CRA finds that the purchase price of a business allocated to the actuarial surplus for a defined benefit plan was a non-deductible capital expenditure
A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan.
Although, in fact, the acquisition occurred before 2017, the Rulings Directorate also addressed what would have happened on a post-2016 acquisition, and concluded that the amount allocated to the actuarial surplus would not have qualified as the cost of a Class 14.1 property, and instead would have been a non-deductible capital expenditure. Its findings towards this conclusion were:
- Having regard for the exclusion for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations.”
- Furthermore, the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
- The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
- Regarding the specific inclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead was specifically identifiable and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed.”
- The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).
Neal Armstrong. Summary of 28 January 2021 Internal T.I. 2019-0817641I7 under s. 18(1)(b) – capital expenditure v. expense – actuarial surplus.