Registered Plans Directorate Newsletter, no. 94-3R
October 21, 2008

Using Assumptions to Compute the Present Value of Benefits

This newsletter cancels and replaces Newsletter 94-3, dated November 17, 1994.

What's new?

In this newsletter you will find information on the following:

• Assumptions acceptable to the Canada Revenue Agency, when computing the present value of benefits;
• How to contact the Registered Plans Directorate for additional information.

Introduction

Paragraph 8502(j) of the Income Tax Regulations requires that when you use assumptions to determine amounts under a registered pension plan (RPP), the assumptions used must be reasonable and acceptable to the Minister of National Revenue.

The determination of whether an assumption or a set of assumptions is reasonable can only be made on the merits of each case and within the scope of the professional guidelines issued by the Canadian Institute of Actuaries (CIA). In this newsletter we do not comment on what is reasonable. However, what we accept in each case can be assumed to be reasonable. What we accept as reasonable in one case may not be reasonable for a similar case at another point in time.

In this newsletter we provide some guidelines on the assumptions that are acceptable to the Canada Revenue Agency when computing the present value of benefits in connection with a defined benefit provision of an RPP. These guidelines apply to computations made on or after the date of this newsletter.

The information we are providing applies only to situations when a single lump-sum amount is to be paid in lieu of a pension under a defined benefit provision of an RPP.

The information does not apply:

• when using assumptions to recommend the eligible contributions to be made by an employer under a defined benefit provision;
• when using assumptions to compute the amount to be transferred from one defined benefit provision to another defined benefit provision; or
• when using assumptions to commute benefits on the replacement of a defined benefit provision with a money purchase provision.

What is acceptable?

We accept:

• the assumptions set out in the Standards of Practice issued by the CIA for the Computation of Transfer Values from Registered Pension Plans as amended from time to time (applicable CIA's Standards of Practice);
• where mandated under the federal Pension Benefits Standards Act, 1985, or a similar law of a province, the assumptions as specified in the applicable legislation; or
• the use of other assumptions that are reasonable at the time they are used and that produce present values that do not exceed the present values produced using the assumptions set out in the applicable CIA's Standards of Practice.

Accepting the use of other assumptions

We recommend you write to get our acceptance if you want to use assumptions that produce present values that exceed the present values produced using the assumptions set out in the applicable CIA's Standards of Practice. However, if you are required to use the assumptions specified in the applicable pension benefits legislation, you do not need to write to us for acceptance. You should provide the actuarial reasoning to justify the use of your assumptions.

If you wish to discuss the use of your assumptions before writing to us, you can call the Registered Plans Directorate who will provide advice on the assumptions you wish to use. We caution that the advice provided by telephone is not binding on the Canada Revenue Agency. With a written acceptance you can be assured that the Directorate has accepted the use of your assumptions.

How to contact us

Contact us at the Registered Plans Directorate if you have any questions about this newsletter. Our telephone enquiries service is available Monday to Friday from 8:00 a.m. to 5:00 p.m., Eastern Time (with a voice mailbox system to take messages outside those hours):

In the Ottawa area:
For service in English, call 613-954-0419
For service in French, call 613-954-0930

Toll free elsewhere in Canada:
For service in English, call 1-800-267-3100
For service in French, call 1-800-267-5565

• Actuaries and plan administrators who need guidance on issues related to a specific plan can write to us at the Registered Plans Directorate, Ottawa ON K1A 0L5, or fax us at:
  613-952-0199.
• We welcome feedback on this newsletter. Send your comments by email to:
  ad-enquiries/da-enquetes.lpra@cra-arc.gc.ca