Newsletter no. 93-2, Foreign Service

October 29, 1993

See update of this Newsletter, No. 00-1

Table of Contents

Part I: Introduction

1. Purpose of newsletter
2. Definitions
3. Application

Part II: Background

1. Eligible service
2. Pension adjustment limits
3. Compensation

* Employment with a participating employer
* Employment with a non-participating employer

4. Loaned employees 5. PSPAs

Part III: Defined Benefit Provisions

1. Employment with a resident participating employer

* Eligible service
* Compensation * PSPAs

2. Employment with a non-resident participating employer or a non- participating employer

* Eligible service * Compensation * PSPAs

3. Existing defined benefit provisions

* Eligible service * Compensation

4. Reciprocal agreements
5. Pre-1992 service credited after 1991 under a grandfathered plan

Part IV: Money Purchase Provisions

Part V: Conditions Imposed Under Subsection 147.1(5)

1. Eligible periods of temporary absence
2. Money purchase contributions
3. RPP members connected with a participating employer

Part I: Introduction

1. Purpose of newsletter

In this newsletter, you will find the following information relating to the provision of pension benefits under a registered pension plan (RPP) for employment outside Canada:

* periods of employment outside Canada that we accept as eligible service under subparagraph 8503(3)(a)(vii) of the Income Tax Regulations;

* remuneration that we accept under paragraph (c) of the definition of "compensation" in subsection 147.1(1) of the Income Tax Act; and

* guidelines that we will follow in determining whether subsection 8303(10) of the Regulations applies to exclude certain past service benefits in calculating past service pension adjustments (PSPAs).

The newsletter deals with more common situations of employment outside Canada. Upon request, we will deal on a case-by-case basis with situations not covered in this newsletter.1

------------------ 1 Subparagraph 8502(b)(v) permits an amount to be transferred to an RPP from a pension plan maintained primarily for the benefit of non-residents for services rendered outside Canada, if we accept the transfer. This newsletter does not deal with the acceptability of such transfers. We will consider requests for approval on a case-by-case basis.

The newsletter also announces three conditions on RPPs that we are imposing under subsection 147.1(5) of the Act. These deal with:

* certain periods of employment outside Canada that are also eligible periods of temporary absence;

* money purchase contributions for certain periods of employment outside Canada; and

* the provision of pension benefits to RPP members who are connected with participating employers while employed outside Canada.

This newsletter replaces those provisions of Information Circular 72-13R8 that deal with the acceptability of periods of employment outside Canada as eligible service under an RPP.

Please note that the Department of Finance is reviewing how foreign service is treated under RPPs. This review may result in new legislative provisions dealing with foreign service.

Unless otherwise stated, references in this newsletter are to provisions of the Income Tax Regulations.

2. Definitions

For purposes of this newsletter:

* "participating employer" has the meaning in subsection 147.1(1) of the Act;2

* "grandfathered plan" and "eligible period of temporary absence" have the meanings in subsection 8500(1);

* "connected", as used in expressions such as "a person connected with an employer" and "an employer connected with another employer", means connected as described in subsection 8500(3);

* an individual's "remuneration" from an employer means any amount (expressed in Canadian dollars) in respect of the individual's employment with the employer that the individual has to include in income under section 5 or 6 of the Act (or would have to include in income if the individual was resident in Canada);

-------------- 2 Note that an employer who would not otherwise be a participating employer may be prescribed by paragraph 8308(7)(c) to be a participating employer. See "Loaned employees" in section 4 of Part II.

* "resident employer" means:

-- a corporate employer that is resident in Canada; or

-- a non-corporate employer that we have agreed is to be considered resident in Canada for the purpose of this newsletter; and

* "non-resident employer" means an employer that is not a resident employer.

3. Application

Parts III and IV of this newsletter apply to all periods of employment outside Canada, except periods before 1992 where the benefits for the period are provided under a grandfathered plan and the period was credited as pensionable service under the plan before 1992.

