27 January 1994 External T.I. 9336685 F - Pension Plan Wind-Up

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.

RULINGS DIRECTORATE CORRESPONDENCE SUMMARY

PRINCIPAL ISSUES:

Whether there are tax consequences upon deregistration of pension plan.

POSITION TAKEN:

Maybe.

REASONS FOR POSITION TAKEN:

Depends on whether there is a "retirement compensation arrangement" or a section 254 substitution. See 7-1483, 920318, 911618, 911130, 5-7891.

LEGAL:

FINANCE OPINION:

JURISPRUDENCE:

RCT PUBLICATIONS:

IC 72-13R8, para. 16.

HAA NUMBER:

7284-1

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  XXXXXXXXXX - Pension Plan (the "Plan") Wind-Up

This is in reply to your letter of December 13, 1993, in which you ask our advice on the tax consequences resulting from deregistration of the above-named Plan. The Registered Plans Division of the Department has confirmed that the Plan may be wound-up but that the fund remaining may be subject to tax.

As your query relates to proposed transactions which are being contemplated by your clients, we are unable to provide an opinion that is binding on the Department. We can, however, offer the following general comments.

We note that in your letter of June 11, 1993, to the Registered Plans Division (copy enclosed with your submission), you suggest that the beneficiaries under the Plan are not "employed". In our view, the relationship between members of a religious order and the order's governing body may be one of employment and subject, unless expressly excepted, to the incidents of taxation contemplated by the Act.

An arrangement whereby an employer makes contributions or sets aside assets to fund employee benefits payable on retirement or termination of employment is considered a "retirement compensation arrangement" (RCA) as defined in subsection 248(1) of the Income Tax Act (the "Act"). A registered pension plan which is revoked or deregistered will be considered an RCA from the date on which the revocation or deregistration takes effect. An RCA is subject to the Part XI.3 refundable tax which is levied on all contributions to the RCA and earnings thereon; however, the tax is not exigible on accumulated contributions and investment income accruing before the date registration is revoked (see Question 49 of the 1992 Canadian Tax Foundation Round Table Discussion). Amounts received out of an RCA are taxable to the beneficiary under paragraph 56(1)(x) of the Act but may be deductible under subsection 110(2) of the Act.

Alternatively, where the pension plan funds are used to purchase life annuities for each of the intended beneficiaries of the registered plan, section 254 is applicable. In this case, or in any situation where "...a document has been issued or a contract entered into purporting to create, to establish, to extinguish or to be in substitution for, a taxpayer's right to an amount...out of...a pension plan", the fund and amounts earned thereon are not subject to immediate taxation, but amounts paid under the substituted arrangement will be taxable to the recipient under paragraph 56(1)(a) and may be deductible under subsection 110(2) of the Act. If the document or contract alters the beneficiary's rights under the pension plan, the beneficiary will be subject to tax at the time the document or contract is entered into, and will be required to include in income an amount equal to the value of the rights created by the document, pursuant to subparagraph 56(1)(a)(i) of the Act and deduct the same amount under subsection 110(2) of the Act, if applicable.

We trust these comments assist you in understanding our interpretation of the Act's provisions as they relate to the situation you describe.

Further queries should be addressed to the district taxation office, or you may wish to apply for an advance income tax ruling in accordance with the guidelines set out in Information Circular 70-6R2.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate