| October 29, 1990 | |
| Corporate Reorganizations I | Financial Industries |
| Division | |
| Mark Symes | W.C. Harding |
| Chief | 957-3496 |
| 902865 |
SUBJECT: 24(1)
This is in reply to your memorandum of October 16, 1990 wherein you requested our views on employer contributions to a defined benefit registered pension plan in circumstances where a partnership assumes the employer's obligation under the plan upon the acquisition of the business of the vendor.
In particular, you requested our views as to whether the partnership would be entitled to a deduction under 147.2(1) where it makes a contribution to the pension plan in respect of services with the predecessor companies in the following circumstances:
a) where the individual is or was an employee of the partnership, and
b) where the individual never becomes an employee of the partnership.
The provisions of subsection 147.2(1) do limit the deductibility of employer contributions to those made in respect of an employer's (the partnership's) employees and former employees. However, while this places a controlling factor on the amount deductible, it does not necessarily restrict contributions to prevent funding of benefits for members of the plan who are not or never were employees of the present employer.
When a member of a plan properly remains a member of a plan after the business transfer, his benefits will continue to be provided on the basis of "eligible service" covered under the terms of the plan. For this purpose, proposed Regulation 8503(3)(a)(ii) provides that eligible service includes any period throughout which a member was employed in Canada by a "predecessor employer" to an employer who currently participates in the plan. "Predecessor employer" is a defined term provided in proposed regulation 8500(1) and means an employer who has disposed of all or part of his business or assets to the current employer where employees of that former employer have become employees of the current employer.
What this means is that an actuary, in determining the required funding of plan, would account for the benefits of all continuing members under the plan and apply plan funds to those benefits in order to determine a total plan deficiency. The actuary would then have to calculate the deficiency of funding related solely to employees or former employees of the present employer to determine the maximum deductible contribution limit. Since plan properties could be applied first to satisfy the benefits of the "non employee" members, this second deficiency would in most cases equal, in time, the total plan deficiency. In other words, while each years contributions are limited to those required to fund current employee or former employee benefits, there is nothing to preclude these funds from being used to fund "non employee" benefits once they are part of the funds assets. To the extent they are so used, subsequent contributions may again be required to fund current employee benefits.
While it is questionable whether or not the former employer could use the provisions of 147.2(2) of the Act when it no longer carries on a business, we would also note that the company is not precluded from contributing to the plan in respect of its former employees.
ChiefDeferred Income, Plans and Trusts SectionFinancial Industries DivisionRulings Directorate