26 April 1994 Internal T.I. 9409486 - RPP PAYMENTS TO BENEFICIARIES AS PRIZES OR BENEFITS

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Are prizes to members of plan a benefit or an administrative expense of the plan

Position TAKEN:

benefit; taxable; not a permissable distribution

Reasons FOR POSITION TAKEN:

legislation

			April 26, 1994

	Head Office	Head Office
	Registered Plans Division	Rulings Directorate
D. Duff
	Attention: John O'Meara	(613) 957-8953

			7-940948

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This is in reply to your memorandum of April 14, 1994 requesting our opinion on the proposal by the administrators of the aforementioned Plan to give prizes to certain members buying past service.

According to the documents submitted to us,

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The client is concerned that the payment of the prize will not be a permissable distribution pursuant to paragraph 8502(d) of the Regulations. Among the various distributions listed in paragraph 8502(d), subparagraph (i) thereof, includes the payment of benefits in accordance with the plan as registered. Benefits of a registered plan must comply with paragraph 3502(c) of the Regulations. The technical notes to paragraph 8502(d) states ~In addition to such distributions, a plan may provide for the payment of all reasonable administrative, investment and similar expenses incurred in connection with the plan." The client argues that these prizes are administrative expenses of the Plan and, consequently, need not comply with the restrictions on the benefits and distributions.

They make the following arguments in support of their position:

1.The purpose of the prize is to accelerate purchases thereby reducing administrative expenses of the Plan,

2.the payment is comparable to a payment to an employee or consultant and a benefit should not include a payment under contract for consideration received, and

3.the recipient receives the prize qua person not qua member, and a comparison is made to payments by an employer to an employee for something unrelated to the employer-employee relationship.

In our opinion such a payment is not an administrative expense of the Plan but is a benefit, and more specifically, it is a superannuation or pension benefit which is defined in subsection 248(1) to include any amount received out of or under a superannuation or pension fund or plan.

We agree that the purpose of the prize is to accelerate the purchases, however, we do not agree that this causes it to be an administrative expense. In a telephone conversation (O'Meara/Duff) it was pointed out that there is no interest or additional amount charged to those beneficiaries purchasing these benefits if they delay the payment. Normally, when a member purchases past service, interest is charged if he opts to pay for Ln over a number of years instead of in a lump sum up front. If no interest was charged it would be reasonable for the member to delay the payment for as long as possible. The prize in the present situation is similar to the interest charged to members paying for past service benefits over time. Its primary purpose is to get the funds into the Plan and we do not see this as an administrative expense.

We disagree with the second argument that it is similar to a payment to a consultant or employee for services rendered as the member is not rendering any services, he is simply paying for his past service benefits more quickly in return for an additional benefit.

We also disagree with the third argument that the recipient receives the prize not as a member but as a person. They argue that the payment of the prize is extraneous to the relationship between the Plan and the member and is similar to a payment made by an employer to an employee for something outside the employer-employee relationship. The normal relationship between a member and a pension plan consists of the member, and the employer, contributing to the plan in return for pension benefits to be received by the member. This benefit in the form of a prize fits within this relationship. Their reference ~o an employer-employee relationship adds nothing to their position. If this was an employer-employee relationship, in our opinion it would be employment income pursuant to the position in paragraph 10 of IT-213R.

Although the writer does not address what the income would be for the recipient, his argument would suggest that it is employment or business income, since the payment is for services rendered. It would be very difficult for the Department to argue that a prepayment for past service pension benefits results in business or employment income to the payer. In our opinion, the receipt of this prize is a superannuation or pension benefit which must be included in income pursuant to subparagraph 56(1)(a)(i) of the Act. Also, the payment would not be a permissable distribution according to any of the provisions in paragraph 8502(d) of the Regulations.

As indicated above, the effect of the payment is similar to a reduction in the total cost for a member who pays for past service benefits up front rather than making a series of payments over time. As such, it is arguable that the payment of the prize is actually a reduction in the premiums paid by the members. However, in our opinion, the prize is a superannuation or pension benefit, and not a premium reduction.

for Director
Financial Industries Division
Rulings Directorate