30 January 2002 Internal T.I. 2001-0105237 - PENSION PLAN ESOP/401(K) 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Will a certain ESOP/401(k) Plan be considered a pension plan for purposes of section 8308.2 of the Regulations?

Position: No.

Reasons:

The Plan has two segments with the employer only contributing to the ESOP. Under the ESOP portion of the Plan, employees can cash out as soon as the rights vest.

								January 30, 2002

	WINNIPEG TAXATION CENTRE			HEADQUARTERS
	Pat Romaniuk					M.P. Sarazin, CA
	Client Services 					(613) 957-2089

								2001-010523
	     XXXXXXXXXX 

This is in reply to your round trip memorandums of October 3 and 4, 2001, wherein you requested additional comments regarding the pension adjustment reported by the above noted taxpayer. The taxpayer disagrees with the general comments provided in our memorandum of April 13, 2000 (the "Memo") (our file# 2000-001912).

The taxpayer has argued that the prescribed amount to be reported under the provisions of section 8308.2 of the Income Tax Regulations (the "Regulations") should only be the amount that was actually contributed to his employer's ESOP/401K plan (the "Plan"). The taxpayer does not state whether the actual contribution amounts of XXXXXXXXXX were contributed to the Plan by him or his employer.

Comments

In the Memo, we discuss the general application of section 8308.2 of the Regulations. We state very clearly that, if the section applies, there is no provision for any reduction of the prescribed amount. Consequently, there is no basis for accepting the actual contributions to the Plan as the prescribed amount.

As noted in the Memo, it is a question of fact as to whether or not an ESOP/401(k) plan may be a foreign pension plan for purposes of the Income Tax Act (the "Act") and Regulations. For purposes of the Act, the term "superannuation or pension benefit" is defined under subsection 248(1) of the Act to include any amount received out of or under a superannuation or pension fund or plan and any payment made to a beneficiary under such a plan or fund in accordance with the terms of, or resulting from the amendment or termination of, the plan or fund. Generally, a plan will be considered a superannuation or pension fund where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payments on or after the employee's retirement in consideration for his or her employment services.

We note that the courts have generally found that a plan will not be a superannuation or pension plan where only the beneficiary of the plan has made contributions. The courts have, in particular, frequently cited the 4th definition of pension as set out in the Shorter Oxford English Dictionary as support for their decisions. This definition provides that a pension is:

"4. An annuity or other periodical payment made, esp. by a government, a company, or an employer of labour, in consideration of past services."

Because of these decisions, we have accepted the general position that a plan or arrangement requiring only employee contributions will not be considered a superannuation or pension plan for purposes of the Act.

Your round trip memorandums included a copy of the "XXXXXXXXXX" describing the general terms of the Plan. The general terms of the Plan include:

(a) The Plan is a combination of two plans, a salary reduction plan (401(k) plan) and an employee stock ownership plan (ESOP). An employee becomes an automatic participant in the ESOP after 6 months of employment with the employer. An employee may become a participant in the 401(k) if after 6 months of employment he or she elects to participate in the 401(k).

(b) The employer intends but is not required to make discretionary contributions to the ESOP. The employer does not and is not required to make contributions to the 401(k) plan. The trustee of the Plan is responsible for investment of the ESOP portion of the Plan and the trustee invests almost all of the employer contributions in shares of the employer.

(c) The employer will only contribute the total amount of the salary reduction that an employee elected to defer and the discretionary amount that it decides to contribute to the Plan.

(d) The employee can elect to defer up to XXXXXXXXXX% of his or her annual compensation. This deferred amount will be credited to a Basic Contribution Account maintained for the employee. The amounts credited to the employee's Basic Contribution Account will always be 100% vested. In respect of his or her Basic Contribution Account, an employee may select investments from a list of specific mutual funds that may be acquired with the amounts credited to his or her Basic Contribution Account.

(e) The employee is not entitled to distributions from his or her Basic Contribution Account before age XXXXXXXXXX except in the event of death, permanent and total disability, termination of employment or financial hardship. Hardship withdrawals may be made to pay for family medical expenses, to purchase a principal residence, to pay for tuition, education and room and board for post-secondary education for a family member or to prevent eviction from your principal residence or foreclosure of the mortgage on the principal residence.

(f) A formula is used to allocate the employer's discretionary contributions. The allocation is determined by multiplying the discretionary contributions by the fraction computed when the employee's compensation is divided by the total compensation of all participants in the Plan.

(g) The portion of the employer's discretionary contributions that are allocated to an employee are credited to a Company Stock Account or Other Invest Account for that employee.

(h) On or after an employee's normal retirement date (65th birthday), the employee is entitled to 100% of all of his account balances. The employee may request a single lump sum payment or a series of installment payments (over a period of not more than XXXXXXXXXX years) from the Plan. On death, an employee's beneficiary is entitled to 100% of the employee's account balances. If the employee becomes permanently disabled, he or she is entitled to 100% of his or her account balances. On termination of employment with the employer, the employee is generally entitled to vested account balances only.

(i) Amounts credited to an employee's Company Stock Account or Other Investment Account vest as followsXXXXXXXXXX

(j) An employee can apply for and receive a distribution of vested shares of the employer credited to his or her Company Stock Account at any time. Once a distribution has been made, the employee is not entitled to another distribution from the Company Stock Account until XXXXXXXXXX months after the last distribution.

(k) An employee may apply for a loan from the balance of his or her Basic Contribution Account and/or Company Stock Account. The borrowed amount may not exceed XXXXXXXXXX of the vested account balances. Plan loans are made at commercial rates and have to be paid off over a period of not longer than XXXXXXXXXX years.

If the actual terms of the Plan are as described above, it would be very difficult to support a conclusion that the Plan is a superannuation or pension plan for purposes of the Act and Regulations. The Plan is broken down into the two components (ESOP and 401(k)) and both allow for pay-out at any time. Even though it is clear that the taxpayer participates in the ESOP, the information provided does not disclose whether the taxpayer participates in the 401(k) portion of the Plan. In any case, the taxpayer is entitled to withdraw his vested ESOP rights at any time and the employer does not contribute to the 401(k) so it would be difficult to support a conclusion that the Plan is a superannuation or pension plan for purposes of the Act and Regulations. If the taxpayer does participate in the 401(k) portion of the Plan, it would difficult to conclude that this, in and by itself, would constitute a superannuation or pension plan since the amounts in the 401(k) may be paid out before retirement, may be paid out in a lump-sum and the amounts do not include any employer contributions. Based on the above comments, in our view, section 8308.2 of the Regulations does not apply to the Plan and, accordingly, there is no prescribed amount and no erosion of the taxpayer's RRSP contribution room.

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