2002 Ruling 2002-0138693 - FOREIGN PENSION PLAN SURPLUS RCA

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:

The proposed transaction involves Canadian resident employees of a Canadian corporation becoming members of a foreign pension plan. All pension benefits to be provided to the Canadian resident employees will only be funded with the foreign pension plan's surplus. Will the proposed transaction constitute a retirement compensation arrangement?

Position: No.

Reasons:

The employer does not have an absolute right to the actuarial surplus, therefore, no employer contributions will be considered to be made to the foreign plan and there will not be a residents' contribution made in accordance with subsection 207.6(5.1). Therefore, the arrangement will not be a residents' arrangement in accordance with subsection 207.6(5) and the proposed transactions will not be subject to Part XI.3 tax.

XXXXXXXXXX 							2002-013869

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Employer") (XXXXXXXXXX)

This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance tax ruling in respect of the above-referenced employer. We also acknowledge receipt of your letters dated XXXXXXXXXX and the information provided in our telephone conversations (XXXXXXXXXX).

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

We understand that, to the best of your knowledge and that of the Employer, none of the issues involved in the ruling request is:

(i) in an earlier return of the Employer or a related person,

(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Employer or a related person,

(iii) under objection by the Employer or a related person,

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, nor

(v) the subject of a ruling previously issued by the Directorate.

Definitions

"CCRA" means the Canada Customs and Revenue Agency;

"Eligible Employees" mean all employees of the Subsidiaries, except temporary, leased, or certain collectively bargained employees, as specifically defined in XXXXXXXXXX the Plan;

"Employer" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act, with head offices located at XXXXXXXXXX ;

"Individuals" mean the three individuals, as discussed in 10 below, who will all be employed with the Employer, as of XXXXXXXXXX; all of whom are currently residents of Canada and for whom the proposed transactions have been designed;

"Individual" means any one of the Individuals;

"Minister" means the Minister of Revenue;

"Plan" means the XXXXXXXXXX;

"RCA" means a "retirement compensation arrangement", as this term is defined in subsection 248(1) of the Act;

"SDA" means a "salary deferral arrangement", as this term is defined in subsection 248(1) of the Act; and

"Subsidiary" means certain wholly-owned United States subsidiaries of the Employer, namely XXXXXXXXXX.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The Employer is a taxable Canadian corporation within the meaning of the Act. The taxation year for the Employer is XXXXXXXXXX. The Employer files tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. The Employer's CCRA business number is XXXXXXXXXX.

2. XXXXXXXXXX.

3. The Plan is a United States pension plan that is a defined benefit pension plan that is tax-qualified in the United States under section 401(a) of the Internal Revenue Code.

4. Currently, the Plan benefits only Eligible Employees employed in the United States with a Subsidiary. The Plan was amended in recent months to allow the Employer to include certain Canadian residents employed by the Employer as beneficiaries. The addition by the Employer of such employees to the Plan, however, has not yet been approved by the Employer. Accordingly, Canadian residents employed by the Employer do not participate under the Plan.

5. The Employer does not sponsor a Canadian registered pension plan.

6. Pursuant to the Plan, Eligible Employees receive a benefit upon retirement or death (or, for certain grandfathered participants, upon disability) based upon a percentage of average final compensation and the number of years of service credited to the employee under the Plan. Unless a participant elects an optional form of benefit, benefits are paid to married participants in the form of a qualified joint and survivor annuity and to unmarried participants in the form of a life annuity with a XXXXXXXXXX term certain.

7. Pursuant to actuarial calculations as of XXXXXXXXXX, the Plan had assets of approximately US $XXXXXXXXXX and liabilities of approximately US $XXXXXXXXXX. The Plan was overfunded by approximately US $XXXXXXXXXX. The Plan has been in an overfunded state for some time and, consequently, no contributions have been made to the Plan for approximately XXXXXXXXXX years.

8. A Subsidiary has been the only contributor to the Plan and while the participating employers may have greater entitlements to the actuarial surplus than would Eligible Employees, such entitlements are not absolute. To access any actuarial surplus in the Plan, the participating employers are required to wind-up the Plan, which process may engage up to three stages of regulatory review.

