18 April 1990 Ministerial Correspondence 59834 F - Pension Rules

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.

April 18, 1990

Dear Sirs:

This is in reply to your letter of March 21, 1990 wherein you requested our views on several questions relating to the following hypothetical situation:

     A non-taxable employer has a 2% final average earnings pension plan.  Highly paid employees however find that their pension is limited by virtue of the maximum pension rule contained in Information Circular 72-13R8 and, the employer feels an obligation to deliver the full benefit promised by the pension plan formula, notwithstanding that there will be no tax assistance in respect of the benefit above the maximum pension (the "excess benefit").

     The employer considers using a retirement compensation arrangement to deliver the excess benefit, but since the employer is not taxable, finds the 50% refundable tax mechanism of the RCA too onerous.

     Instead, the employer decides to pay the excess from operations (i.e. there is no-prefunding) in one of the following ways:

(a)     in a single lump sum payment equal to the present value of the excess benefit;

(b)     monthly for 10 years in such amount that the present value of the 10 year payment stream is equal to the present value of the excess benefit; or

(c)     monthly for life, in the same form as the pension is being paid.

Your questions and our replies to them are as follow:

1.     Are the payments under each option taxable to the retired employee in the year of receipt or at some earlier point?

     Generally we would consider the amounts to be taxable at the time of their receipt.  However, if under the terms of an actual plan, the payments are, in fact, amounts on account or in lieu of salary for prior services which the taxpayer has a right to receive and it is reasonable to assume that one of the main reasons for the plan is to postpone taxes otherwise payable, the arrangement would be a salary deferral arrangement (SPA).  In this case, the deferred amount payable together with any additional amounts accrued under the arrangement to the employee at the end of each calendar year, must be included in his income to the extent it was not included in a prior year.

2.     Do the payments under each option qualify as a retiring allowance, thereby permitting the retired employee some RRSP rollover?

     The definition of a "retiring allowance" provided in subsection 248(1) of the Income Tax Act specifically excludes amounts paid out as superannuation or pension benefits.  In our opinion, in your scenario, the amounts would in each case be paid out as a superannuation or pension benefit provided that the plan is not an SPA.

3.     The Pension Benefits Act of Ontario, 1987, excludes from its jurisdiction a plan that provides retiring allowances.  Does Revenue Canada acknowledge that an unfunded plan can be designed to provide retiring allowances, or would any such benefit be classified as a pension benefit or a salary deferral arrangement?

     As noted in our reply to 2.  above, an amount paid out of a pension plan will be, for taxation purposes, a pension benefit and not a retiring allowance.  In our opinion an unfunded plan can be designed which is not a pension plan but is a plan to provide retiring allowances.  What any specific plan is, however, may only be determined on a case by case basis and only after a complete review of all of the plan's provisions is completed.

4.     Are the payments under each option deductible to the employer in the year they are paid as an expense incurred for the purpose of earning income from a business?

     Provided the amount of the payments is reasonable given the actual circumstances, in our opinion, the payments would be deductible by the employer for the year in which they are made provided that the plan is not an SPA.

We hope these comments are satisfactory to your needs.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate