B. Fioravanti (613) 957-8962
August 31, 1988
Dear Sirs:
This is in reply to your letter of July 4 concerning the conversion of a defined benefit pension plan to a money purchase plan and the maximum contributions to the plans permitted in the year of conversion.
The Department's position in this regard is set out in paragraph 4 of Interpretation Bulletin IT-167R5 dated March 14, 1985, which states:
"The maximum amount that may be deducted for a taxation year in respect of contributions for current service is $3,500. If an employee is contributing to more than one fund or plan, the maximum deductible amount of $3,500 applies to the total contributions to all such fund or plans and not separately to each one".
It should be noted the paragraph 8(1)(m.1) of the Income Tax Act came into force on December 19, 1985 and, as a result, is not reflected in the Bulletin. Paragraph 8(1)(m.1) provides a deduction in a year for employee contributions to a defined benefit plan, other than voluntary contributions, in excess of $3,500 with respect to services rendered in the year. Accordingly, the "maximum deductible amount of $3,500" referred to above may be greater if required by the defined benefit plan prior to the date of conversion.
The following comments have not taken into consideration the one year delay in implementing certain of the Income Tax changes announced in the Department of Finance Release dated August 19 or any other changes that may occur as a result of this delay.
Under the Proposed Legislation Relating to Savings for Retirement, in the case of a defined benefit plan, proposed new paragraph 147.1(3)(a) of the Act would require that employee contributions in respect of current service must reasonably be expected not to exceed the lesser of: (i) 9% of remuneration and (ii) $600 plus 70% of the employees pension cretit for the year under the provision. The pension credit is the employees' Pension Adjustment ("PA") in respect of the provision.
In the case of a money purchase plan, employer and employee contributions may be made by virtue of paragraph 147.1(2)(a) of the Act only if they are made in accordance with terms of the plan as registered. Subsection 147.1(17) of the Act limits the PA for a plan member in respect of a participating employer, and subsection 147.1(13) requires an RPP to include terms to ensure that these limits will be respected. Where defined benefits are also provided under the same plan or a different plan, benefits provided under the defined benefit provision and contributions under the money purchase provision must be co-ordinated to ensure that the PA limits are respected.
We trust the above comments will be of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate