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:
1. Can an RPP have two fully independent defined benefit provisions and funding accounts (or trusts), where surplus funds in one account are not available to fund the other account?
2. Can certain "start-up" and training costs be treated as distributions out of an RPP?
Position:
1. No.
2. Registered Plans Directorate has the ability to allow the costs and it would seem reasonable to do so.
Reasons:
Application of 147.2(2) will prevent the segregation of the funds in the manner desired.
RPPs are permitted by regulation 8502(d) to make certain permissible distributions. However, distributions to pay administrative expenses are not specifically listed. Nevertheless, the technical notes to paragraph 8502(d) provides that in addition to the distributions that are listed, a plan may provide for the payment of all reasonable administrative, investment and similar expenses incurred in connection with the plan. Accordingly Registered Plans Directorate has the ability to permit or deny the proposed distributions based on its determination of whether or not the distributions do in fact represent such expenses. Rulings has not previously attempted to define such costs. However, fairly inclusive opinions have been given. Our general concern has been to prevent the distribution of pension benefits as tax-free distributions.
June 24, 2002
HEADQUARTERS HEADQUARTERS
Ms. Patricia Spice, A/Director Financial Industries
Policy and Communications Division Division
Registered Plans Directorate W.C. Harding
957-8953
Attention: Mike Godwin
2002-014070
Registered Pension Plan Funding and distributions
This is in reply to your memorandum of May 13, 2002, concerning the restructuring of a Registered Pension Plan (an "RPP") and the payment of various expenses incurred as a consequence of the restructuring.
First Issue
XXXXXXXXXX
Your Position
Both of XXXXXXXXXX proposals seek to interpret subsection 147.2(2) of the Income Tax Act ("the "Act") so as to permit funding based on the status of an individual provision within the Plan. In this and similar situations, your position has consistently been to interpret subsection 147.2(2) of the Act to require that the funded status of a plan as a whole be considered in determining what will constitute an eligible contribution.
We concur with your position. A similar proposal was addressed by us in a memorandum to the Registered Plans Division dated November 19, 1992. (See our file E9230366 a copy of which is enclosed.) In that case, a proposal was made to combine a pension and a supplemental pension plan into a single registered plan having two defined benefit provisions funded, respectively, through two separate trusts. In our reply, we stated:
"With respect to whether or not a pension plan can have two separate trusts, there is nothing in the Act that would in our view preclude such an arrangement. However, for the purposes of determining whether or not additional funding of a pension plan is required by an employer, it is our view that the plan must be looked at as a whole and that the assets of the two trusts would be considered as one pool of assets for this purpose. In this regard, we note that a permissible contribution with respect to a defined benefit provision is limited under subparagraphs 8502(b)(iii) and (vi) of the Regulations to an eligible contribution under subsection 147.2(2) of the Act. The latter part of the preamble to subsection 147.2(2) reads:
"...so that the plan will have sufficient assets to pay benefits under the defined benefit provisions of the plan......"
From this wording, it can be seen that if a plan as a whole is adequately funded, an employer could not make a contribution to the plan on the basis that the assets related to one of its defined benefit provisions were deficient. We could find nothing in section 8516 of the Regulations or in any of the other relevant provisions of the Act or Regulations contradicting this limitation. It seems that the only time that a division of assets of a plan is appropriate for the purposes of determining if part of the plan needs funding is where two or more employers contribute to the plan and it is necessary to determine if one employer has an actuarial liability to the plan (e.g., see paragraph 8515(6)(d) of the Regulations)."
In our view, this position is equally valid in your present situation.
Second Issue
In conjunction with the restructuring of the Plan, XXXXXXXXXX is divesting itself of the responsibility of managing the Plan. It will pass legislation identifying certain "Representative Sponsors" from employer and employee organizations. These Representative Sponsors will then be required to appoint a specified number of delegates to two autonomous bodies:
1. the Sponsors' Committee that will control Plan terms and design and
2. the XXXXXXXXXX Board that will administer the Plan.
The Sponsors' Committee will be required to assume its responsibilities within XXXXXXXXXX years of the re-structuring. In the interim, this committee will have to establish an agreement for such things as meetings, voting protocol and dispute resolution. The current XXXXXXXXXX Board will continue to administer the Plan during the transition phase and the new members will likely be phased in gradually.
As a result of the restructuring, it is anticipated that a number of expenses will be incurred during this interim period. These expenses will include certain expenses relating to the Representative Sponsors obtaining the education and expert advice necessary in order that they can determine how to select delegates to the two new bodies and set the terms of the new arrangement, including the structure and functions of the Sponsors' Committee.
RPPs are permitted by paragraph 8502(d) of the Income Tax Regulations (the "Regulations") to make permissible distributions as described therein. However, distributions to pay administrative expenses are not specifically listed. Nevertheless, the July 31, 1991 Technical Notes to paragraph 8502(d) of the Regulations provides that in addition to the distributions that are listed, "a plan may provide for the payment of all reasonable administrative, investment and similar expenses incurred in connection with the plan".
As you noted, the majority of our interpretations concerning expenses of registered plans relate to whether such expenses could be deducted by the employer outside the plan (See also Interpretation Bulletin IT-105), whether the members of a registered pension plan could be charged such expenses and be permitted a deduction, or whether administrative fees and investment management fees could be deducted if paid inside or outside of registered retirement savings plans or registered retirement income funds.
In our previous files only limited opinions have been provided in respect of the characterization of expenditures for the purposes of paragraph 8502(d) of the Regulations. Please refer to our enclosed files: E58948, dated May 19, 1989, E9409486 of April 26, 1994, and E9719235 dated August 8, 1997.
You noted that the proposed expenditures are similar in nature to pre-incorporation expenses of a corporation or the expenses incurred in the formation of a partnership or unit trust, the deduction of which is limited under the Act and, in particular, in respect of the latter expenditures, by virtue of subparagraph 20(1)(e)(i) of the Act. Interpretation Bulletins IT-364, Commencement of Business Operations and IT 454, Business transactions Prior to Incorporation, provide general comments on the accounting of the former types of expenditures. In our view, while this may be an accurate description, the Act provides limitations on the deduction of such amounts for the purpose of computing income; the Act does not, of itself, limit the payment of such amounts. Accordingly, we do not think these provisions will be of assistance in your situation.
In general, it appears that historically, Rulings has accepted that a broad spectrum of expenditures may properly be characterized as administrative expenses and that such expenses may be paid out of an RPP in accordance with paragraph 8502(d) of the Regulations. Furthermore, it has always been presumed that the RPPs in question had the legal ability to make such distributions. As a result, it appears that our primary concern, as expressed in the above-noted replies, has been substantially limited to ensuring that the provisions are not used to provide any benefits to employees or to employers on a tax-free basis. Accordingly, it is our opinion that your RPD may permit or deny the proposed distributions based on your determination of whether or not the distributions do, in fact, represent administrative expenses and not benefits and that the RPP does have the legal ability to pay the expenses from its funds. XXXXXXXXXX.
As an alternative to paying the expenses from the Plan, XXXXXXXXXX has asked if the expenses could be covered by payment of Plan surplus to the Representative Sponsors who have incurred the costs. It is your view that the person receiving the surplus must have an "interest" in the surplus and that the distribution would only be permitted under subparagraph 8502(d)(vi) of the Regulations. We concur with your views.
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Enclosures:
Our Files: E9230366
E58948
E9409486
E9719235
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