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:
If an employer is entitled to the surplus in an IPP and uses it to increase the employee's pension benefits (with the option of the employee taking a cash lump sum), does Regulation 8503(15) apply?
Position TAKEN:
Yes.
Reasons FOR POSITION TAKEN:
Change of ownership of surplus would be contribution by employer and would be in lieu of cash payment to employee. (See also 7-932607, October 28, 1993, D. Delorey.)
October 25, 1994
Head Office Head Office
Registered Plans Division Rulings Directorate
S. M. Black J. Stalker
Director 957-3499
Attention: Michel Mathieu
941478
Application of Subsection 8503(15) of the Regulations
We are writing in response to your memorandum of June 6, 1994 and the attached letter from XXXXXXXXXX dated May 31, 1994 concerning the application of subsection 8503(15) of the Income Tax Regulations (the "Regulations").
Since the facts are not clear, we have assumed that the plans referred to in XXXXXXXXXX letter are Individual Pension Plans (IPPs). We understand that these IPPs will be wound up shortly. We also understand that the ownership of the surplus remaining in the IPPs varies between plans, and in some cases has yet to be determined. XXXXXXXXXX is concerned with the consequences of arrangements entered into to deal with these surpluses.
XXXXXXXXXX proposes that the surpluses be used to provide additional pension benefits to the employees and asks for our comments on the applicability of subsection 8503(15) of the Regulations. His alternate proposals are unclear; however, it appears that the employer would offer the employee the option of taking "his/her share of the surplus" either in the form of increased pension or as a cash lump sum. Notwithstanding XXXXXXXXXX reference to the employee's share of the surplus, he asks if our response would differ where (1) the surplus belongs to the employee and (2) the surplus belongs to the employer who transfers that right to the employee.
(1)If an employee has absolute rights to the surplus in the IPP, subsection 8503(15) of the Regulations would not be applicable as there would be no employer contribution. The amount would be taxable to the employee under subparagraph 56(1)(a)(i), and subject to the deductibility rules in subsection 147.2(4) of the Act.
(2)If the employer has absolute rights to the surplus but instead leaves it in the plan to provide additional pension benefits to the employee, it is our view that subsection 8503(15) of the Regulations would be applicable.
XXXXXXXXXX states in his letter that there is no "fresh contribution being made by the employer to the plan". We disagree. The lack of a physical withdrawal of an amount from a plan does not mean that there has not been a contribution by way of change of ownership of an amount. The fact that the funds come from surplus belonging to the employer, rather than from outside the plan, does not change their characterization as a contribution by the employer. Accordingly, the employer would be making a contribution currently so that subparagraph 8503(15)(b)(ii) of the Regulations and prior approval under paragraph 20(1)(s) of the Income Tax Act (the "Act") is irrelevant.
As required by paragraph 8503(15)(c) of the Regulations, the contribution would be in lieu of a payment to the employee, that is, the optional cash lump sum. We would note that the phrase "payment or other benefit" does not restrict the amount to salary or wages.
In your memorandum, you refer to comments by Marcel Theroux and Brad Rowse in "The Individual Pension Plan: A Compleat Guide" in the 1991 Corporate Management Tax Conference (page 8:37) that the requirement that the "substitution of past service benefits for some other benefit must be with 'the consent of the member'" could be problematic. However, in the case at hand, the employee has to choose and thereby "consent to" the employer's contribution to the pension instead of or "in lieu of" a cash lump sum which the employee will "otherwise" be entitled to under the terms of the agreement.
You also indicate a problem with the words "all or substantially all of the contribution", referring again to comments by Marcel Theroux and Brad Rowse in the above-noted article. Those authors argue that one could avoid the application of subsection 8503(15) where less that 90% of the contribution is foregone compensation. In our view this argument does not apply to the situation at hand. If it is determined that 80% of the surplus belongs to the employer and 20% belongs to the employee, and both parts of the surplus are contributed to the RPP to increase benefits, we would consider that two contributions have been made, one by the employer and one by the employee. Subsection 8503(15) of the Regulations would apply to the contribution of the 80% by the employer.
We refer you to our memorandum to Registered Plans (7-932607, October 28, 1993, D. Delorey) in respect of Regulation 8503(15) and XXXXXXXXXX Pension Plan, a one man plan that had not been registered:
The expression "would otherwise be entitled" (in paragraph 8503(15)(c)) does not in our view limit the application of subsection 8305(15) to payments to which an individual was entitled prior to the execution of an agreement under which the payment is made to the individual's pension plan, but that it also applies to concurrent entitlement. The question to be asked, therefore, is whether or not it is reasonable to expect that the individual would receive the payment were it not contributed to the pension plan....
As a matter of interest, our view that subsection 8503(15) applies even where there is no prior entitlement was expressed in a memorandum dated May 8, 1990 to Sharon Yetts of your Division. The memorandum related to representations made by XXXXXXXXXX and in the memorandum, Wayne Harding of this Division commented as follows:
"In our view Regulation 8503(21) (now 8503(15)) is applicable where the allowance is not a prior entitlement but is offered concurrently, provided the employee has a right to receive it if he does not consent to the pension contributions."
We refer you to an article dealing with subsection 8503(15) in Taxation of Executive Compensation and Retirement (Volume 5 Number 8, April 1994) entitled, "Past Service Pension Enhancements and the Subsection 8503(15) Anti-Avoidance Rule" by Randy V. Bauslaugh at page 899.
Summary
In response to your specific questions which we have repeated below:
1.Is a change or ownership of the surplus and/or the actual attribution of the surplus to members considered a "contribution"?
Yes, as discussed above.
2. Assuming it is, can such contributions be considered not to have been approved under former subsection 20(1)(s)?
Where the surplus belongs to the employer and is used to increase pension benefits, the employer would be making a current contribution. Accordingly, approval under subsection 20(1)(s) is not relevant, as the contribution would be made after December 10, 1989.
3.Assuming it is, and provided we can prove that the member consented to such "contribution" being made, can it be considered that all or substantially of such portion of the contribution was paid, with the consent of the member, in lieu of a payment or other benefit to which the member would otherwise be entitled?
Yes, and subsection 8503(15) of the Regulations applies where the surplus belongs to the employer and is used to increase pension benefits. We would note again that the employee's consent would be evidenced by their not taking a cash payment instead.
We note that although a plan must be a defined benefit plan in order to make past service contributions, these plans have characteristics of money purchase plans. It appears that benefits will be available on the wind-up of the plan equal to the extent of the money available. You may wish to consider the following statement from a letter on the registration of IPPs written by Brian Darling of our Division in respect of XXXXXXXXXX on January 17, 1990:
GAAR is not of relevance at the registration stage but may become relevant in considering what action can be taken in respect of plans that have been registered.
Please call the writer when you receive this.
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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