2 June 1988 Income Tax Severed Letter 5-5524 - [880602]

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.

June 2, 1988

Financial Industries Division W.C. Harding 957-3499

SUBJECT: OBJET: Your Files: HAD 8224-7352, HAU 8224-8006 and HAD 8224-8056

DOSSIER

This is in reply to your memo of February 26, 1988 wherein you requested we reply to the above-noted taxpayers in respect of their request for the registration of certain proposed pension plans.

Upon our review of the subject matter we believe this is more a question of your Division's application of the rules for registration of pension plans than it is a question of the interpretation of the law governing those rules. Accordingly, we feel it would be more appropriate for you to reply. directly to the correspondents on the matter and to this end, we offer our comments as follow below.

As we understand, A company is a partnership held 50% each by B Limited and C Limited. B is the sole shareholder of B Limited and its primary (if not only) employee. Prior to it becoming a partnership, A company was a business of C Limited and it employed B to manage its affairs.

"B" Limited now wishes to register a defined benefit pension plan for B. "A company" also wishes to register a money purchase pension plan for its employees. While there does not appear to be any problem with the registration of A's plan, B Limited's plan appears to be one which is primarily for its significant shareholders and is, in consequence, not normally registerable.

Information Circular I.C. 72-13R7, paragraph 8(d) provides that plans which are primarily for significant shareholders will not be accepted for registration. In accord with the memorandum supplied by you "this paragraph gives rise to a "50%" rule". This rule appears to state that where more than 50% of the present value of all of the benefits accrued under a plan are for significant shareholders, the plan will be considered to be primarily for significant shareholders.

It also appears that, to alleviate problems where an employer (for whatever reason) has more than one plan, it is acceptable for the registration of each plan, if the "50% rule" can be met in total. In consequence, when one employer has both an otherwise unacceptable significant shareholder plan, and another acceptable plan, both will be accepted for registration if in total they meet the "50% rule".

In our opinion, the circumstances of this case do not fit in with the above 50% rule and are clearly outside of the intent of paragraph 8(d) of the information circular as it is presently written. It must, therefore, remain your Division's decision as to whether or not those provisions should be extended to cover the situation as described.

Wayne Douglas Chief Deferred Income Plans & Trusts Section Financial Industries Division Rulings Directorate