prior written approval of the Department is needed.

4. Transfers and conversions

24. Plans may provide for the transfer of funds to and from other registered plans according to the provisions of section 147.3 of the Act. However subsection 147.1(3) of the Act does not allow any transfers to or from the plan to be made until the plan is actually registered by the Minister. Transfers of funds from foreign plans to a registered plan need prior written approval from the Department.

25. When a plan is converted from defined benefit to money purchase, the transfer rules of section 147.3 of the Act also apply for the transfer of funds from the defined benefit provision to the money purchase provision.

25.1. If the converted plan is required to contain the maximum defined benefit limit of paragraph 9(g) of the Circular, contact the Registered Plans Division for further information.

5. Benefits

26. The only benefits that a money purchase plan may provide are described in paragraph 8502(c) of the draft Regulations. If the terms of a pension plan are silent about a particular benefit, it is understood that the benefit is not being provided.

27. Please note that subsection 8509(10) of the draft Regulations allows the Minister to exempt benefits that are derived from contributions made before l992, from the conditions of paragraph 8502(c). All requests for exemptions under this paragraph must be submitted in writing to the Department.

28. The plan must provide that settlement on retirement is to be in the form of an annuity payable in equal periodic amounts at least for life [8502(e) and 8500(1)]. Exceptions to the equal periodic requirement that are allowed are described in paragraph 8506(1)(a) of the draft Regulations. Annual increases in pension payments to reflect increases in the Consumer Price Index and annual increases of a specified rate up to 4% are the most common exceptions. 29. Under draft Regulation 8506(1)(b), a bridging benefit can be provided. The bridging benefit increases the pension payments over the period between retirement, and the end of the month following the month in which the member turns 65 years of age.

30. The member's pension may be allowed to be guaranteed for up to 15 years from the day the member's pension starts [8506(1)(c)]. If the member dies before the guarantee period expires, the plan can permit the remaining guaranteed payments to either continue to be paid to the member's beneficiary(ies), or the beneficiary(ies) can be allowed to take the commuted value of all or part of that benefit in a single amount (lump sum) [8506(1)(i)]. According to the transfer rules of subsection 147.3(7) of the Act, only the spouse or former spouse can be permitted to transfer a single amount to his or her own RPP or registered retirement savings plan (RRSP).

30.1. The plan can allow for the guaranteed payments to be paid to more than one beneficiary as long as the total monthly pay out to all beneficiaries is not more than what the member would have received in the month if the member had been living throughout that month.

31. If the member dies after the pension starts, retirement benefits may be allowed to continue to be paid to the member's spouse or former spouse for their lifetime, at a monthly level that is not more than 100% of what the member would have received in the month if the member had been living throughout that month [8506(1)(d)]. This option along with the equal periodic payment exception that allows the member's pension payments to be decreased after the spouse's death, permits a joint-and-last- survivor option with payments continuing at the same or at a reduced level after the death of the first life.

31.1. Alternately, the spouse or former spouse may be allowed to take the commuted value of all or part of his or her entitlement to the benefits in a single amount (lump sum) and transfer the single amount to hir or her own RPP or RRSP [8506(1)(i), 147.3(7)].

31.2. The monthly pay out under this paragraph 31 plus the monthly pay out(s) under paragraph 30 above, must not add up to more than what the member would have received in the month if the member had been living throughout that month.

31.3. The major difference between what the legislation now permits and the Circular permitted in terms of benefits payable to beneficiaries of a member who dies after pension payments start (except for paragraph 30 above), is that under the legislation, only the spouse or former spouse is allowed to either continue receiving periodic pension payments for hir or her life or transfer the commuted value to hir or her own RPP or RRSP. In this case, non-spousal beneficiaries may only receive benefits in the form of a non-transferable lump sum payment [8506(1)(i)].

32. If the member dies before retirement, the spouse or former spouse may be allowed to elect a life annuity purchased with the balance in the member's account [8506(1)(e)]. The plan may also allow the selection of varying payments, bridging benefits and a guarantee period as if they were a plan member. The guarantee period, in this instance, can be up to 15 years from when the spouse's or former spouse's benefit starts. If the spouse or former spouse dies before this guarantee period expires, hir or her beneficiary or beneficiaries can be allowed to continue to receive the remaining guaranteed payments, or take the commuted value in a lump sum.

32.1. The plan can allow the spouse or former spouse to defer receiving the retirement benefits until the end of the year in which the spouse or former spouse turns 71 years of age. However, if his or her is already 71 years of age when the member dies, the pension payments must begin no later than one year after the day of the member's death [8506(1)(e)].

32.2. Alternately, the spouse or former spouse may be allowed to receive all or part of the balance in the member's account in a single amount (lump sum), and transfer the single amount to hir or her own RPP or RRSP [8506(1)(g), 147.3(7)]. If the member's beneficiary is other than the spouse or former spouse, the only option permitted is to receive the balance in the member's account in a non-transferable, lump sum payment [8506(1)(g)].

33. Under paragraph 8506(1)(f), single amount (lump sum) withdrawals from the member's account at any time before retirement are allowed to be provided in a plan. This covers cash settlements on termination of employment, termination of the plan, and the splitting of pension credits on the breakdown of the member's marriage or other conjugal relationship pursuant to a decree, order, or judgment of a competent tribunal, or written agreement.