There are special rules set out in sections 3 and 4 of Part III. The rule in section 3 applies to benefits provided on a current service basis under an existing defined benefit provision of an RPP. The rule in section 4 deals with service transferred to an RPP under an existing reciprocal agreement between the RPP and an unregistered pension plan.

The conditions set out in Part V of this newsletter apply only to defined benefits provided, or money purchase contributions made, after 1993.

Part II: Background

The following describes the legislative provisions that are particularly relevant to this newsletter.3

1. Eligible service

Paragraph 8503(3)(a) [eligible service] limits the periods for which an RPP can provide benefits under a defined benefit provision. Subparagraph (vii) permits an RPP to provide benefits for a period throughout which a plan member is employed outside Canada, if we accept the period.

Section 8509 [transition rules] exempts grandfathered plans from the requirements of paragraph 8503(3)(a) for benefits provided for pre-1992 service, but requires that such benefits be acceptable to us.

--------------- 3 For precise details of the provisions described in this Part, please refer to the legislation itself.

2. Pension adjustment limits

The pension adjustment (PA) limits in subsections 147.1(8) and (9) of the Act allow us to revoke the registration of a pension plan if a member's PA (or pension credits, if the plan is a multi-employer plan) in respect of a participating employer is more than 18% of the member's compensation from that employer.

There are other limits in subsections 147.1(8) and (9) relating to PAs and pension credits, but they are not relevant for purposes of this newsletter.

3. Compensation

An individual's "compensation" from an employer is defined in subsection 147.1(1) of the Act to be the total of the amounts referred to in paragraphs (a), (b), and (c) of that definition.

Generally, paragraph (a) refers to remuneration for periods when an individual is resident in Canada, whether the remuneration is for services rendered in or outside Canada. Paragraph (a) also refers to remuneration for periods when an individual is not resident in Canada but renders services in Canada, so long as a tax treaty does not exempt the remuneration from tax in Canada.

Paragraph (b) refers to amounts that are prescribed for inclusion in an individual's compensation by section 8507 for periods of reduced pay. Paragraph (c) refers to remuneration for periods when an individual is not resident in Canada, so long as the remuneration is not already included under paragraph (a).

Amounts referred to in paragraphs (a) and (b) are included automatically in an individual's compensation. Amounts referred to in paragraph (c) are included only if we accept them.

The following is a more detailed description of the amounts that are included in compensation when an RPP member is employed by an employer outside Canada.

Employment with a participating employer

If the employer participates in the RPP, the member's remuneration from the employer is included in compensation from that employer:

* automatically under paragraph (a) for periods when the member is resident in Canada; and

* to the extent accepted by us under paragraph (c) for periods when the member is not resident in Canada.

Employment with a non-participating employer

If the employer (the "foreign employer") does not participate in the RPP, any defined benefits provided to the member, or money purchase contributions made by or on behalf of the member, for the period of employment with the foreign employer have to be attributed for PA purposes to an employer who participates in the plan.4 Consequently, it is the member's compensation from the participating employer, rather than from the foreign employer, that has to be determined. Amounts are included in the member's compensation from the participating employer as follows.

1) Remuneration from the participating employer

If, while employed by the foreign employer, the member is also an employee of the participating employer and receives remuneration from the participating employer, that remuneration is included in the member's compensation from the participating employer:

* automatically under paragraph (a) for periods when the member is resident in Canada; and

------------- 4 Note that, during the period of employment with the foreign employer, the member may, or may not, also be an employee of the participating employer to whom benefits or contributions are attributed.

* to the extent accepted by us under paragraph (c) for periods when the member is not resident in Canada.

2) Prescribed compensation re eligible period of temporary absence

If the period of employment with the foreign employer is also an eligible period of temporary absence with respect to the participating employer, amounts may be prescribed by section 8507 for the period. Paragraph (b) includes these amounts in the member's compensation from the participating employer.