Proposed Transactions

9. The Employer proposes to adopt the Plan as amended and approve the addition of the Individuals to the Plan in order to extend retirement benefits under the Plan to the Individuals. The adoption of the Plan is proposed by the Employer so that employees of the Employer resident in Canada are entitled to participate in the Plan in the same way as they would otherwise be entitled to participate in the Plan were such employees employed in the United States with a Subsidiary. Participation in the Plan by the Individuals will not affect the employment income such Individuals would otherwise receive from the Employer. It is not possible for the Employer to create a pension plan in Canada for the Individuals.

10. Two of the Individuals to be added as beneficiaries to the Plan are residents of Canada and have never participated in the Plan. The third Individual (also a resident of Canada) is employed in the United States with a Subsidiary, and in such capacity, has been participating in the Plan while a resident of Canada since XXXXXXXXXX. However, effective XXXXXXXXXX, this Individual will cease to be an employee of a Subsidiary, thereafter being employed by the Employer. This Individual would thus no longer be entitled to participate under the Plan unless the Plan is adopted by the Employer.

11. It is intended that the Plan will provide retirement benefits for the Individuals. Each of the Individuals' retirement benefits will be based upon his or her years of service with the Employer or a Subsidiary, rather than years of participation in the Plan.

12. Due to the overfunded status of the Plan, the Employer will not make any contributions to the Plan to fund the retirement benefits that will be provided to the Individuals. All of the liabilities associated with providing such retirement benefits to the Individuals will be funded by the allocation of the appropriate amount of the overfunded portion of the Plan.

13. In the event the Plan ceases to be in an overfunded state such that the participating companies will be required to commence making contributions to the Plan, the Plan will be frozen or terminated, so that no such additional contributions will be made and the Eligible Employees' benefits will be annuitized.

Purpose of the Proposed Transactions

14. The purpose of the proposed transactions is to provide retirement benefits to certain Canadian resident employees of the Employer and to put those Canadian resident employees in the same position with respect to participation in the Plan as persons employed in comparable positions with a Subsidiary.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions and provided the proposed transactions are completed as described above, we rule as follows:

A. The proposed transactions will not, in and of themselves, constitute a "retirement compensation arrangement" as this term is defined in subsection 248(1) of the Act so that Part XI.3 will not apply as a result of the proposed transactions.

B. The proposed transactions will not, in and of themselves, constitute a "salary deferral arrangement" as this term is defined in subsection 248(1) of the Act.

C. The proposed transactions will not, in and of themselves, give rise to income of the Individuals from employment under section 5 of the Act or a benefit from employment under paragraph 6(1)(a) of the Act.

D. The total of all amounts received by an Individual in a year out of or under the

Plan or from the disposition of any interest in the Plan, will be required to be included in the Individual's income for the year pursuant to paragraph 6(1)(g) of the Act.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Comment

Subsection 8310(2) of the Income Tax Regulations (the "Regulations") provides the Minister with the authority to require the determination of pension adjustments and past service pension adjustments where, in the Minister's opinion, it is appropriate. The Registered Plans Directorate of CCRA has the authority to exercise the Minister's powers under subsection 8310(2) of the Regulations. Officials of the Registered Plans Directorate have indicated that in situations as described above, they would require a pension adjustment (PA) to be reported in respect of current service pension benefit accruals and a past service pension adjustment (PSPA) in respect of past service pension benefit accruals, in respect of the Individuals.

The Registered Plans Directorate has indicated that they would require the same PA calculation as described in subparagraphs 8308.1(2)(b)(v) and (vi) of the Regulations. As a result, the PA to be reported would be the lesser of: (a) 18% of the Individual's compensation from the employer for the year, and (b) the money purchase limit for the year, minus the PA offset for the year. If pension benefits are to be provided in respect of past service, the Registered Plans Directorate has indicated that they would require a PSPA to be calculated in accordance with subsection 8308.1(5) of the Regulations. Alternatively, the Employer may make a written application to the Registered Plans Directorate proposing an alternative method of determining the PA and/or PSPA.

For more information concerning the PA and PSPA implications for members of foreign pension plans, please contact XXXXXXXXXX, Registered Plans Directorate, XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate