• Incorporated Company / Employment Relationship
• Past Service
• Employment Earnings

Incorporated Company / Employment Relationship

Pension is an employment benefit so there must be the employer-employee relationship between the Company and the IPP member.  The pension plan sponsor should be an incorporated company with employment earnings paid to the member.

Note that in addition to the pension plan sponsor, a "predecessor employer" may also sponsor an IPP. A predecessor employer as defined by Income Tax Regulation 8500 means, in relation to a particular employer, an employer (in this definition referred to as the "vendor") who has sold, assigned or otherwise disposed of all or part of the vendor's business or undertaking of all or part of the assets of the vendor's business or undertaking to the particular employer or to another employer who, at any time after the sale, assignment or other disposition, becomes a predecessor employer in relation to the particular employer, where one or more employees of the vendor have, in conjunction with the sale, assignment or disposition, become employees of the employer acquiring the business, undertaking or assets.

Past Service

A non-connected person can have past service recognized retroactively to the date of hire.  However, any new pre-1990 past service recognized is only 2/3 pensionable (i.e. maximum benefit is capped at 2/3 of the maximum pension limit) and is subject to the "Proportionality Condition".  Proportionality Condition for pre-1990 past service is outlined in Registered Plans Directorate's Newsletter 99-1.  The key requirement is that present value of pre-1990 past service benefits for a pension plan member can not exceed the present value of benefits accrued after the effective date of the pension plan.  In summary, a defined benefit pension plan that provides new pre-1990 benefits can no longer provide full benefit or full funding immediately as a lump sum.  The benefits can only be provided, and their associated funding contributions can only be made, as a matching contribution to the current service contributions each year from the effective date of the plan until the pre-1990 past service liability is fully amortized.

A connected person can only have post-1990 past service benefits after the incorporation date.  A connected person is eligible for pre-1991 past service benefits only if the 50-50 Test can be satisfied.

Please note that there is a maximum of 35 years of pensionable service under the old pension rules in Information Circular 72-13R8 that govern pre-reform service.  Therefore, the 35-year service maximum only applies to pre-reform service.  Pre-reform means pre-1991 for new plans and pre-1992 for grandfathered plans.

Post-1989 past service can only be provided if the provisional Past Service Pension Adjustment (PSPA) is satisfied.  It must be satisfied through one (or a combination) of the following means before such post-1989 past service benefits can be provided:

• Approval by CRA of Form T1004 (Applying For The Certification Of A Provisional PSPA) filed with them.  CRA will approve the form if the individual has sufficient unused RRSP room carried forward to satisfy the PSPA amount.  Please note that the individual's unused RRSP room would be reduced by the PSPA amount upon CRA's approval; or

• Transfer (tax-free) an amount from the pension plan member's RRSP or account in a Defined Contribution (DC) Pension Plan to the pension plan that provides the past service benefits.  Such a transfer is commonly referred to as a Qualifying Transfer; or

• Withdraw an amount from the pension plan member's RRSP using CRA Form T1006 (Designating An RRSP Withdrawal As A Qualifying Withdrawal).

Since IPPs are tax-driven, most IPP candidates or prospects would more than likely have made maximum RRSP contributions for prior years.  Provisional PSPA is usually satisfied through a Qualifying Transfer from RRSP.

Options if Not Enough RRSP Funds for Qualifying Transfer

  Or Not Enough Unused RRSP Room for PSPA Certification

The Past Service Pension Adjustment (PSPA) requirement must be satisfied in total through one or a combination of the three options outlined above.  If not enough RRSP funds are available for transfer and/or not enough unused RRSP contribution room is available to get certification, the options are:

1.    Cut back on the post-1989 years recognized for past service purposes.  It is recommended that the more recent years (e.g. 2002, 2001, etc) be cut, since they generate higher PSPA than earlier years (i.e., 1991, 1992 etc.).  Our IPP On-Line Quoting System^© automatically eliminates the more recent years until the PSPA can be satisfied.  The past service funding amount is also reduced by the elimination of some past service years.

2.    Since the PSPA amount does not change (it is calculated using actual T4 earnings from prior years), one option is to leave the RRSP funds in the RRSP to grow until sufficient to satisfy the PSPA.  The liabilities for these years would grow with interest over time, thus creating higher past service funding in the future.

3.    Recognize only a selected number of years (use up the earlier years first as they are at lower PAs) by meeting the required qualifying transfer amount from the RRSP.  Leave the remaining RRSP funds to grow until they are sufficient to satisfy the PSPA for the remaining years.  Obviously, the company can do past service funding for only those years of past service recognized.

Note: Choosing Option No. 1 above may result in certain years of past service being "lost" for funding purposes forever as the PSPA for those years will likely never be satisfied.  Options No. 2 and No. 3 would allow all post-1989 past service years to be recognized over time.  It is up to the individual to decide whether to use up all the RRSP funds to have immediate recognition and funding of post-1989 past service or to have post-1989 past service gradually recognized and funding spread over time.

Employment Earnings

Section 147.1 of the Income Tax Act defines compensation for pension purposes as employment earnings that are required to be included in the individual’s taxable income for the year by Section 5 or 6 of the Income Tax Act.  T4-type earnings such as salaries and wages, bonuses, director's fees, taxable benefits and allowances, distributions from EPSP (Employee Profit Sharing Plan) reported on T4, T4A, T4PS would be eligible earnings for pension purposes.

Please note that self-employment earnings (proprietorship) and dividend income are not pension-eligible.  If you are not sure, please consult an accountant.