An amount is prescribed by section 8507 if the period is a "qualifying period" as defined in paragraph 8507(3)(a). The amount prescribed is the amount that would have been the member's remuneration from the participating employer had the member worked on a regular basis for that employer, minus any actual remuneration from that employer for the period. The amount prescribed is limited to five years of full-time equivalent remuneration less any amounts previously prescribed.5

--------------------------- 5 Please note that the Department of Finance is considering amendments to the Regulations to ensure that the five years of full-time equivalent remuneration that can be prescribed by section 8507 is not reduced on account of compensation prescribed for an eligible period of temporary absence that is also a period of employment outside Canada acceptable to us for purposes of subparagraph 8503(3)(a)(vii).

3) Remuneration from the foreign employer

The member's remuneration from the foreign employer for any period when the member is not resident in Canada is, to the extent accepted by us, included by paragraph (c) in the member's compensation from the participating employer. This is possible because that paragraph allows an individual's remuneration from one employer to be included in determining the individual's compensation from another employer.

This inclusion of the member's remuneration from the foreign employer in determining the member's compensation from the participating employer would be relevant, for example, when the member's remuneration from the foreign employer is taken into account in determining benefits under the RPP, and either there is no compensation prescribed by section 8507 or the compensation prescribed by section 8507 is less than the member's remuneration from the foreign employer.

4. Loaned employees

Subsection 8308(7) sets out rules that apply when there is an arrangement between one employer (the "lending employer") who is a participating employer in a pension plan and another employer (the "borrowing employer") who would not be a participating employer if subsection 8308(7) did not apply.

Subsection 8308(7) applies if, under the arrangement:

* an employee of the lending employer renders services to, and is remunerated by, the borrowing employer; and

* defined benefits continue to accrue to the employee, or the lending employer continues to make money purchase contributions on behalf of the employee, during the period of the loan.

Subsection 8308(7) provides that the employee's defined benefits are to be attributed to the lending employer and the borrowing employer in proportion to the remuneration the employee receives from each employer. It also provides that any money purchase contributions made by the lending employer that relate to remuneration the employee receives from the borrowing employer are to be considered contributions made by the borrowing employer. The effect of these provisions is to include in the employee's PA in respect of the borrowing employer amounts that would otherwise be included in the employee's PA in respect of the lending employer.

In addition, subsection 8308(7) prescribes the borrowing employer to be a participating employer in relation to the plan.

5. PSPAs

Past service benefits provided for a period of employment outside Canada are excluded in calculating PSPAs if we give written consent that subsection 8303(10) applies to allow the exclusion.

Since no PSPAs are generated if past service benefits are for pre-1990 service, this relieving provision is relevant only when past service benefits are for post-1989 service.

Part III: Defined Benefit Provisions

1. Employment with a resident participating employer

Eligible service

We accept as eligible service under subparagraph 8503(3)(a)(vii) any period throughout which an RPP member renders services outside Canada under an employment contract with a resident employer who participates in the plan. This acceptance applies only if the member is, or has been, resident in Canada. It applies whether benefits for the period are provided on a current service or past service basis.

Such eligible service would include, for example, a period when an RPP member who is usually resident in Canada renders services in a foreign branch of a resident participating employer. It would also include a period when such a member renders services to a foreign subsidiary on behalf of a resident participating employer -- that is, without becoming an employee of the foreign subsidiary.

Compensation

When a period of employment of an RPP member with a participating employer is eligible service as described above and the member is not resident in Canada, we accept (under paragraph (c) of the definition of "compensation") the member's remuneration from the employer as compensation from the employer.

PSPAs

We will determine on a case-by-case basis whether subsection 8303(10) may apply to allow past service benefits for a period of eligible service described above to be excluded in calculating PSPAs. We will use the following guidelines to make this determination:

* We will not give approval if the member's remuneration for the period is included in "earned income" for RRSP purposes (as defined in paragraph 146(1)(c) of the Act). Such remuneration will usually be included in earned income if the member was resident in Canada during the period.

