26 March 2009 External T.I. 2008-0271871E5 - RPP forfeitures

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does constructive payment and receipt of an amount occur when a forfeiture in an RPP is allocated to an employer and the employer asks the administrator to use the amount as directed by the employer? How does this position apply given subsection 8506(2) of the Regulations?

Position: When the administrator is going to make a payment to the employer and instead uses the funds as directed by the employer then constructive receipt will occur. This position has no effect on the application of the Regulation. It assumes that an amount has already been allocated to the employer under the Regulation.

Reasons: There is a constructive receipt and payment. The position takes into consideration the application of subsection 8506(2).

2008-027187
XXXXXXXXXX Wayne Harding
(613) 957-8953
March 26, 2009

Dear XXXXXXXXXX :

Re: Payment of Registered Pension Plan (RPP) Forfeitures

This is in response to your email of March 18, 2008, regarding the payment of forfeitures out of an RPP to an employer.

Written confirmation of the tax implications inherent in particular transactions can be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.

In our letter E2005-0130471 we expressed the view that tax withholdings must be made on an amount paid out of a DPSP or an RPP to an employer even though the employer intends to contribute all or a portion of the amount back into the plan. We then extended this position to situations where funds are made available to an employer who requests the plan retain the amount either on account of future contributions or on account of the employer's reimbursement of expenses and, in particular stated that, the employer would be considered to have constructively received the amount retained on the employer's behalf. Accordingly, it is our view that subsection 153(1) of the Income Tax Act (the "Act") would apply to the gross amount retained by the payor.

You are concerned that (1) this position renders paragraph 8506(2)(f) of the Income Tax Regulations (the "Regulations") meaningless and that (2) the extension of this position means that an employer will be taxed on forfeitures that are left in the plan but will not be entitled to deduct the portion retained within the plan to pay expenses.

Paragraph 8506(2)(f) of the Regulations provides that forfeitures and any earnings on the forfeitures under a money purchase RPP must be

(i) paid to participating employers,
(ii) allocated to the accounts of plan members, or
(iii) paid as or on account of administrative, investment or similar expenses incurred in connection with the plan

within a specified period of time.

The position described in our previous letter is intended to address situations where an employer requests a payor to not make a payment that would otherwise be made directly to the employer and instead requests the payor to make specific expenditures on the employer's behalf. Accordingly, we can confirm that where:

(i) a forfeiture arises in a registered pension plan,
(ii) the plan terms provide for the amount of the forfeiture to be paid to the employer under subparagraph 8506(2)(f)(i) of the Regulations, and
(iii) all or a portion of the amount is retained in the plan to be used to make specific expenditures on the employer's behalf,

then subsection 153(1) of the Act will apply to the whole amount of the forfeiture.

For the purposes of the application of subparagraph 8506(2)(f)(i) of the Regulations, it is presumed that a participating employer would have a right under the applicable pension benefits legislation to be paid an amount in respect of any forfeitures realized within a particular plan. If this is not the case and an allocation of forfeited amounts is made to an employer there may be additional consequences that are beyond the scope of this letter.

We trust that these comments clarify our previous comments.

Yours truly,

Mary Pat Baldwin C.A.

for Director
Financial Sector and exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch