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:
Follow-up to 2001-008352. A group of employees was transferred from one employer to another resulting in the employees no longer being members of the former employer's pension plan. The pension plan paid the surplus in the plan to the municipality on the condition that the municipality and the Police Association agreeing on the disposal of the excess funds. It is proposed that the surplus in the pension plan relating to these former employees be divided between the former employer and the former employees. Is the payment of the surplus as a lump sum to the former employees taxable?
Position TAKEN:
Yes.
Reasons:
By requiring the municipality and the Police Association to agree on the distribution of the surplus, the Pension Plan paid the amount to the municipality in trust for the municipality and the employees. It then left it to the two parties to determine the distribution. Therefore, the payment from the municipality is a payment from the pension plan. Subsection 248(1) defines a "superannuation or pension benefit" to include "any amount received out of or under a superannuation or pension fund or plan ...". Therefore, the payments are taxable under subparagraph 56(1)(a)(i).
Alternatively, the police officers received the payments in respect of their employment making the payments taxable pursuant to paragraph 6(1)(a).
XXXXXXXXXX 2001-010684
T. Young, CA
January 15, 2002
Dear XXXXXXXXXX:
Re: Payment of Pension Surplus
This is in reply to your letter of October 16, 2001, concerning the division of a pension surplus sent in follow-up to our letter of October 3 (our reference number 2001-008352).
In your letter, you expressed concern with our position that the payments from the municipality to the police officers were not payments out of a pension fund, but were payments from the municipality to the officers in settlement to avoid future litigation. In support of your position you referred to our interpretation letter 9209585, which states that where a surplus amount is paid out of a pension plan to an employer, it is our opinion that such amount is income of the recipient in the year received by virtue of subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act"). You also referred to our advance income tax ruling 9816373, which stated that a payment from an employer to former employees to avoid litigation as a result of changes to post-retirement benefits was non-taxable.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. However, we are prepared to provide the following comments, which may be of assistance to you.
Based on the additional information you provided us with your letter of October 16, 2001, it is our understanding that the pay-out of the Ontario Municipal Employees Retirement System (OMERS) Type 3 Supplementary surplus to the municipality was made on the condition that the municipality and the bargaining agent for the employees or former employees (the "Employees") agree on how to divide the funds. By placing this constraint on the payment, the OMERS Board acknowledged that the Employees had a right to a portion of the funds. This Court of Appeal for Ontario in Ontario Metropolitan Police Services Board et al. vs. OMERS Board dated August 26, 1999 (docket C22844/C22846), confirmed that it was within the rights of the OMERS Board to require that the Police Services Boards and the Police Associations agree to the division of the funds.
In our opinion, it is clear that the payment from OMERS to the municipality was made on behalf of the municipality and the Employees. Therefore, when amounts totalling 50% of the funds received from OMERS were paid by the municipality to the Employees, the Employees received a payment out of the pension plan, which is taxable under subparagraph 56(1)(a)(i) of the Act.
Alternatively, even if the amounts were not taxable to the Employees as pension income, it is our view that they would be taxable as employment income. As stated by H. Krever J.A. in Metropolitan Police Services Board et al., "(t)he benefits may reasonably be thought of as present wages postponed or deferred". Therefore, as an alternative argument, the payments to the Employees were benefits received by virtue of their employment and are taxable under paragraph 6(1)(a) of the Act.
With respect to the technical interpretation letters to which you referred, 9209585 stated that the payment of a pension surplus to an employer was taxable as a pension payment pursuant to subparagraph 56(1)(a)(i) of the Act. It further stated that whether or not the income would be active business income is a question of fact. This is consistent with our position on the issue currently in question, but only in respect of the portion of the funds received from OMERS that the municipality has a right to keep. The letter is not relevant to the portion of the funds paid to the Employees.
As we stated in our letter of October 3, advance income tax ruling 9816373 dealt with the payment of a lump sum by a former employer in settlement of a claim resulting from the cancellation of certain post-retirement health benefits by the former employer and is not relevant in the current situation.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
- 2 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content