* We will usually give approval if the member's remuneration is not included in earned income, as long as the benefits under the plan are not designed to take advantage of the potential application of subsection 8303(10) (which could be the case, for example, if there were a higher benefit accrual rate for employment outside Canada than for employment in Canada).

2. Employment with a non-resident participating employer or a non-participating employer

Eligible service

Within the limits noted below, we accept as eligible service under subparagraph 8503(3)(a)(vii) a period throughout which an RPP member renders services outside Canada under an employment contract with an employer who is:

* a non-resident participating employer;

* a non-participating employer who is connected with a participating employer; or

* a non-participating employer who has an arrangement with a participating employer concerning the member's rendering of services outside Canada.

This acceptance applies only if:

* the member is, or has been, resident in Canada and has previously rendered services in Canada under an employment contract with a resident participating employer; and

* benefits for the period of employment outside Canada are provided to the member on a current service basis.

This acceptance is limited to the first three years of the member's employment outside Canada, whether that employment is with one employer or more than one employer. However, if the member returns to Canada and then again becomes employed outside Canada, the three-year limit applies to the subsequent employment outside Canada as though the member had not previously been employed outside Canada. This renewal of the three-year limit applies only if, while in Canada,

the member renders services for a period of at least 12 months under an employment contract with a participating employer.

Compensation

When a period of employment of an RPP member with a participating employer6 is eligible service as described above and the member is not resident in Canada, we accept (under paragraph (c) of the definition of "compensation") the member's remuneration from the employer as compensation from the employer.

When a period of employment of an RPP member with a non- participating employer (the "foreign employer") is eligible service as described above and the member is not resident in Canada, we accept (under paragraph (c) of the definition of "compensation") the member's remuneration from the foreign employer as compensation from the participating employer to whom benefits provided for the period are attributed for PA purposes. This acceptance is limited to the amount by which the member's remuneration from the foreign employer for the period exceeds the amount (if any) included in

----------- 6 See Footnote 2.

the member's compensation from the participating employer for the period under paragraph (b) of the definition of "compensation".

PSPAs

Since a period of employment described above is automatically accepted as eligible service under subparagraph 8503(3)(a)(vii) only if benefits for the period are provided on a current service basis, there will be no PSPAs. Therefore, subsection 8303(10) is irrelevant.

3. Existing defined benefit provisions

Eligible service

If a registered pension plan was submitted for registration on or before the date of this newsletter (and regardless of when it was registered), we accept as eligible service under subparagraph 8503(3)(a)(vii) any period of employment outside Canada that is to be credited on a current service basis under a defined benefit provision of the plan.

This acceptance applies only if the following three conditions, relating to the terms of the plan that provide for the crediting of foreign service, are satisfied:

* the terms were submitted to us on or before the date of this newsletter;

* we accepted the terms either by registering the plan with the terms in it or by accepting a plan amendment with the terms in it; and

* the crediting of the service is not dependent either on our approving the service or on the service being acceptable under any administrative positions we have taken on foreign service, for example, a plan which recognizes foreign service as acceptable under the Circular.

If an RPP satisfies the first two conditions but not the third, we will, upon request, consider the acceptability of periods of employment outside Canada as eligible service under the plan. Of course, this consideration will not be required if the period in question is acceptable under any other criteria set out in this newsletter.

Compensation

When a period of employment of an RPP member with a participating employer7 is eligible service as described above and the member is not resident in Canada, we accept (under paragraph (c) of the definition of "compensation") the remuneration of the member from the employer as compensation from the employer.

When a period of employment of an RPP member with a non- participating employer (the "foreign employer") is eligible service as described above and the member is not resident in Canada, we accept (under paragraph (c) of the definition of "compensation") the member's remuneration from the foreign employer as compensation from the participating employer to whom benefits provided for the period are attributed for PA purposes. This acceptance is limited to the amount by which the member's remuneration from the foreign employer for the period exceeds the amount (if any) included in the member's compensation from the participating employer for the period under paragraph (b) of the definition of "compensation".

