News & Views

You are here

New position of CRA on pension plan transfer agreements and recognition of past service

Plan sponsors and administrators have expressed concerns in the past that pensionable service rules in the Income Tax Regulations prohibited recognizing a member’s service under a former pension plan when there was a transfer from one defined benefit plan to another.

When the former plan has a solvency ratio of less than 1, pension standards legislation requires that the commuted value of the pension benefits be transferred in two stages, the first being the commuted value multiplied by the former plan’s solvency ratio and the second being the residual commuted value to be transferred within five years. So far, the Canada Revenue Agency (CRA) had taken the position that the employee was still a member of the former plan until the residual commuted value was transferred, which prohibited the importing plan from recognizing the employee’s service under the former plan in the interim.

On December 21, 2012, the Department of Finance issued a “comfort letter” to the Canadian Association of Pension Supervisory Authorities confirming it was prepared to recommend to the Minister of Finance that an amendment be introduced to the Income Tax Regulations to permit importing plans to recognize pro-rated past service of a member who makes a partial transfer due to a solvency ratio below 1. We understand that the CRA will apply this new rule to transfers made after 2012. There were various problems in administering those transfers in the past and the new rule will alleviate some of them. However, administrators may continue for a certain period to deal with two types of transfer cases.