34. On or after retirement, paragraph 8506(1)(h) allows the plan to provide for the commutation of all or part of the member's entitlement to benefits. This covers the commutation of a small pension, and the splitting of the pension on the breakdown of the member's marriage or other conjugal relationship. Although the primary purpose requirement of the plan must first be satisfied (see paragraph 35.2(e) below), the plan can allow for all or part of the member's pension to be commuted at or after retirement as an option, as long as the single amount is not more than the present value of the benefits that cease to be provided.

6. Summary of prescribed registration conditions (draft Regulation section 8501)

35. The first category of prescribed registration conditions is made up of those conditions which must be met on initial registration, and then must continuously be met afterwards. Some conditions in this category will be met by including appropriate wording in the plan document. An analysis of the plan documents should confirm that the other conditions in this category have not been violated.

35.1. Conditions requiring explicit wording.

(a) The pension must start to be paid no later than the end of the year in which the member turns 71 years of age, and must be payable at least annually [8502(e)].

(b) The plan must specifically state that no right of a person under the plan is capable of being assigned, charged, anticipated, given as security, or surrendered [8502(f)].

(c) The plan must specifically include a stipulation that permits employer and employee contributions to be returned to the contributor to avoid the revocation of the registration of the plan [8506(2)(d)].

(d) In the case of permissible benefits, when a particular benefit is being provided, it must be specifically provided for under the terms of the plan [8502(c)]. 35.2. Conditions not requiring explicit wording.

(e) The primary purpose of the plan must be to provide retiring employees with a pension for their life in recognition of their service as employees [8502(a)].

(f) The plan terms must not result in the determination of an inappropriate pension adjustment [8502(l)].

(g) The manner in which the employer contributions are determined must be acceptable to the Minister [8506(2)(a)]. (For example, a percentage of earnings, a specific dollar amount, or some other manner which in a "stand-alone" plan has as its minimum 1% of each member's annual earnings for each year of eligible service not to be more than the money purchase limit for the particular year, would be acceptable.)

36. The second category of prescribed registration conditions is made up of those conditions which are considered to have been met on initial registration and afterwards, when there is no reason to expect on the basis of the plan documents and the funding arrangements, that the plan may become a revocable plan because any of those conditions have been violated [8501(1)(d)]. For some of these conditions, the Department will need wording in the plan that confirms this expectation. For the other conditions in this category, specific wording may not be needed. Analysis of the documents that make up the plan should confirm whether it is reasonable to expect that the plan will not become revocable because of a violation of those conditions.

36.1. Conditions requiring explicit wording.

(h) Employee contributions must be credited to their accounts [8502(b)].

(i) Employer contributions must be for the employer's employees or former employees, and they must be for particular plan members [8502(b), 8506(2)(b)].

(j) If it applies, employer contributions must not be made while there is any surplus being held under the provision or while there are any unallocated pre-1990 forfeited amounts (including associated earnings) being held under the provision after 1990 [8506(2)(c)].

(k) Plan earnings (excluding those related to forfeited amounts and surplus funds) must be allocated on a reasonable basis to plan members at least once a year [8506(2)(e)]. (Plans may be silent on the basis of the allocation.)

(l) Forfeited amounts (including associated earnings), other than pre-1990 amounts, must be either paid to participating employers or reallocated to members of the plan by the end of the year following the year in which the forfeited amount arose [8506(2)(f)]. An extension of this deadline may be considered according to draft Regulation 8506(3).

36.2. Conditions not requiring explicit wording.

(m) All contributions to and disbursements from the plan must be solely those that are acceptable under the legislation [8502(b), 8502(d)]. (This does not prevent reasonable administrative, investment, and similar expenses relating to the plan from being paid out of the fund.)

(n) The funding media must be acceptable to the Minister [8502(g)]. (Those currently acceptable under paragraph 6(e) of the Circular will continue to be acceptable.)

(o) The plan must not hold any investment that is prohibited [8502(h)].

(p) No money may be borrowed for purposes of the plan except what is allowed by the Regulations [8502(i)].

(q) Reasonable actuarial assumptions and generally accepted actuarial principles must be used when determining amounts in connection with the plan [8502(j)].

(r) Any transfers of assets between provisions of the same plan must conform with section 147.3 of the Act as if the transfer were between separate plans [8502(k)].

(s) The retirement benefits must be provided by means of the purchase of annuities from a person licensed or otherwise authorized under the laws of Canada or a province to carry on an annuities business in Canada, or some other acceptable means [8506(2)(g)]. (Those means currently acceptable under the Circular will continue to be acceptable.)

(t) Lump sum death benefits payable to beneficiaries must be paid out as soon as practicable [8506(2)(h)].

37. The final prescribed registration condition is that there should be no reason to expect that the plan may become a revocable plan because the pension adjustment limits of subsections 147.1(8) or (9) of the Act have been violated [8501(1)(e)]. This requirement will be considered to have been met by limiting the total contributions as discussed in section 3 above.

7. Conclusion

38. The requirements of the legislation effecting money purchase pension plans are, in most instances, more generous than what the Circular allowed. As a result, we anticipate that most money purchase pension plans will need only minor changes to comply with the new legislation.

39. The only condition that is entirely new and therefore will not be in any plan is the stipulation that permits refunds to be made to the employee and employer to avoid revocation.

40. If you need any additional information on these registration requirements, information on the related legislation, or if you have any suggestions concerning this newsletter or topics for future newsletters, please write to us at:

Registered Plans Division Revenue Canada, Taxation 400 Cumberland Street Ottawa, Ontario K1A 0L8

OR call us at: 1-(613)954-0419 (English) 1-(613)954-0930 (French)

(Monday to Friday between 8:00 AM and 5:00 PM)