19 October 1988 Income Tax Severed Letter 7-3359 - [Refunds of Pension Surplus]

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.

October 19, 1988

Financial Industries Division M. Shea-DesRosiers 957-8953

SUBJECT: Refunds of Pension Surplus XXXX

This is in reply to your Round Trip memorandum of October 12, 1988 in answer to our memorandum of September 27, 1988 (file #7-3190).

You have clarified two points:

(1) In the case of the additional pension benefits paid for by the individual employees through a reduction to their gross pay, only the net amount was included on their T4 slips. In the example of our memorandum of September 27, 1988 (at page 4), only the 8% increase is reflected in Box C of thee T4 slips.

(2) You advise that there was no obligation on the part of the City to refund the surplus to the employees. The City of XXXX was aware that court cases were pending in other cities on the entitlement of the surplus payments. The payments were made to the employees only to maintain amicable employer/employee relations.

Our Opinion

I - If the pension plan itself states that surplus amounts are to be paid to the employer, the payments made to the employees would not be considered superannuation or pension benefits. The amounts being paid by the City to the employees (current, former or their estate) would, in our opinion, be considered a taxable benefit received by the employees by virtue of their employment pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act").

The Department maintains the view that the phrase "in respect of, in the course of, or by virtue of employment" as used in paragraph 6(1)(a) of the Act is to be given the broadest possible meaning within the interpretation given that phrase by the Supreme Court of Canada in Savage v. The Queen 83 DTC 5409 and that any benefit received by a taxpayer by virtue of an employment is taxable.

As for the amounts to be considered "rights or things" pursuant to subsection 70(2) of the Act, the employees must have had a clear right to the amounts at their death. If the employees had no proprietary interest or clear right to the amounts at that time, then said amounts would not qualify for subsection 70(2) of the Act tax treatment.

II - If the pension plan itself states that surplus amounts are to be paid to the employee and the employer only acts as an agent for the transfer of these funds, then our previous opinion of September 27, 1988 is maintained.

We trust the above comments will be of assistance to you.

for Director Financial Industries Division, Rulings Directorate