1 November 2000 External T.I. 2000-0044525 - DEMUTUALIZATION PENSION PLAN

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: An RPP receives a demutualization benefit in trust for the annuitant in respect of a paragraph 254(a) annuity contract acquired for the annuitant retiree under the plan. If the RPP distributes the demutualization benefit to the annuitant, will the flow-through rule in subsection 139.1(16) apply to the distribution?

Position: Yes, provided that the requirements of 139.1(16) are met.

Reasons: Subsection 139.1(16) was designed to treat stakeholders (in this case the RPP as Contractholder under the annuity contract) as conduits for cash conversion benefits transferred to individuals.

XXXXXXXXXX 2000-004452
M. P. Sarazin
Attention: XXXXXXXXXX

November 1, 2000

Dear Sirs:

Re: Demutualization and Annuity Contract

This is in reply to your letter of July 19, 2000, forwarded to us by the Registered Plans Division, requesting our views regarding the payout of an amount received by a registered pension plan on behalf of a retiring member of the registered pension plan ("Annuitant") from an insurance company as result of its demutualization.

The XXXXXXXXXX (the "RPP") is a registered defined contribution pension plan. In XXXXXXXXXX, an annuity was purchased from an insurance company for the Annuitant. The annuity was purchased in accordance with paragraph 254(a) of the Income Tax Act (the "Act") under a group annuity master agreement executed between the RPP as contractholder and the insurance company. However, no other members of the RPP have opted to purchase an annuity under the master agreement.

The RPP has received a cheque for $XXXXXXXXXX from the insurance company in respect of its demutualization. The RPP received the funds as trustee for the Annuitant. You will distribute the funds to the Annuitant and you want to know whether the distribution will be deemed to be a dividend received from the insurance company or will the distribution be a pension benefit that should be subjected to withholding taxes?

Comments

Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance tax rulings, please refer to Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "Agency"). Copies of information circulars and interpretation bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.

Subsection 139.1(16) of the Act permits a stakeholder, within the meaning assigned by subsection 139.1(1) of the Act, which has received a cash demutualization benefit in respect of an insurance policy to distribute such benefit to the individual who receives benefits under the particular insurance policy. Where subsection 139.1(16) of the Act is applicable, it generally treats the stakeholder as a conduit by deeming the stakeholder not to have received the demutualization benefit and by providing that no amount is deductible in computing the stakeholder's income because of the distribution. The individual receiving the demutualization benefit under the particular insurance policy from the stakeholder is deemed to have received a dividend equal to the amount of the distribution from the insurance corporation.

For subsection 139.1(16) of the Act to apply, the following conditions in paragraphs 139.1(16)(a) to (f) must be met:

(a) a stakeholder receives a conversion benefit because of the interest of any person in an insurance policy,

(b) the stakeholder makes a payment of an amount (except, in general, a payment made by way of a transfer of a share) to a particular individual

(i) who has received benefits under the policy,

(ii) who has, or had at any time, an absolute or contingent right to receive benefits under the policy,

(iii) for whose benefit insurance coverage was provided under the policy, or

(iv) who received the amount because an individual either received such benefits or had such a right or insurance coverage,

(c) it is reasonable to conclude that the purpose of the payment is to distribute an amount in respect of the conversion benefit to the particular individual,

(d) either

(i) the main purpose of the policy was to provide retirement benefits or insurance coverage to individuals in respect of their employment with an employer, or

(ii) all or part of the cost of insurance coverage under the policy had been borne by individuals (other than the stakeholder),

(e) subsection 139.1(14) of the Act does not apply to the conversion benefit (this provision applies where a conversion benefit is in respect of a life insurance policy held by a trust governed by a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan or superannuation or pension fund and the conversion benefit is paid to a person, other than the trust), and

(f) one of the following applies,

(i) the individual is resident in Canada at the time of the payment, the stakeholder is a person exempt from tax under Part I of the Act and the payment would, if section 139.1 were read without subsection 139.1(16), be included in computing the income of the individual,

(ii) the payment is received before December 7, 1999, and the stakeholder elects in writing filed with the Minister, on a day that is not more than 6 months after the end of the taxation year in which the stakeholder receives the relevant conversion benefit, that this subsection applies in respect of the payment,

(iii) the payment is received after December 6, 1999, the payment would, if this section were read without reference to this subsection, be included in computing the income of the particular individual and the stakeholder elects in writing filed with the Minister, on a day that is not more than six months after the end of the taxation year in which the stakeholder receives the relevant conversion benefit, that this subsection applies in respect of the payment, or

(iv) the payment is received after December 6, 1999 and the payment would, if this section were read without reference to this subsection not be included in computing the income of the individual.

In your case, if all of the above conditions are met, subsection 139.1(16) of the Act will apply in respect of the distribution.

With regard to the preparation of T5 slips, pursuant to paragraph 139.1(16)(i) of the Act, the insurance company will be deemed to have paid a dividend to the individual at the time the distribution is made by the RPP. However, under paragraph 139.1(16)(j) of the Act, the RPP assumes the obligations, including the reporting obligations, with regard to the deemed dividend that would otherwise be imposed on the insurance company. Accordingly, the RPP will be responsible for preparing the T5 slips to the plan member.

Please note also that subparagraph 147.4(3)(a)(ii) of the Act provides that the payment of the demutualization benefit will not constitute an amendment to the annuity contract giving rise to an income inclusion to the Annuitant at the time of the amendment.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 and are not binding on the Agency in respect of any particular situation

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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