Registered Plans Directorate Newsletter, no. 92-8
August 18, 1992

Eligible Service

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 fourth 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.

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. 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.

This newsletter does not apply to benefits provided to connected persons as defined in subsection 8500(3) of the Regulations, or to partners and proprietors and their spouses unless specifically stated otherwise. The rules for these individuals are outlined in Pension Reform Update 91-1.

We wish to remind you that the Regulations 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.

Eligible service

As noted above, paragraph 8503(3)(e) and subsection 8509(3) of the Regulations require that all benefits for periods of service before 1991 (1992 for grandfathered plans) under a defined benefit provision have to be acceptable to the Minister. For periods of service before 1991 (1992 for grandfathered plans) to be acceptable to the Minister, the conditions in paragraphs 8(e)(i),(ii), (iii), (iv), (v), and (vi) of the Circular need to be met. Foreign service issues (paragraphs 8(e)(i), (ii), and (iii)) will be covered in a future newsletter.

Under paragraph 8(e)(i) of the Circular, eligible service is service with an employer that carries on all or part of its business in Canada or that otherwise operates in Canada. The employer, or a proprietorship, partnership, or corporation that was its predecessor, must also be or have been a contributing employer under the plan. An exception to this rule is allowed if a participating employer has a reciprocal agreement with another Canadian employer. Reciprocal agreements will continue to be required for pre-reform service. They must be current, ongoing agreements for the crediting of pre-reform service and not merely agreements that existed at the time the service took place. The terms of a pension plan must state that a reciprocal agreement exists and a copy of the agreement must be sent to the Department.

We will continue to consider including in eligible pre-reform service other relatively short periods of service (three years or less) that occurred inside Canada with an employer that is associated or affiliated with a participating employer.

We will also continue to allow, without limit, the following periods to be included in pre-reform eligible service: paid leave, sabbatical leave, educational leave, maternity/paternity/adoption leave, active service with the Canadian Armed Forces or veteran's active service in the allied forces in WWII or the Korean War, and disability leave.

Periods of up to three years, with or without pay, of short-term appointments to federal or provincial governments, or loan to a union, charitable or educational organization, where benefits do not accrue under another pension plan remain eligible as pre-reform service.

Other periods of unpaid leave of not more than two years can also be included in eligible pre-reform service.

Plans can continue to accept pensionable service from other registered pension plans as long as the funds associated with the pre-reform service are transferred to the current plan under a portability arrangement. See paragraph 8(e)(vi) of the Circular.

Unpaid or partially paid leaves of absence relating to pre-reform service are not subject to the prescribed compensation provisions of section 8507 of the Regulations. This section allows compensation to be prescribed, within limits, for the purpose of ensuring that the Pension Adjustment limits are not exceeded. The amount of pre-reform leave taken does not affect the prescribed compensation limit or the amount of post-reform leave that may be recognized as eligible service.

The terms of a pension plan must indicate what pre-reform service is being included as eligible service. If pre-reform service is being credited after 1988 for new plans (after 1991 for grandfathered plans), the service must comply with the eligible service requirements of the Circular or, if more restrictive, the terms of the plan.