Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether the proposed payment of damages to a registered pension plan by the former manager is a contribution as defined under paragraph 147.2(1)(b) of the Act.
Position:
No.
Reasons:
The payments to be received by the registered pension plan as damages payable by the former manager are not “contributions” under 147.2(1). The action for damages against the former manager is an asset of the plan. In essence, the plan is realizing a return on this asset as they would on any investment held by the plan. Thus the payment into the plan is “income” or “earnings” on the plan’s assets and not a “contribution” into the plan from an external source.
XXXXXXXXXX
XXXXXXXXXX 990353
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Tax Ruling
XXXXXXXXXX (the “Plan”)
This is in response to your letter of XXXXXXXXXX, in which you requested an Advance Tax Ruling in the above taxpayer’s file. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX).
Our understanding of the facts and proposed payment is as follows:
RELEVANT FACTS
1. XXXXXXXXXX (the “Company”) (XXXXXXXXXX) is the sponsor of the Plan (registration XXXXXXXXXX). The Plan is registered in XXXXXXXXXX. The Company is also the administrator of the Plan under the XXXXXXXXXX. The Plan is a defined benefit pension plan.
2. Effective XXXXXXXXXX (“the previous manager”) ceased to be the investment manager for the Plan and was replaced by XXXXXXXXXX (“the current manager”). The Company, as the administrator of the Plan, instructed the previous manager to liquidate all assets under its control with effect on the XXXXXXXXXX valuation date. The previous manager, however, erroneously liquidated these assets prior to this date, contrary to the specific instructions of the Company. Financial markets posted positive returns in the period during which the subject assets remained uninvested. The Plan assets, therefore, did not benefit from this market increase. The estimated loss to the pension fund is $XXXXXXXXXX.
3. As a result of the investment manager’s actions, the administrator of the Plan has a cause of action (in tort or in contract) against the investment manager for damages to recover the loss to the pension fund and the administrator has a fiduciary obligation to pursue its claims against the previous manager. However, the previous manager has accepted responsibility for the loss and has agreed to reimburse the pension fund for the amount of $XXXXXXXXXX, without the administrator having to commence legal proceedings. The proposed payment would be unrelated to the most recent actuarial valuation report filed in respect of the Plan and would constitute compensation to the pension fund for the loss caused by the previous manager’s error. The previous manager’s payment would be made in full and final settlement of all claims that the administrator may have as a result of the previous manager’s actions.
PURPOSE OF PROPOSED PAYMENT
4. The proposed payment will be made by the previous manager to compensate the pension fund for the loss caused by the premature sale of the assets.
OTHER INFORMATION
5. To the best of your knowledge and that of the Corporation none of the issues in respect of which rulings are herein requested are:
(a) in an earlier return of the Corporation or a related person,
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Corporation,
(c) under objection by the Corporation or a related person,
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(e) the subject of a ruling previously issued by the Directorate.
6. The Company and the Plan are served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.
RULING GIVEN
7. Provided that the statement of facts and the description of the proposed payment are correct and constitute a complete disclosure of all the relevant facts and relevant terms of the proposed payment, we rule as follows:
A) No amount of the proposed payment to be made to the Plan by the previous manager will constitute a contribution to the Plan within the meaning of paragraph 147.2(1)(b) of the Income Tax Act (the “Act”) and no amount of the proposed payment will be deductible under paragraphs 147.2(1)(b) and 20(1)(q) of the Act.
The above advance income tax ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and is binding upon the Department provided the proposed payment is made within six (6) months of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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