31 May 2000 Internal T.I. 2000-0015977 - UNEARNED PENSION SURPLUS

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.

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 a financial institution's pension surplus is included in its capital for Large Corporations Tax purposes.

Position: It is included in capital as any other surplus pursuant to paragraph 181.3(3)(c)(ii).

Reasons: The concept of "surplus" is not defined in the Act; however, we have considered it on a few occasions and have adopted a broad view as to its meaning. Essentially an amount that reflects the excess of a corporation's assets over liabilities would generally be viewed as surplus. A prepaid pension asset would seem to fit squarely within that concept.

		May 31, 2000

	OTTAWA TSO	HEADQUARTERS
	Scott Boswell	Income Tax Rulings Directorate
	Manager	R. Maley
		957-9226
	Attention:  John Paisley
		2000-001597

Large Corporations Tax - Unearned Pension Surplus

This is in response to your e-mail dated March 23, 2000 requesting our comments as to the application of the Large Corporation's Tax to pension surplus reflected on a financial institution's financial statements. As we understand it, the financial institution has debited its pension fund surplus with an offsetting credit in respect of unamortized pension surplus. A portion of the surplus is amortized monthly and is reflected in the client's retained earnings. There is no income inclusion or reserve in respect of the surplus for Part I purposes.

You would like to know whether the surplus amount should be included in the financial institution's capital as any other surplus within the meaning of subparagraph 181.2(3)(c)(ii) of the Act.

As we understand it, the amount shown in financial statements as prepaid pension is the excess of pension funding payments over the cumulative accounting pension expenses. The funding payments would have been made based on actuarial recommendations and deducted for income tax purposes in the year during which they were made. We considered a similar issue respecting pension surplus once before in XXXXXXXXXX (endnote¹). XXXXXXXXXX position had been that the pension asset was akin to a negative reserve and should be deductible against retained earnings. Ruling's position was that the reserve inclusion cannot be a negative amount that offsets other items of capital (this position would subsequently be affirmed in the National Trust Company case) (endnote²). Thus the retained earnings inclusion could not effectively be offset by a negative reserve inclusion.

As noted, the financial institution has offset the pension surplus unamortized pension surplus credit. XXXXXXXXXX used a different accounting presentation, offsetting their pension surpluses by crediting retained earnings. Irrespective of the accounting presentation, our view is that pension surplus should be included in capital. The fact that there may be legal constraints to an employer in accessing the excess pension amounts should not pose a problem as the CICA (EIC-1 and section 3461) has provided for this consideration in valuing the pension asset.

The concept of "surplus" is not defined in the Act; however, we have considered it on a few occasions and have adopted a broad view of its meaning. For example, in E9705367 a number of definitions of surplus were reviewed, many of which essentially define that concept as an excess of assets over liabilities. A prepaid pension asset would seem to fit squarely within those definitions.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ E9511377
² 96 DTC 6234