Registered Plans Directorate Newsletter, no. 92-11
November 30, 1992

Maximum Pension Limits

Introduction

The Income Tax Regulations require that all pre-reform benefits provided under a defined benefit provision of a registered pension plan be acceptable to the Minister of National Revenue. This permits the Department to continue to apply a number of restrictions in Information Circular 72-13R8 that have not been included in the Regulations or that differ from the restrictions in the Regulations.

This is the sixth newsletter that explains how to apply the new pension legislation to benefits provided for pre-reform service under a defined benefit provision of a registered pension plan. It also explains which administrative rules outlined in the Circular continue to apply. Also see Pension Reform Update 91-5 and 92-5.

This newsletter is not a legal document. It uses plain language to inform plan administrators, employers, and pension consultants of the conditions that pre-reform benefits must satisfy in order to be acceptable to the Minister. The information relates to pre-reform benefits only, and is not intended to interpret how the Regulations apply to post-reform benefits.

This newsletter refers to "pre-reform" and "post- reform" service and benefits. Pre-reform service means pre-1991 service for all plans except grandfathered plans. A grandfathered plan is a plan which contains a defined benefit provision and which was registered on March 27, 1988 or for which an application for registration was made before March 28, 1988. It is also a plan that was established to replace defined benefits for one or more individuals under another grandfathered plan. Pre-reform service for grandfathered plans means all service prior to the earlier of January 1, 1992 and the effective date of the amendment made to the plan to comply with the requirements of the Income Tax Regulations. All service after those dates is post- reform service. Pre-reform benefits are benefits that accrue in respect of a period of pre-reform service. All other benefits are post-reform benefits.

A new plan is a pension plan for which application for registration was made after March 27, 1988.

This newsletter, combined with the rules outlined in Pension Reform Update 91-1, applies to benefits provided to connected persons as defined in subsection 8500(3) of the Regulations, or to partners or proprietors and their spouses unless specifically stated otherwise. Please remember that all pre-reform benefits for these individuals are subject to the 50- 50 rule. The 50-50 rule is described in Pension Reform Update 91-1.

We wish to remind you that this newsletter cannot be applied to pre-reform benefits in pre-October 1968 and 1980 shareholder plans if doing so will increase the benefits or the costs under the plans.

Maximum Pension Limits

Pension Reform Update 91-5 indicates that the Minister of National Revenue will continue to apply paragraph 9(g) of the Circular to pre-reform benefits. This newsletter will clarify the application of this rule. It will not address all of the maximum benefit restrictions of the Regulations which apply to pension plans.

• All plans may be amended to increase the $1715 limit in the 9(g) maximum pension rule to $1722.22 indexed after 1995 (rather than 1994). The change to the indexation of the limit was announced in the February 25, 1992 budget and was published in the Notice of Ways and Means Motion dated June 19, 1992.
  
  
• All new defined benefit and new combination money purchase/defined benefit plans may stop applying the 9(g) maximum pension rule for service accruing from January 1, 1990. The defined benefits in new plans are also subject to the maximums under section 8504 of the Regulations.

Effective January 1, 1992, all combination plans have to stop applying the 9(g) maximum pension rule to the combination of money purchase and defined benefits for post-reform service.

• Grandfathered plans, including those that provide benefits based on a combination of money purchase and defined benefits, have to continue to apply the 9(g) maximum pension rule, as modified above, to benefits for service before January 1, 1992. The 35-year pensionable service limit in the 9(g) maximum pension clause may, however, be applied solely to pre-1990 pensionable service if the plan is amended at January 1, 1990 for post-1989 benefits to comply with all the requirements of the legislation. See Pension Reform Update 91-5.
  
  
• Employers whose pension plans include the 9(g) maximum pension clause may amend the normal form of benefits for all years of service to provide a 66 2/3 percent joint and survivor pension with a five year guarantee period. All new plans may provide a 66 2/3 percent joint and survivor pension with a five year guarantee period for all, including pre-reform, benefits.
  
  
• The exemption under paragraph 9(g) of the Circular for pensions under $300 per year may apply to benefits for pre-reform service only in grandfathered plans. A provision allowing the $300 exemption is not acceptable in a new plan as the Regulations do not maintain this exception to the rule.
  
  
• Employers may opt to amend their plans to apply up to the highest average compensation (as defined in subsection 8504(2) of the Regulations), indexed to the year of commencement of the member's retirement benefits, for pre-reform service.
  
  
• For purposes of the maximum pension rule, subsection 8504(10) of the Regulations excludes any additional lifetime retirement benefits which may arise when the payment of a pension is postponed until after age 65. This actuarial, or less favourable, increase may apply to pensions based on all, including pre-reform, years of pensionable service.