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Normandin Beaudry

The Income Tax Act


There, in black and white

NB Bulletin Vol. 6 N. 6, June 2003

Proposed Regulations Amending the Income Tax Regulations (the "Regulations") were published in the Canada Gazette, Part I on May 17, 2003. Among the proposed amendments is a change to the rules concerning defined benefit Registered Pension Plans ("RPPs") whereby plan members are required to share in the funding of an unfunded actuarial liability.

Under the proposed Regulations, RPP eligible contribution rules under the Income Tax Act, often called excess surplus rules, would be relaxed for defined benefit RPPs. This relaxation would apply only to RPPs governed by a shared funding arrangement between the employer and the members that has been approved by the Minister. Under such an arrangement, the employer and the members share in the entitlement to surplus and the liability for unfunded actuarial deficiencies (jointly funded plans). Therefore, prescribed plans are those for which employer contributions are linked to employee contributions according to a pre-established contribution schedule. For example, the proposed Regulations would apply to a defined benefit plan under which employee and employer contributions are automatically adjusted according to the funded status of the plan so that employer contributions tend toward a defined percentage of employee contributions.

The table below describes how the proposed Regulations would permit employer contributions to be made to the prescribed plans, if the funding ratio (ratio of funded assets to liabilities) exceeds 110%, a level beyond which employer contributions are not permitted under the existing Regulations.  


Funding ratio
Total current employer and
employee service contributions

Between 110% and 115% inclusive75% of current service costs
Between 115% and 120% inclusive50% of current service costs
Between 120% and 125% inclusive25% of current service costs
Over 125% No contribution permitted


These amendments apply to contributions made after 2002.

The relaxation of RPP eligible contribution rules for jointly funded plans recognizes the fact that both employee and employer contributions are linked to a plan’s funded status. As a result, employee contribution rates have the potential to vary significantly in contrast to "traditional" plans, under which employee contribution rates remain constant regardless of the funded status of the plan. By relaxing the restrictions on employer contributions, changes in the funded status of jointly funded plans should be less volatile, and consequently required employee contributions should be more stable.

The proposed Regulations are subject to a 60-day consultation period that began on May 17, 2003. Another Bulletin will be sent to you when the provisions have been finalized.


Please feel free to contact us for additional information.

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