| 7-922744 | |
| D. Duff | |
| 957-8953 |
September 25, 1992
Registered Plans DivisionFinancial Industries DivisionTechnical Review SectionDeferred Income Plans Section
Attention: John O'Meara
The 2% limit in paragraph 8503(3)(g)
This is in response to your memorandum of September 21, 1992 regarding the interpretation of the 2% maximum on the benefit accrual rate in paragraph 8503(3)(g) of the Income Tax Regulations.
Paragraph 8503(3)(g) provides "where the amount of lifetime retirement benefits provided under the provision to a member is determined, in part, by multiplying the member's remuneration (or a function of the member's remuneration) by an annual benefit accrual rate, or in a manner that is equivalent to such a multiplication, the benefit accrual rate or the equivalent benefit accrual rate, as the case may be, does not exceed 2 percent...".
Consequently, where you have a benefit based, in part, on a percentage of remuneration and, in part, on an amount not related to remuneration, the issue is whether paragraph 8503(3)(g) will limit only the rate to 2 percent or the entire benefit to 2 percent of remuneration.
If a plan provides for a benefit of 2 percent of remuneration plus an amount not related to remuneration it is our view that it will not violate the restriction in paragraph 8503(3)(g), although the benefit will be restricted by other provisions of the Act. Mr. Kevin Smith, of the Registered Plans Division, indicated in a telephone conversation on September 22, 1992, that this would be their position for such plans. Alternatively, if a plan provides for a benefit of 2.25 percent of remuneration less an amount not related to remuneration, it is our view that it will violate paragraph 8503(3)(g) even though the total benefit may be less than 2 percent of remuneration.
In the case referred to us the benefit is 2.25 percent of final average earnings (FAE), less a percentage of the year's maximum pensionable earnings (YMPE). The percentage of YMPE may reduce the entire benefit to less than 2 percent of remuneration, however, as indicated above, the 8503(3)(g) restriction is on the rate and not the entire benefit. A benefit reduction based on the YMPE is not a reduction in the "benefit accrual rate" or the "equivalent benefit accrual rate" as the YMPE is independent of the employees' remuneration. We would agree that, if such a reduction was based on remuneration or a function of remuneration, there would be a reduction in the equivalent benefit accrual rate. We do not interpret the term, equivalent benefit accrual rate, to include adjustments to the entire benefit that are not based on remuneration or a function of remuneration.
Finally, the restriction in paragraph 8503(3)(g) does not mean simply that the benefit formula cannot have a percentage greater than 2 percent. A formula of 7 percent of FAE less 5 percent of FAE would not be prohibited, but a formula of 1.5 percent of FAE plus 1 percent of FAE would be prohibited. The restriction means that the portion of the benefit that is based on some form of remuneration, when expressed as a percentage, cannot exceed 2 percent. Consequently, a benefit formula with 2.25 percent of FAE plus or minus adjustments not based on remuneration violates paragraph 8503(3)(g) regardless of the form in which it is presented.
for DirectorFinancial Industries DivisionRulings Directorate