-----------------

7 See Footnote 2.

4. Reciprocal agreements8

We accept as eligible service under subparagraph 8503(3)(a)(vii) any period of employment of an RPP member outside Canada that is "transferrable" from an unregistered pension plan to the RPP under a reciprocal agreement between the two plans.

This acceptance applies only if:

* the reciprocal agreement had been established on or before the date of this newsletter in accordance with terms of the RPP approved by us; or

* the reciprocal agreement was submitted to us on or before the date of this newsletter and subsequently approved by us, whether approval was given before or after the date of this newsletter.

We will consider on a case-by-case basis whether subsection 8303(10) may apply to allow past service benefits for eligible service described above to be excluded in calculating PSPAs.

------------- 8 A period of employment outside Canada that is "transferrable" from one RPP to another RPP pursuant to a reciprocal agreement between the two plans will usually be acceptable as eligible service under subparagraph 8503(3)(a)(v). Therefore, our approval under subparagraph 8503(3)(a)(vii) would not be required.

5. Pre-1992 service credited after 1991 under a grandfathered plan

As noted in section 1 of Part II, grandfathered plans are exempted from the requirements of paragraph 8503(3)(a) for benefits provided for pre-1992 service. However, section 8509 requires that such benefits be acceptable to us.

When a pre-1992 period of employment outside Canada is to be credited as pensionable service under an RPP after 1991, we will not accept benefits for the period under section 8509 unless the period is acceptable to us. For this purpose, any period of employment outside Canada identified in this newsletter as being acceptable under subparagraph 8503(3)(a)(vii) is also acceptable under section 8509. We will consider other periods on a case-by- case basis.

Part IV: Money Purchase Provisions

If the terms of an RPP allow money purchase contributions to be made by or on behalf of a member for a period when the member is employed outside Canada and not resident in Canada, we will consider requests to accept the remuneration of the member for the period as compensation under paragraph (c) of the definition of "compensation". We will consider such requests on a case-by- case basis.

Part V: Conditions Imposed Under Subsection 147.1(5)

We impose the following conditions under subsection 147.1(5) of the Act. These conditions do not apply to defined benefits provided, or money purchase contributions made, before 1994.

1. Eligible periods of temporary absence

If an eligible period of temporary absence of an RPP member with respect to an employer is also a period during which the member is employed outside Canada by another employer (the "foreign employer"), benefits may not be provided to the member under a defined benefit provision of the plan for the period, unless we accept the period under subparagraph 8503(3)(a)(vii).

This condition applies only if the foreign employer is:

* a non-resident participating employer;

* a non-participating employer who is connected with a participating employer; or

* a non-participating employer who has an arrangement with a participating employer concerning the employment of the member outside Canada.

As a result of this condition, subparagraph 8503(3)(a)(iii) cannot be used as the basis for providing benefits under an RPP for an eligible period of temporary absence if the period is also a period of employment described above. This means that the benefits can be provided only if the period is acceptable under subparagraph 8503(3)(a)(vii).

2. Money purchase contributions

Contributions may not be made to a money purchase provision of an RPP by or on behalf of a plan member for a period during which the member is employed by an employer outside Canada, unless we have approved in writing the making of the contributions.

This condition applies only if the employer is:

* a non-resident participating employer;

* a non-participating employer who is connected with a participating employer; or

* a non-participating employer who has an arrangement with a participating employer concerning the employment of the member outside Canada.

3. RPP members connected with a participating employer

When a member of an RPP is connected with a participating employer during a period of employment outside Canada,

* there may be no benefits provided under a defined benefit provision of the plan in respect of the member for the period, and

* there may be no contributions made to a money purchase provision of the plan by or on behalf of the member for the period,

unless the benefits or the contributions, as the case may be, have been approved by us in writing.